Establishing a Living Trust can have a lot of advantages. This article will discuss a few of the advantages that having a Living Trust can provide. Let’s jump right in:
I provide a short description of the probate process on my website, here, and it will be a topic of discussion for future blog posts as well.
A Trust can help you avoid the probate process because, when you pass away, your assets are owned by the Trust, not by you. Since you don’t own assets on your death that need to be transferred into another person or entity’s ownership, the probate process is largely unnecessary.
A well-drafted Trust, however, will include a Will, commonly referred to as a Pour-over Will. Right now, you’re probably thinking, “wait, why do I need a Will if the Trust owns all of my assets?” The short answer is:it’s a CYA thing. Inevitably, when people die, they own property that has not been transferred into the ownership of the Trust. Most often this includes items of personal property in your home, or maybe a financial account that was not transferred into the Trust or did not have a payable-on-death beneficiary.
By using a Pour-over Will, any assets you own outside the Trust are transferred by your Will into the Trust. Any assets owned by the Trust, however, will not need to be administered through the probate process.
The Privacy issue relates to the Probate process as well. When a person dies, with or without a Will, a Personal Representative needs to be appointed to administer the deceased person’s Estate. As part of the Probate process, the person seeking appointment as Personal Representative needs to file a copy of your Will with the court, as well as providing an inventory and accounting of distributions from the Estate. Court filings are generally public record, which means that other people can get access to documents about your family’s business.
It is not uncommon to have people call heirs inquiring about purchasing Estate property in these circumstances. Having a Trust can help people outside your family from getting information about your assets after you’re gone.
While a Trust is not the only way to manage assets during incapacity, it has some major advantages.
First, a Power of Attorney can fail when you become incapacitated. There is a distinction in the law between a Power of Attorney and a Durable Power of Attorney. Both give another person the authority to manage your assets on your behalf. A Power of Attorney that is not durable, however, will lapse if you become incapacitated, meaning that your agent will not be able to handle your financial affairs for you. A Durable Power of Attorney will remain in effect during incapacity. If you are planning for incapacity, you need a Durable Power of Attorney, but you would be surprised how many people don’t know whether their Power of Attorney is durable.
Second, a Power of Attorney can be rejected. Believe it or not, you can’t force other people to honor a Power of Attorney; at least not short of taking them to court over it. Power of Attorney form are rejected for many reasons (the Power of Attorney is too old, The Power of Attorney is not on a financial institution’s preferred form, failing to provide proof of incapacity, or fear of fraud), and banks, especially, are notorious for refusing to honor them. If you are not able to manage your own financial affairs, do you really want people questioning whether your agent is authorized?
Having a Living Trust avoids these issues because your assets are transferred into ownership of the Trust. When your trust documents are drafted, you designate successor Trustees who can take over management of the Trust if you become incapacitated. When a successor Trustee takes over, they instantly have full legal authority to manage trust assets, in a manner consistent with your wishes in a trust document.
When you pass away with a Will, you have some control over your assets. You can specify who gets certain property, and you can even put conditions on a person’s right to inherit some or all of your assets. While not all conditional gifts will be upheld by the courts (they will be rejected if the conditions go against public policy by, for example, requiring that a beneficiary commit a crime, or attempting to control a beneficiary’s right to freedom of religion), many type of conditional gifts will be upheld.
However, property passed to beneficiaries through a Will is almost always given outright to a beneficiary. This means that the beneficiary gets the assets immediately, and you can’t control what the inheritance is used for. You also can’t protect your beneficiaries from creditors. If a beneficiary inherits a million dollars and gets into a serious car accident the next day, the money you passed down is up for grabs.
If you want to have control over your beneficiaries’ inheritance, the only real way to do that is to use your Will to create a “Testamentary Trust” in your Will.
You can avoid having to do that by putting the assets into a Trust during your lifetime. Using a Living Trust also allows you to plan and leave assets to beneficiaries in a way that creditors cannot easily access.
A Living Trust is a great tool, but it only works if you actually transfer assets into it (called funding). An unfunded Trust will not give you any of the advantages I discussed above. I will write about the importance of funding in another blog post.