Life is full of important documents. Birth certificates, marriage licenses, the property title of your first home. These pieces of paper are not only legal instruments but cherished markers of life’s big moments. Unfortunately, not all paperwork is so gleeful in nature. No matter what stage of life you are in, thinking of your future is always a good idea. Inevitably, everyone has to “plan” for death. Specifically, drafting documents such as a living trust. In this article, we are going to detail everything you need to know about a living trust and more.
What is a Trust?
Before we dive into the nitty-gritty of a living trust, let us first discuss what a trust is. A trust is a common financial tool to pass assets from one party to another. Trusts are especially popular because they are a legal way to protect your assets and reduce taxes. Furthermore, a trust is commonly utilized to avoid the probate process. We will discuss probate later in this article.
What is a Living Trust?
A living trust is a legal document that details the whole of your assets within a trust during your lifetime. Upon your death, your assets will be legally redistributed to a pre-determined beneficiary, or “successor”. As previously mentioned trusts act as a way to avoid probate. In terms of a living trust, this notion is especially beneficial because the trust is handling the entirety of a person’s assets. Namely, what happens to them in the event they become incapacitated or pass away. These situations are often delicate and emotional. Forgoing court proceedings regarding asset distribution can be a real gift.
Why Should I have a Living Trust?
Planning for death is never fun, but it is necessary. Drafting a living trust can make this inevitable transition legally and financially easier on your family. If you are skeptical, below are some reasons you should consider having a living will.
Quick and Easy Distribution of Assets
A living trust will detail extensively your wishes in regards to the fate of your assets. Perhaps you have a home that has been in your family for years. Naturally, you may want to leave this home to your children to continue your family legacy. Any asset to your name will be assigned a beneficiary.
Upon your death, a representative of your estate will handle the pre-determined distribution of your assets. This process takes mere weeks compared to the year’s probate may consume.
With a living will, this process can bypass probate and save loads of time and money in the process. A living will places the ownership of your assets into a trust. Therefore, the trust, not you, owns the assets and property within the trust. This simple distinction is what keeps your estate from going through probate after your death. During your lifetime you still maintain control over your assets.
Your beneficiaries will still cover any outstanding debts with money from the estate. However, there will be more leftover by having avoided probate costs. Better yet, out-of-state properties bypass probate as well. Without a living trust, multiple probates may occur if properties are owned across multiple states.
Lessen Estate Taxes
The more valuable the estate, the greater the federal estate taxes. A properly composed living trust can help minimize estate taxes by utilizing tax exemptions. Who doesn’t love saving money on their taxes?
Peace of Mind
Dying is scary for a number of reasons. Chief amongst them – not knowing what is going to happen once you are gone. Having a living trust can help ensure your wishes are carried out after you pass on. You can rest easy knowing your family has been taken care of. Losing a loved one is hard enough without having to comb through layers of legal proceedings.
A living will is a private, legal document. Before and after your death this fact remains true. A will, on the other hand, is subject to public record. Many people prefer to detail their wishes privately, understandably so.
More Control of your Estate
Accidents happen and sometimes people land in a sort of in-between state. For example, if they are in a coma or suffering from a debilitating disease. Should you become incapacitated – your chosen trustee, as detailed in your living will, can handle your affairs. This prevents your estate from falling into the sticky legal hands of the court system.
What is Probate?
When people die, they leave a legacy behind. Every person has a legacy as unique as the life they led. People have families, friends, and a myriad of assets they accrue during life. Assets can include homes, money, cars, and items of personal significance. When someone dies, their assets, also known as their estate, will go into probate for distribution. Furthermore, probate will include the transfer of debts the deceased person may have left behind. Even if a person has a will, their assets will go through probate.
What Happens During Probate?
Probate is a notoriously long and expensive process. In fact, probate can take six months to two years. During this time, the estate and all its assets are simply frozen in time. They cannot be used or sold until the terms of the probate are determined. Hence, why utilizing a living trust is a good idea. However, you may find yourself dealing with probate at one point or another. If that is the case, here are the steps you can expect:
1. Filing a Petition
First and foremost, a petition must be filed with the probate court. This petition will declare whether or not the deceased had a will. If they did not, you must assign an administrator to handle the estate. In the event the deceased had a will, the document will be submitted into probate.
Any living heirs of beneficiaries of the estate must be noticed of the court proceedings. Thus, giving them the opportunity to formally object the petition if they have just cause. Furthermore, the probate hearing will be announced in local newspapers. Therefore, potential unknown creditors of the late executor can be informed of their clients passing.
2. Take Inventory of the Estate
Additionally, if the appointed administrator of the estate learns of any outstanding debts owed by the deceased, they must inform the creditors post haste. Most states require a written notice be sent to the creditors. Should the creditors want to make a claim towards the estate, they have a set amount of time to do so. This period of time varies by state.
Then, a detailed inventory of the estate will be made. Everything from stocks, business holdings, property, furniture, and more. In some estates, a court-appointed appraiser will assign a monetary value to all necessary assets.
3. Pay Funeral Expenses and Debts
Debts owed will be paid back either with money from the estate or from selling various assets to meet the owed amount. The administrator will ensure that all requested claims are legitimate and true. Furthermore, the administrator of the estate will determine which assets will be sold to pay any lingering debts. Finally, the administrator will use funds from the estate to pay the necessary funeral expenses.
4. Property Title Transfers and Asset Distribution
Whatever assets remain after paying outstanding debts are distributed amongst the beneficiaries of the will. Typically, the will details specifically who receives which assets. In the event the deceased did not have a will, the states intestacy laws will determine the proper course of action.
Once proper courses are determined, asset ownership will be appropriately and legally transferred to the rightful heir.
Revocable Living Trust
In short, “revocable living trust” is another way of simply saying “living trust”. To extrapolate, with a revocable trust the terms can be changed at any time. The owner of the trust has the power to alter stipulations within the trust and add or remove beneficiaries as they see fit.
This type of trust has some notable benefits. First of all, life happens. Perhaps you fall out with someone who is currently named a beneficiary in your trust. You have the power to modify to remove them as a beneficiary if you so desire. Conversely, you may have someone come into your life after your trust was established that you would like to add! Furthermore, you can easily add and remove trust assets as they come and go in your life.
However, a revocable trust does have drawbacks. For example, when the owner of the trust passes away, the assets within the trust are taxed on the state and federal level. Furthermore, having greater control over the trust leaves your assets less protected from creditors. If the owner of the trust is sued, their assets are subject to liquidation to pay outstanding debts.
Irrevocable Living Trust
On the other hand, an irrevocable living trust cannot be altered once signed. Naturally, in certain circumstances, changes are possible – but incredibly hard to enact. This is due to the fact that the owner of the trust places all of their assets into the trust itself. Therefore, transferring ownership and control of the assets into the hands of the trust.
Why would someone choose to relinquish control? Well, irrevocable trusts have lucrative tax benefits. Since the assets are owned by the trust, they are not considered part of the owner’s taxable estate. Ultimately bypassing estate taxes when they pass away. Better yet, an irrevocable trust protects the benefactor of the trust. For example, the benefactor will not have to pay taxes on an income earned by the assets left to them within the terms of the trust.
How to Set Up a Trust
Clearly, there are pros and cons to both irrevocable and revocable living trusts. How do you choose which is best for you? In short, consult an attorney trained in trust law. They will help asses your unique situation and determine the best path for you. On the other hand, it is possible to make a do-it-yourself living trust. However, due to the complex nature of estates and trust laws, it is a good idea to at least have a lawyer review your living trust. Either way, below are some tips on how to create a living trust.
Keep in mind that trust laws and requirements vary from state to state. Avoid the headache of failing to comply with state requirements and consult the list of living trust requirements by state.
List out Your Assets
First of all, make a thorough list of all of your assets. To clarify, an asset is an item of value that can be converted into money. Common examples of assets include:
- Money – Money in the bank (checking, savings, etc), physical cash, treasury bills, etc
- Real Estate – Such as parcels of land, houses, businesses, or any physical structure
- Personal Property – Cars, boats, furniture, jewelry, etc
- Investments – Bonds, life insurance policies, annuities, pensions, mutual funds, stocks, retirement plans, etc
Keep in mind that assets may also take sentimental value over financial value. Perhaps your mother has a monetarily worthless necklace she wore on her wedding day. Items like this can lead to familial tension when not outlined in a will or trust. You may want to talk to your family about items they want, as to avoid tension when you aren’t there to mediate.
Leave a Paper Trail
Countless trust distributions have been slowed down by a lack of document preparation. Many of your larger assets will have important documents attached to them. Such as vehicle titles, property deeds, life insurance policies, bank information, etc.
When preparing your trust, be sure to include any relevant documents. This will wondrously expedite the transfer of assets when the time comes.
Select Your Beneficiaries
A beneficiary is a recipient of your trust assets upon your death. You can have as many beneficiaries as you would like. Beneficiaries often include family members, close friends, or even organizations such as charities. You have the power to determine who gets what specifically.
Knowing who you want as your beneficiaries, and who you don’t want before you draft your trust is a vital step in the process.
Furthermore, some of your assets may already have beneficiaries. For example, if you have a life insurance policy, you would have selected beneficiaries for that. Be sure to inform your attorney of any pre-determined beneficiaries in your existing assets. It is important that the name beneficiaries line-up in the trust, to avoid discrepancies and potential legal disputes later on.
Appoint a Successor Trustee
You, as the architect of your trust, are known as the trustee. This title gives you control over the assets within your trust during your lifetime. Every living trust must detail a successor trustee. This is a very important role whose importance should not be taken lightly. The successor trustee is responsible for paying outstanding debts and distributing your trust assets upon your death. This person is trusted to honor the wishes you had laid out during your life.
Furthermore, should the trustee become incapacitated, the successor trustee would take over the trust and be responsible for handling the necessary affairs.
Choose a Guardian for Your Children
To clarify, your living trust cannot legally detail who you want to care for your children in the event of your death. However, it is still a very important notion to consider. Talk to your lawyer about the appropriate paperwork to acknowledge this information.
What is a Will?
A few times in this article, we have referred to a “will”. Namely, the fact that a will must go through probate upon a person’s death. What else is involved in a will?
A will, or “last will and testament”, is a legal instrument that details a persons wishes upon their death. Most notably, a will details how you want your assets to be distributed. Similar to a revocable living trust, you can freely amend your will throughout your lifetime. Unlike a living trust, you can choose a guardian for children under the age of 18.
Living Trust vs. Will
Interestingly enough roughly 80% of Americans have a will instead of a living trust. This is in large part due to the fact that a living trust is more expensive to draft. Furthermore, a living trust requires financial attention throughout its maturity during your lifetime. There are undoubtedly pros and cons to both wills and living trusts. So how do you choose which is best for you? Some factors to consider when making your decision:
- Assets – Probate can wreak havoc on many of your assets. Especially if you own a business, consider using a living trust to bypass your company getting tied up in probate. Furthermore, some states all wills to bypass probate if the estate is valued under a certain amount
- Location – To reiterate, state trust and estate tax laws vary widely. Check with your attorney about what benefits and disadvantages wills and living trusts have depending on your state of residence
- Beneficiaries – In a living trust, you can details when a beneficiary can reap the benefits of the assets left to them. For example, you may not want to leave a fifteen-year-old several thousand dollars. Instead, you may choose for them to be able to access that money at the age of your choosing. Additionally, you may dictate that the money left to them must be used for certain actions, such as paying for college
- Taxes – A living trust is often preferred for large estates because it helps reduce the cost of estate taxes on both the state and federal level
Ultimately, everyone has a unique set of reasons that make their estate between suited for either a will or a living trust. Consult your lawyer about which is the best choice for you.
Notarizing your Living Trust
If it not already apparent, a living trust is an incredibly important document. Once you have drafted your living trust and gotten approval from an attorney, you should get it notarized. Getting a document notarized makes it more official in the eyes of the law. Notarization is when a representative of the secretary of state (called a notary) witnesses the signing of documents of great importance. A notary does not simply watch someone sign documents. Instead, a notary prevents fraud by confirming the intent and identity of the signer(s).
First, a notary will confirm the signer’s identity with a valid photo i.d. Then the notary will confirm that the signer understands the entirety of the document. Finally, the notary will ask the signer if they are signing by choice. The notarization will be complete when the notary themselves signs and stamps the document with their unique notary seal.
How to Prepare for a Notarization
If you are unfamiliar with getting documents notarized, it is helpful to know how to best prepare for your appointment. First of all, it is important to understand the distinction between a notary and a lawyer. In the previous section, you read that a notary will ask you if you understand the document. If you say “no”, understand that the notary cannot translate for you or give you legal advice. Therefore, you need to consult a lawyer or translate the document yourself prior to visiting a notary.
Once you are comfortable with the contents of your document, here is what you need to bring to your notary appointment:
- Proper photo identification – Such as a valid drivers license or passport.
- The Document – Ensure that any required fields are filled out beforehand, but wait to sign until you are in the presence of the notary
- All signing parties – You can save valuable time and money by bringing all necessary signers to the notary appointment to sign at the same time
- Notary Fee – While some places (like your bank) may offer complimentary notary services, most notaries will charge a small fee per signature
Please note that notary laws and requirements vary by state.
Living Trust: In Conclusion
A living trust is an important legal document that determines the fate of everything you worked hard for in life. A living trust has loads of benefits for both you and your beneficiaries. However, these benefits vary based on your state of residence and the contents of your estate. The legal weight of a living trust should not be taken lightly. Be sure to consult a well-informed attorney to determine your best course of action regarding your end of life planning.