Clients often come to an initial consultation with preconceived notions of whether they would like to include a “living trust” as part of their estate plan.
For those unfamiliar, a living trust is a trust instrument created by an individual (the “Settlor”). The Settlor then funds their living trust by transferring assets to it. A living trust can hold nearly any kind of asset, except for retirement accounts. The Settlor is also the “Trustee” (the person who controls the trust). The living trust can be amended or modified in whole or in part by the Settlor.
There is a lot of misinformation about how trusts work and the benefits that they offer.
Here, we attempt to separate fact from fiction, explaining the advantages that a living trust can offer, and debunking myths of protection that living trusts do not actually offer.
FACTS
Living Trusts Offer Privacy
Unlike a Last Will and Testament, which must be filed with the Register of Wills and becomes a matter of public record after your death, a living trust need not be filed and is not a matter of public record. This can be important, for example, for families who prefer to keep private that one child is being treated differently from another child in their estate plan. When a Settlor creates a living trust, he/she still needs to create a Last Will and Testament, and this Will must be filed. However, this Will (called a “pourover Will”) simply names the living trust as the beneficiary and identifies the Personal Representative (Executor) of the estate. There are no substantive terms of the Settlor’s living trust spelled out in a pour-over Will to become a matter of public record.
Assets Held in a Living Trust Can Avoid Probate
Depending upon where you live and the assets exposed to probate, probate might not actually be that arduous and costly a process. But if you live in a jurisdiction where probate is an arduous or costly process, or if you have a more complicated asset portfolio that would complicate probate (i.e., real estate in more than one state, business interests, investments in hard-to-value assets), it may offer a real benefit to your loved ones to avoid the cost and time of probate. A living trust can do just that. Assets held in a living trust are not subject to the court-supervised probate process after the Settlor passes away. Bear in mind, however, that probate avoidance does not mean that the post-death administration of a living trust requires no work or expense. Assets held in a living trust may still need to be inventoried and appraised for tax purposes. However, everything in probate is public, including the appraisals of probate assets. There are reasons why people might prefer appraisals of certain probate assets, such as closely-held family businesses, for example, to remain out of the public record.
Assets Held in Living Trusts Can Be Easier to Access if You Are Sick
Assets held in a living trust are under the control of a “Trustee”. As Settlors age, they may choose to add a trusted child as a “co-Trustee” of the trust. The co-Trustee does not own the asset. However, the co-Trustee has access to the asset. This may become very helpful to an aging Settlor who relies on an adult child for financial assistance. If that adult child is a co-Trustee of a trust and has the same ease of access to assets in the living trust as if they were a co-owner of the account, the Settlor can more confidently know their child will promptly and easily be able to access assets to fund their care.
Living Trusts Can Be Useful for Blended Families
Assets held in a living trust are under the control of a “Trustee”. As Settlors age, they may choose to add a trusted child as a “co-Trustee” of the trust. The co-Trustee does not own the asset. However, the co-Trustee has access to the asset. This may become very helpful to an aging Settlor who relies on an adult child for financial assistance. If that adult child is a co-Trustee of a trust and has the same ease of access to assets in the living trust as if they were a co-owner of the account, the Settlor can more confidently know their child will promptly and easily be able to access assets to fund their care.
Living Trusts Can Constrain Beneficiaries
There are a number of reasons why a Settlor might prefer not to provide an unrestricted “outright” inheritance to a child. Common reasons include immaturity, concerns about spending habits, and concerns about divorce. A living trust provides a mechanism to place constraints on a child’s inheritance in a private way, while also ensuring that the child can access their inheritance. While a testator can place constraints on a child’s inheritance in a Last Will and Testament, remember that a Will is a matter of public record. As such, for clients with concerns about their beneficiaries, a living trust offers both privacy and reassurance.
FICTION
Living Trusts Minimize Exposure to Estate Tax
A common misperception is that assets which are transferred by a Settlor to a living trust are immune from estate tax and not included in the Settlor’s “taxable estate” when they die. This is simply incorrect. There are certain kinds of trusts that a Settlor can create that would offer this advantage. But all of those trusts also have significant downsides in exchange for the tax benefit – chief among them being that the trust almost always must be “irrevocable”, meaning locked and not modifiable.
Living Trusts Offer Additional Creditor Protection to the Settlor
When a Settlor contributes assets to a living trust, the only creditor protection that those assets are afforded is the creditor protections that existed prior to the transfer into the trust. There are no additional creditor protections afforded to a Settlor who contributes his/her assets into a trust. That being said, there CAN be significant creditor protections afforded to a beneficiary of the trust after the Settlor’s death. For example, a living trust can be drafted in such a way as to grant a child use and access to the holdings of the trust after the Settlor’s death, but to make these distributions fully discretionary and controlled by a third party as Trustee. Following that approach could shield a child’s inheritance from creditors.
Living Trusts Are Immune from Challenge by an Aggrieved (or Disinherited) Beneficiary
Some clients believe that a living trust cannot be challenged by an aggrieved (or disinherited) family member. That is untrue. A living trust can be challenged. However, it can be more difficult for the person considering a challenge to learn of the existence of the living trust, let alone its contents. Remember that the living trust itself need not be filed in the Register of Wills – only a Last Will and Testament noting the existence of a living trust is filed. As such, in addition to the private nature of a trust, clients who are considering disinheriting a child often choose a living trust because the aggrieved child will have an uphill battle to even obtain a copy of the living trust to understand their rights and initiate a suit to challenge the living trust within the requisite one-year post-death challenge period.
How can we help you determine if a Last Will and Testament or a living trust makes the most sense for your particular estate planning needs? Contact estate planning attorneys Jeremy Rachlin (jrachlin@bulmandunie.com) or Elizabeth Farley (lfarley@bulmandunie.com) and let’s begin a discussion.
