Manage Your Legacy Through a Living Trust

Dan Nigito
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Posted: Oct 27, 2010 10:56 AM

A Revocable Living Trust is a multi-dimensional planning document that can prove to be an invaluable tool in your estate plan. By creating and funding one of these bad boys you will eliminate confusion and delay both during your lifetime and at death.

A revocable living trust acts as a separate legal entity, which holds and distributes your property. Because it transfers assets outside your Will it avoids the probate process. The “revocable” part is important because it means that you can change all aspects of the Trust at any time, or end the Trust completely. The fact that you can change or terminate the Trust means that the assets in it are still part of your taxable estate. A Living Trust in not a tax avoidance tool. Rather, it is a probate avoidance and estate management tool. It is a part of the wealth preservation and transfer process to be used in conjunction with the other estate planning tools I’ll cover in future articles.

When funded during your lifetime, there are two major benefits of your Living Trust. First, it avoids the expense, publicity, and delay of probate. Second, it provides uninterrupted management of your family’s assets upon disability and death.

Probate Avoidance

Assets that are transferred to your heirs via your Will are subject to probate. A Living Trust is, in fact, a Will substitute. Where probate is a public document open to inspection at your county courthouse, a Living Trust is private. No one can find out anything about what you gave and to whom you gave it. The probate process ranges from a minimum of 9 months to well over a couple of years before assets can be distributed to your heirs. At death, a Living Trust changes title to the next heir in line. It takes about a couple of weeks. Your Successor Trustee reads your instructions and distributes the assets according to your wishes. Finally, the cost of probate is going to average about 2%-4% of your gross estate. That is a lot of money. While you may incur some accounting fees for estate tax return preparation, and some minor administrative costs, the Living Trust will save you a boatload of cash.

One last probate avoidance benefit of a Living Trust is that it will avoid probate everywhere that you own property. If you live in one state and own a vacation home in another, that property must go through probate in that state. Living Trusts cross state lines and therefore all your real estate will avoid probate wherever it is located!

Uninterrupted Management

Assuming you act as your own trustee (see the last section below), you remain in constant control of your Living Trust and all of the assets in it as long as you are competent to do so. Nothing really changes from how you manage your assets today.

If you are unable to manage your own financial affairs on a day-to-day basis because of a debilitating illness, or that you just don’t want to do it anymore, a Living Trust can be the best friend your estate ever had. Your Living Trust spells out that if anything happens to you, your Successor Trustee will take over in a heartbeat with no costs, no delays. Assets can be bought or sold, social security checks may be deposited in your name. Life goes on. The Successor Trustee that you have named steps in to manage your affairs until you are back on your feet and can take over the reins. Often we name our spouse as the Successor Trustee, with the kids to follow. The Successor Trustees don’t step in until you need them. Your assets remain intact and family squabbles are vanquished. A Living Trust doesn’t just preserve and protect your wealth; it preserves and protects your peace of mind.

Who's in Control?

Here is the most important thing I will tell you about the Living Trust: For it to be effective it must be funded while you are alive. Only assets that are “owned” by the Trust at the time of death are free from probate. Only assets owned the Trust at the time of disability may enjoy uninterrupted management. It is pretty simple to understand and the most overlooked aspect of estate planning. Simply put, the ownership of the property that you want to place into the Trust, must change from you (or your spouse) to Trust. The control of the asset management would be in the hands of your the Living Trust Trustee. Unless there is some medical or other reason to the contrary, you should always be the Trustee of your own Trust. In other words, you change control from you “the person” to you “the trustee” That way you’ll maintain complete control over the management and distribution of your assets.

For example, property currently owned by John Smith would change to John Smith, Trustee of the John Smith Revocable Trust. John still controls and manages the property in the Trust that he can change or end. Further, the Trustee that takes over in case you cannot perform your duties as Trustee, (kind of like the runner-up in the Miss America Pageant) is the Successor Trustee. That person could be a spouse, child, another family member or a combination of two or more people acting together. The bottom line is that if you cannot manage your Trust through disability or death, the Trust continues on without missing a beat.

One last thought, don’t “do-it-yourself.” Always seek the advice of a professional advisor. This is not a document you want to take an chances with so spend the money and see an attorney to do the job right. However, please heed this last word of advice, if the attorney you talk with advises you against using a Living Trust, maybe you should look for another one.