Many individuals use a living trust when they want to avoid probate when transferring assets upon their death.
What is a living trust? A living trust is a revocable trust where the grantor (the creator of the trust) transfers property to the trustee, who then manages such property for the benefit of the beneficiaries. Although the living trust generally has three parties (the grantor, the trustee, and the beneficiary), all these three parties are usually embodied in one person upon execution. When the grantor, the trustee, and the beneficiary are one person, the person retains complete control over the property.
Individuals establish living trusts as a will substitute because:
- It avoids probate.
- It is revocable before death.
- It allows management of assets for a longer period of time after death.
- It is private.
- It can provide for loss of capacity.
Even if a living trust is a will substitute, it is important in your estate planning that you still execute a will, so that any property not covered by the trust can still be distributed in accordance with your will and not through state intestacy laws.
Living trust avoids probate
One of the main advantages of a living trust is that it avoids probate. In fact, this is one of the more popular reasons for executing a living trust. When property is transferred to a living trust, that property is easily transferred to the successor trustee upon the grantor’s death simply by submitting a death certificate and an affidavit of death. There is no need to file a petition for probate or administration in order to transfer the property. The ease in transferring property upon death is one of the reasons living trusts are a popular tool in estate planning.
Living trusts are revocable
Another reason living trusts are so attractive is because they are revocable. Grantors can change their mind about the names of the successor trustees and beneficiaries and execute an amendment to the trust at any time before their death. Because living trusts are revocable, grantors have control over their property until they die. For this reason, living trusts are more attractive than deeds with a life estate and other forms of estate planning documents where the rights of a remainderman or a beneficiary vest and cannot be changed anymore.
Living trusts allow asset management for a long time after death
In wills, assets are distributed by the personal representative immediately after payment of the estate’s debts and expenses. A living trust, on the other hand, allows asset management for a longer period of time after death. For example, while a will usually distributes the net estate to the heirs or beneficiaries immediately after payment of estate debts and expenses, a trust can continue to manage the assets until 21 years after the death of a potential beneficiary who was alive when the trust was created. This becomes more attractive for grantors who want their assets managed until their beneficiaries reach a certain age or until the happening of an event. For example, Princess Diana created a trust for her children. After she died, Prince Harry only received income from the trust until 2014 when Prince Harry turned 30 and received the bulk of the assets from the trust in the amount of $13.8 million. This would not have been possible in a will because assets need to be immediately distributed after death.
Living trusts provide for loss of capacity
A will only becomes effective when the grantor dies. When the grantor becomes incapacitated, it does not affect the will. In a trust, however, when the grantor and trustee are one and the same, when the grantor-trustee becomes incapacitated, a trust usually contains a provision for the appointment of a successor trustee. It usually requires a certification from at least two doctors that the grantor-trustee has lost capacity. Most estate planning attorneys, however, will also prepare a durable power of attorney that allows you to appoint an agent to act in your behalf in case you lose capacity.
Living trusts provide privacy
Trust documents are private. Probate records, on the other hand, are public. If you wish to keep your wealth documents private, living trusts may be a more effective tool for your estate planning. For example, Larry King, noted CNN anchor, died in 2021 with his estate’s estimated value at $2 million. Many believe, however, that this is not his entire estate and that most of his estate was transferred to trusts before his death. Because most of his assets were in trust which is considered private, people could not access the extent of his wealth, except for probate records which provide for his $2 million probate estate.
Disadvantages of living trusts
An irrevocable trust may be more appropriate given the objective
Depending on your objectives, a living trust may or may not be the proper estate planning tool. If you want to ensure Medicaid eligibility or shelter your assets from creditors, an irrevocable trust may be a more appropriate estate planning document. In an irrevocable trust, assets are transferred to the trust, and such transfer is irrevocable and cannot be changed. The grantor loses control over the property during his lifetime. There are ways to return back control to the grantor, such as the appointment of a trust protector or a power of attorney in the trust, granting a third person the right to choose beneficiaries.
An estate planning attorney is needed to draft irrevocable trusts, because the IRS is strict on the language wording required, depending on the type of irrevocable trust.
Costs of a trust
A trust requires the transfer of property into the trust in order for it to be effective. Depending on the type of property to be transferred, this may entail substantial costs, especially in cases of the transfer of real property. There may be payment of filing fees required to register the transfer. For this reason, some people prefer transferring properties to the next generation using deeds (such as life estate deeds), a more cost-effective solution. These should be taken into consideration in determining the proper estate planning document to utilize for your estate.
No estate tax advantage
Properties in a living trust (a/k/a revocable trust) are considered part of the value of the gross estate of the deceased for purposes of computing estate tax. Thus, properties in the living trust does not make a difference for purposes of computing estate tax. However, properties in an irrevocable trust are not part of the gross value of the estate of the deceased. For this reason, individuals seeking to lower the value of their estate in paper use irrevocable trusts.
Living trusts are a good estate planning tool depending on your objective. If you are at that stage of your life where you would like to plan your estate for the purpose of transferring wealth to the next generation, we at the law offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at email@example.com.