Living Trusts
1. What is a living trust?
A living trust allows you to put your assets in a trust while you’re still alive. A your living trust gives you great flexibility. You or someone in whom you have confidence manages the property, usually for the benefit of you or your family. Most people name themselves as trustees, and find out there is no difference between managing the trust and managing their own property. In a living trust you have the right to buy, sell, or give property as before, though the property is in the trust’s name rather than their own.
A living trust is one of the two main estate planning methods to avoid probate. The other way to avoid probate is by a joint tenancy with rights of survivorship. One of the purposes of probate is to determine the disposition of the property you leave at death. Since the trustee of your living trust owns that property, there is no need for the probate process. Living trusts have become extremely popular in recent years. Even though they are useful, simple, and relatively inexpensive way to plan your estate, they will not solve all of your estate planning issues. New Jersey has a very simplified probate process. Therefore, many of the advantages of living trusts have diminished in the Garden State. And though they’re great for some people, you can’t assume they’re great for you.
2. How does a living trust work?
In general, you must execute a document saying that you are creating a trust to hold property for the benefit of yourself and your family. Some living trusts list the major assets such as your home or investments that you are putting in trust. Meanwhile, some other living trusts only refer to another document called a schedule in which you list the exact property that will begin the trust. In any type of living trust you prepare, you can add and subtract property whenever you want. If you decided to have a living trust, then there is a reasonable mount of legal paperwork that you will have to prepare. In a living trust you basically have to retitle most of your assets to be owned by the living trust. You will have to change the ownership registration on whatever property you put into the trust. You will have to change the deed of your real estate to be owned by the living trust. Moreover, you will have to have your brokerage accounts, bank accounts, mutual funds from your own name to the name of the living trust.
If you make yourself the trustee, then you will have to remember to sign yourself in transactions as “Robert Johnson, Trustee,” instead of using only your name. When you put property into a living trust, the trust becomes its owner. Thus, this is the reason why you must transfer title to the property from your own name to that of the trust. Nonetheless, you retain the right to use and enjoy the property.
In the view of the tax authorities, the property in the trust belongs to you, the grantor, for tax purposes. Thus, if you receive income from the assets, you must still report the income from the trust directly on your income tax return. The trust itself often files a separate income tax statement as well, though the IRS doesn’t require one if the grantor and trustee are the same person. If you choose to have a living trust, then it is advisable to apply to the Internal Revenue Service for an employers identification number for the trust. You can make anyone you want the trustee. You can also name an alternative trustee. An alternative trustee is also sometimes known as successor trustee to take over in the event of the original trustee’s death or incapacity.
In a living trust, you also keep the right to manage your property whether you’re the trustee or not, since you have a right to change the terms of the trust, the trustee, and the property in the trust at any time. When you die, your alternative trustee distributes the property according to the terms of the trust. Usually, your alternative trustee is your surviving spouse or an adult child, but you can name a bank or trust company if you are willing to pay their fees.
Living trusts can exist long after you die. If you want the trust to benefit your grandchildren, for example, you might specify that the trustee make gifts to them as needed until they are fully grown. Living trusts also give you wide flexibility in distributing your property.
It can be a hassle to set up and fund the living trust, but the payoff for your family comes when you die. However, there are two major benefits of a living trust. First, since the property does not have to go through probate, there’s no break in continuity. Second, a living trust in some cases saves a person substantial probate costs. If a probate action is contested then it could get expensive.
3. What are the other advantages of having a living trust?
A living trust can help you to manage your affairs. If you have a trustee then a living trust can manage your property. Say you rent out condos; then your trustee can take over the management, while you receive the income, minus the trustee’s fees. A living trust can also provide a way to care for you and your property in case you become disabled, which is why many people use them. You’d typically set up a living trust, fund it adequately, and name a reliable alternative trustee (often an adult child) to manage it should you become ill. This avoids the delay and red tape of expensive, court-ordered guardianship. And at the same time the trustee can take over any duties you had of providing for other family members.
4. Does a living trust protect my privacy rights?
One of the best advantages of a living trust is that it maintains the deceased’s privacy more than wills, since there’s typically no public record required. However, if the trust is funded through a pour over provision in your will, the items transferred from your probate estate may indeed appear in a public record, especially if the will is contested.
5. Are living trusts easy to prepare and change?
For a simple estate it is not that hard for a lawyer to create a living trust tailored to your estate objectives, and you don’t have to go through the formalities required to execute or change wills.
6. What is the best reason to have a living trust?
In my professional opinion the best reason to have a living trust is if you have real estate in multiple states. If you have property in another state, I always recommend setting up a living trust to hold the title to that property. This helps you avoid time-consuming, complicated ancillary probate procedures.
7. What are the disadvantages of having a living trust?
The major disadvantageare the costs involved. It takes much more time to prepare a living trust and to prepare the documents to transfer title to the living trust, than it does to prepare a set of wills. It only costs a few hundred dollars in legal fees to prepare a set of wills. Meanwhile, the legal costs to prepare a living trust range form $1,000 to $2,000. Moreover, there are expenses to retitle your assets and to prepare new deeds. There are also filing fees that must be incurred to file your deed with the County Registry.
8. Will I have any title problems with my assets if I decide to go with a living trust?
Some people do have title problems if they decide to go with a living trust. Not all items may be easily transferred into a trust. Jewelry can be a problem, and if you transfer title to your car into the trust, you may have trouble getting insurance on it, since you don’t own it anymore.
9. Will I have any tax problems if I choose to have a living trust?
The federal estate tax allows an estate to use a year other than a calendar year as the “taxable year” used in tax deadlines. Living trusts don’t receive the same flexibility. If you have a large estate and timing is a consideration, then it might save you money to pass your assets via will instead of trust. You don’t have to have a separate taxpayer ID number for a living trust, but trusts are required to make estimated tax payments, while estates are exempt from this requirement for the first two years.
10. Are there any other types of traps if I decide to go with a living trust?
There are other traps yo having a living trust. Living trusts along with other non-probate transfers like insurance policies, are not automatically revoked or amended on divorce, unlike wills. If you don’t amend the living trust, then your ex-spouse could end up being the beneficiary.
11. What special considerations should I take when I prepare my living trust?
When you write your living trust make sure you consider these issues:
a. Coordinated estate plan. It is important to make sure to coordinate the trust with the rest of your estate plan. The executor of your will still must pay income and inheritance taxes and various probate expenses, but if too many of the estate assets are in the trust, he or she may not have enough money to do so. One way to meet this contingency is to give the trustee (and successor) power to make these payments from trust assets.
b. Coordinated disability plan. If you prepare a living trust, then you should also name your attorney in fact as specified in your power of attorney as your successor trustee. You don’t want the provisions of your living trust to conflict with your power of attorney. If they do this could create a disaster and massive litigation.
12. Should my living trust be revocable or irrevocable?
Living trusts can be revocable (changeable) or irrevocable. Most living trusts are revocable. However, some people (usually those with a lot of money) do use irrevocable living trusts to avoid taxes and for medicaid planning. If you choose to have an irrevocable living trust then you give up control over the assets in the trust, in return for escaping some estate, income or gift taxes and for medicaid planning.
An irrevocable trust doesn’t avoid taxes entirely. A living trust merely sets up a separate taxable entity that might be able to pay taxes at a lower rate than if all the assets were combined in one estate. It can also offer a bit more protection from creditors. If you make the trust irrevocable to reduce taxes and avoid creditors, prepare for a lot of paperwork. And understand that you lose the flexibility of a revocable living trust. Be sure to consult a lawyer before setting up an irrevocable trust.
12. How is a living trust funded?
The easy part is setting up the trust. The harder part is putting something in it the living trust. This process is called funding the trust. This includes not just depositing money in the trust account, but also transferring title of assets to the name of the trust. Living trusts can be funded now, while you are alive, or after you have died. If you want to fund it before you die (a funded trust), you transfer title of your assets to the trustee and make the trustee the owner of any newly acquired assets you want to go in the trust. Any assets in the trust will avoid probate. The more you leave out, the more involved probate will be.
13. How do you transfer title of your assets to the trustee?
You have to re-register title document for your assets. Thus, you have to transfer title of your bank accounts and stocks to the trustee’s name. Moreover, you have to prepare and sign a new deed to your house that designates the trustee as owner. Some people are just afraid to take the family house out of the husband and wife’s names in joint tenancy and to put it into a living trust in the name of one of the spouses. Maybe that’s because then they don’t own their house and the trust does. Moreover, some people don’t trust the spouse who is trustee to hold and manage it for the benefit of both spouses.
Finally, keeping a few assets out of the living trust can help protect against creditors’ claims down the line. When your estate contains some property and when it goes through probate, it triggers the running of the statute of limitations on claims that can be filed against your entire estate. Your creditors are put on notice that you have died, and once the statutory period runs out, the estate is safe from most claims. If everything you had was in the living trust and there were no probate, then the time within which a creditor can come after the estate may be extended.
14. How does a living trust work if it is unfunded?
The other way to fund a trust is to have the assets transferred to the living trust just before you die or after your death. Many people choose to fund it through their will. To do this you set up a living trust and a pourover will, which transfers the assets into the trust upon your death. Thereafter, you can add some assets to the trust before you die. Generally, the will would specify that all estate property would pour over into the trust, including life insurance and other death benefits.
15. Should I have a living trust?
The debate over having a living trust focus on saving the cost to go through the probate process. However, in New Jersey the cost incurred in the probate process are not substantial. Having a living does not guarantee you to save you money. If your records are well-organized, if size of your estate is modest, if your beneficiaries get along reasonably well, then the cost to probate an estate is very reasonable. The cost to go through the probate process might actually be less that having your estate pass through a living trust. It is important to emphasize, that you will still need a will even if you have a living trust. You may want to determine how much probate will cost your estate and compare it to the costs, financial and otherwise, of a living trust for the same size estate.
16. What are the disadvantages of having a living trust?
A living trusts is a very important estate planning tool. In recent years, many people erroneously have become led to believe living trusts are miracle makers. This is an urban legend. Here’s a list of miracles they won’t perform;
a. Won’t help you avoid taxes. A living trust doesn’t save any income or estate taxes that couldn’t also be saved by a properly prepared will. The property in the living trust is still counted as part of your taxes. Your successor trustee still has to pay income taxes generated by trust property and owing at your death. Your executor would have to pay such taxes out of your estate if you had disposed of the property by a will instead of a trust.
b. Won’t make a will unnecessary. You will still need a simple will to take care of assets you fail to transfer to the living trust, or that you acquire shortly before your death. Moreover, if you have small minor children, a will is still required to appoint a guardian for the little ones.
c. Won’t affect non-probate assets. Like a will, a living trust won’t control the disposition of jointly owned property, life insurance payable to a beneficiary, or other non-probate property
d. Won’t protect your assets from creditors. A living trust won’t provide you with asset protection. Your creditors can still try to seize and attach your living trust assets.
e. Won’t protect your assets absolutely from disgruntled heirs. It is harder to challenge a living trust than a will. However, a relative can still file a lawsuit in trial court to challenge a living trust on the grounds of lack of mental capacity, undue influence, duress, or for other reasons.
f. Won’t entirely eliminate delays. A living trust could reduce the time required to distribute your assets after you die. However, it won’t completely eliminate any delays.
