Living Trust: Alternative to a Will

Clients often say to me that they have been “told” that they need a “family” trust or “living” trust. For those with an estate of any significance, and especially if the estate includes real property, with or without equity, Whether a single person or married couple, the advice is appropriate.

The terms “family” and “living” trust are two names for the same thing; a revocable inter vivos trust. These trusts are prepared primarily for estate planning purposes. Theses trusts are established by an individual or a couple referred to in the trust instrument as the settlor, trustor or grantor. These trusts are funded with all or substantially all of the settlor’s assets and managed and administered by a trustee. Often the trustee and the settlor are the same person. During the lifetime of the settlor or settlers, they are the primary beneficiaries of the trust.

There are provisions in the trust document for a successor or contingent beneficiaries. The successor beneficiaries are those persons who are to receive the trust assets or enjoy the benefits of the trust following the death of the settlors. It is in this respect that the trust instrument functions in a manner most often associated with a Will. Like a Will, the trust instrument may be amended or revoked so long as the settlers are competent to do so.

In the broadest sense, a family trust is an alternative legal document to a Will as a manner of disposing of assets on death. If this is the primary purpose of the family trust, the next logical question is to ask what advantages, if any does a family trust have over a Will? The family trust has a number of characteristics which are considered advantages.

Probate Avoidance

Probate is the legal process whereby a decedent’s affairs are put into order, debts are paid and assets are distributed to the beneficiaries. The process takes place under court supervision and there is a number of often cumbersome, time-consuming and expensive steps which must be followed during the process that lasts upwards of 8 months.

Avoidance of Ancillary Probate Proceedings

If a person dies owning real estate, for example, a vacation home in a state other than the state of his or her residence, an ancillary probate proceeding is necessary in that other state in addition to the probate administration taking place in the state of the decedent’s residence. In most cases, if the trust is funded with this out of state real estate, this ancillary proceeding can be avoided.

Privacy

Probate is a court-supervised procedure. The documents filed with the court become a part of the public record. Information concerning the manner in which the decedent chooses to dispose of his or her property as well as the nature of the property is available to the public. A trust instrument and documents concerning the administration of a trust do not come under court supervision and do not become part of the public record.

Contesting terms of Trust

It is generally a more costly and time-consuming procedure to initiate a contest of a trust than of contest a Will

Lifetime benefits

A Will only becomes effective on death whereas a funded family trust functions immediately. A trustee is named to manage the assets. If the trustee is no longer able to do so due to physical or mental impairment, the successor trustee can immediately take over management duties without court involvement

Flexibility

The powers of the successor trustee are generally the same as those of the original trustee. In most instances, the trustee’s powers afford a greater degree of flexibility and allow quicker action than is available to an executor under a Will.

There are as one would expect, a few disadvantages as well which are summarized below.

Set Up

The legal costs for the initial documentation are generally higher for a trust than for a Will Additionally, with a trust the client needs a special type of short Will called a “pour-over” will which transfers at the time of death to the trust any assets not previously transferred. There is also the cost of transferring assets to the trust. While the initial cost to prepare and fund a trust is greater than for a Will, overall the trust is less costly primarily due to the avoidance of probate.

Transferring of Assets

While each of us should keep clear and detailed records of all of our assets, few actually do. The task of transferring assets into the trust can be seen as an advantage if it provides the needed push to organize record. This is an ongoing process. Assets acquired in the future must also be transferred to the trust. Often, more paperwork is required when an asset is sold. One example of additional paperwork is a title company requiring a copy of the trust before insuring title.

Claims by Third Parties

Following a death, there is a longer period of time when a creditor can initiate a claim for payment when assets are held in a trust compared to an estate subject to probate administration. Similarly, for disgruntled heirs or would-be beneficiaries, there is a longer period of time in which to initiate a claim or contest before being cut off by the applicable statute of limitations.

It is important to note that one exceedingly important aspect of estate planning is tax planning. Generally, with careful planning, the same tax objectives, that is avoiding reducing or delaying estate taxes, can be achieved with the either a family trust or a will. The family trust is not, in and of itself a tax savings device although if properly drafted, like a will, it may be able to achieve that goal.

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Whether a family trust is appropriate for you depends on many individual factors including age, health, financial and family status, type of assets as well as who are the chosen beneficiaries. Each of the advantages and disadvantages discussed take on a different degree of importance for every individual. It is advisable to discuss your situation, your desires, and concerns with a competent attorney familiar with estate planning principles. If you need our help, contact The Law Offices of Yacoba Ann Feldman for a consultation.