A few times a year we get a phone call from someone telling us that they need a trust. After talking with this person, we often learn that they heard from a talking head that they need to avoid probate and they need a trust to do that. When we start asking questions, we find out that a trust is often too complicated for what they want to accomplish (and will cost about twice what they think it will cost).
What is a Living Trust?
A trust is a legal way of owning things. You can hold almost anything in a trust – property, collections, bank accounts, insurance policies, art, jewelry, and on and on. You can have more than one trust and divvy up your possessions among several trusts.
A living trust is you (and maybe your spouse or partner). A living trust uses your and your spouse’s or partner’s social security number because it does not file separate taxes. You can still file your taxes on a 1040. It is merely a way of owning things.
So instead of the deed to your house reading, “John and Sandy Smith, as husband and wife,” it would read, “John and Sandy Smith as trustees of The Smith Family Living Trust u/a January 17, 2006.” This change in language might not seem like a big deal, but it significantly changes how things work after you die.
What is Not a Living Trust?
A Living Trust is not a form of asset protection. A living trust does not protect your assets from a lawsuit. It does not protect your property from estate clawback if you received Long Term Care through Medicaid. A Living Trust is not a separate legal entity from you. Some kinds of trust are entirely separate legal entities, which means that they have their own tax identification number – like a social security number for a trust – they have different tax laws that apply to them, and they have different succession laws that apply to them.
A living trust is not a health care directive. A living trust does not have any effect regarding medical decisions that are made on your behalf. That would be a Living Will, which is better called an Advanced Health Care Directive.
Benefits of a Living Trust
The magic of a living trust happens when a triggering event turns the living trust into an irrevocable trust. Up until a triggering event, your life is going to proceed as it always did before you created the trust.
What are some triggering events? It depends on your trust, but here are a few common ones:
- Incapacity. Meaning that if you are unable to care for yourself and need someone to take care of your affairs. A living trust can take the place of a Durable Power of Attorney and is, in fact, a better alternative to a Power of Attorney.
- Death. After you die, your living trust will allow your trustee to distribute assets outside of the probate and administration process. Probate is a court process where a person is formally appointed as an executor and administration occurs when your executor manages your estate and distributes your assets. Where there is a trust, a triggering event with automatically give a person authority to take control. There is no need to await a court appointment to manage your affairs.
- Tax planning. A living trust can be used to help better plan for estate and inheritance taxes. Although New Jersey does not currently have an estate tax, there is no guarantee that the estate tax will never return. A living trust can help maximize the estate tax exemption amounts by dividing assets to the point where they are below the exemption amounts. (This means that each decedent trustee’s estate tax exemption amount is used to the fullest.)
- Blended Family Inheritance. In blended families, especially where there are children from previous and current marriages, dividing assets equitably among heirs can be accomplished through the creation of trusts and sub-trusts that hold each families’ assets in protection for the correct heirs. That way no one gets left out by an errant step-parents or step-child.
Although probate avoidance is one of the top reasons we are contacted about creating living trusts, it is not the primary reason a person chooses to build a living trust. The probate and administration process is a useful closing technique for most, if not almost all, estates. It clears out creditors, cleanly passes title to their heirs, and provides a structured way to pass assets to the next generation. The majority of people who create living trust are doing it for one of the four reasons listed above, the primary reason being incapacity planning.
If you’re serious about creating a trust, you can expect to invest anywhere from $1,000 to $5,000 per person. (Yes, per person, so you may have to double this number).
Ready to talk about your plan?
Let’s talk about how you can make sure your kids make awesome decisions with your hard earned money.