Trust Me! What You Need to Know About Trusts

The most common statement I hear from a new client, after recommending a Revocable Trust or Living Trust is, “I don’t have enough money to really need a Trust!”

This is a complete falsehood, which equates legal documents to the amount of assets you have.

Nothing could be further from the truth. It is true that having a substantial estate would necessitate having a Revocable Trust to lower estate taxes, but the primary advantage of having a Living Trust is to avoid a probate.

Probate is simply the procedure for transferring a decedent's assets, either by person's will, or, if there is no will, by following state statutes.

In the vast majority of cases, the system functions smoothly and without undue delay or expense. But sometimes, because of a will being contested or other disputed claims, the estate could be tied up for years and suffer enormous legal fees and administrative expenses.

There are only two ways to avoid probate: live forever or don't own anything.

A Living Trust tries to accomplish another way of avoiding Probate and in most cases, having a Living Trust is a big advantage.

Who Does the Contesting of a Trust?

Have you ever heard the joke, “Do you know the difference between in-law’s and outlaws?"

“Only one of them is wanted.”

If a problem arises, it’s not your own children that are of the cause of it, but, it’s usually who they are married to. Sadly, I have seen the closest of siblings agree to disagree only because of their spouses.

A Trust goes under several traditional names like, "Revocable Trust" and "Inter Vivos Trust." Literally, a trust "between the living," the Latin name for Inter Vivos Trust tells you that the concept is very traditional. A Living or Revocable Trust is created by a living person that may be revoked or modified only by themselves and no one else. The creator of the Trust, called the "Grantor," can be his or her own trustee, and can designate a Successor Trustee or Trustees in the event of incapacity or death.

The Grantor is typically the beneficiary of the Trust during his or her life, and designates in the Trust document those who will be the beneficiaries upon his or her death.

The use of a Living Trust to avoid probate requires that the Trust be funded with all, or substantially all, of the grantor’s assets during their lifetime. This way, the Trust enables the grantor to follow the mantra,   “don’t own anything,” allowing the assets to be passed down from personal ownership to ownership by the Trust. The assets have passed from individual ownership to ownership by the Trust, and, there is nothing to "probate." The grantor can enjoy the use of the Trust assets during his or her life.

An additional advantage of having a Revocable Trust, beyond probate avoidance, is that the size and distribution of the estate is kept confidential, unlike probate, where the proceedings are a matter of public record. The assets of a Living Trust are typically distributed to beneficiaries much sooner than is possible in the probate of a will. AARP has done a survey on probate that finds that it normally takes 18 months to finish and distribute the estate to the beneficiaries.

A major disadvantage of a Living Trust is the cost associated with its preparation and funding. The paperwork is more complex for a Living Trust than for a will and the attorney's fee is typically larger. Property that passes by title, for example real estates and vehicles, has to be transferred formally from individual ownership to Trust ownership. More paperwork means more expense. Remember that   attorneys get paid by the pound of paper they create.

You may need to change the beneficiary designations to insurance policies and bank accounts. Your attorney will advise you on how to fund your Trust.

A Living Trust can cost two to three times the cost of a will, along with ancillary documents, if the estate has substantial assets to retitle. People who choose a Living Trust over a will are essentially doing much of their own probate before their death, similar to the way that some people plan their own funerals. As a result, they are paying costs and performing work that would normally have to be done by the Trust’s personal representative.

Additionally, the formalities of setting up and funding a Living Trust must be observed and records kept as to reflect observance throughout the grantor’s life if the transfer of the assets is to occur smoothly and without probate when the settlor dies. Again, this is more paperwork and transaction expense to keep the Trust current. Unfortunately, many people lack the self-discipline necessary to keep their affairs in the order required by a Living Trust after they have established one.

I usually recommend, unless unusual circumstances exist, that it's in the best interests of a new client to get a Living Trust. The cost of having a probate more than outweighs the cost of establishing a new Trust. A Trust also includes all the necessary ancillary documents at a much cheaper price than obtaining them on an individual basis.

I advise my clients that I could give them all the financial advise in the world, but they could lose everything anyway, unless they have good legal documents to protect themselves, and, to always remember, "In America, we don't have a justice system, we have a legal system."

A good Living Trust will give you the protection that you need.