10 Things You Should Know about Living Trusts
Years as an estate planning attorney in California taught me the importance of setting up a living trust. It also made me very aware of how many people out there do not understand the basics of a living trust. I came upon an article by AARP, which I feel explains it in very clear terms.
Whether a revocable living trust is right for you depends on your circumstances. I will say, from a personal point of view, that I find revocable living trusts much better vehicles than wills for passing your estate to your intended beneficiaries. Trusts have the added benefit of setting up guidelines for how you want your assets managed if you are alive, but incapacitated and unable to manage them yourself.
So, what is a revocable living trust? Well, simply put, it is a written agreement designating someone to manage your property. It is “revocable” because as long as you are alive and have the capacity to make changes, including revoking (or cancelling) it, you may. Nothing is set in stone. It is “living” because it is established while you are alive and, unlike a will, it has a purpose and function during your lifetime.
Trusts involve three main parties: the Settlor (your, as the creator of the trust), the Trustee (the person responsible for managing the trust), and the Beneficiaries (those who get the benefit of the trust). Typically, you are the initial Trustee of your own trust because you do not need anyone to manage your assets for you. In the trust document, you name a Successor Trustee, a person who will step in and manage the trust for you if you are unable to do so, or at your death. You are also the primary Beneficiary of your trust, again, because the assets in the trust are yours and should be used for you. In the trust, you name remainder beneficiaries, those who will receive any assets remaining in the trust after your death.
Why choose a trust over a will? Wills are a matter of public record, meaning they must be lodged with the court at the testator’s (the person whose will it is) death. Typically, with a will, a probate is required as well, meaning that the court system will be involved through the entire process of distributing a person’s estate. Trusts tend to be much more private ways of distributing your estate, as courts are not involved unless a problem arises. Trusts also provide for more flexible ways of leaving a person some part of your estate, as you can designate that a beneficiary receive his or her gift over time and in amounts that you specify.
Do you need to fund the trust? One place where I disagree with the AARP article is when it states that it is not necessary to fund a trust when it is created. It is important to understand that the trust can only control what it owns. If real property is not transferred into the trust (by way of a recorded deed), it is not owned by the trust. If bank accounts are not retitled in the name of the trust, they are not owned by the trust. Any assets outside of the trust at your death will not be distributed according the trust. Likewise, if a Successor Trustee needs to step up and manage your assets for you while you are alive, they will only be able to do so with the assets that are properly funded to the trust. The author of the AARP article suggests that you can direct your trust to be funded at your death, but that is most likely through a will, and now all of the requirements of executing a will will need to be followed, as well as a full trust administration. In my California law practice, I saw over and over again the negative consequences of not properly funding a trust. I would urge anyone with a trust to ensure it is properly funded now, rather than waiting for some future time.
Should an attorney set up the trust? YES!!!!!! Any estate planning attorney can tell you horror story after horror story about trusts that were not properly drafted. On-line or generic do-it-yourself kits will almost certainly end in a lengthy court proceeding to figure out how to distribute your estate. This is an important legal document and you want to be sure you are working with an attorney well versed in estate planning.
How much does a trust cost to set up? The AARP article suggests it typically runs several thousand dollars to set up a trust. I respectfully disagree. While your geographic location will have some bearing on the cost (it is typically more expensive in large cities like Portland or Los Angeles than in more rural places like the Rogue Valley), a basic trust-centered estate plan (this includes a Trust, Pour-Over Will, Financial Power of Attorney, Health Care Directive) should probably cost between $1,500-$2,500. The more complex your estate, whether from the assets included or your distribution scheme, the more expensive the trust will most likely be. However, what you save later by avoiding probate and possible conservatorships makes the investment well worth it. The reality is, the difference between a trust-centered plan and a will-centered plan is one document – namely the trust – and the cost differential between the two should not be significant.
Do you need to update the trust? Just as with your investments, your estate plan should be reviewed annually. Family structures change. Financial situations change. Life changes. These are all things that may result in adjustments being made to your trust to keep it up to date. These updates should also be done with an attorney. Some attorneys may include annual reviews as part of their service to their clients; others may not. If your attorney is one who charges a fee to review the trust with you, or if you do not have an ongoing relationship with the attorney who created the trust, I would be happy to help you with this review. Please contact me to set up a free initial consultation.
To read the full AARP article: AARP – 10 Things You Should Know about Living Trusts
Cheri Elson, J.D.
Gray Matters Consulting