Thursday, October 23, 2014

Probate Avoidace Series, Topic #2: Living Trusts

As described in Topic #1 of this series, probate is the traditional court-supervised method of distributing property after the death of a family member.  People dislike probate because the judicial process often drags on for a year or much longer.  It is also frequently expensive, requires trips to the courthouse, and is also highly public.

In this post, I'll briefly discuss a very popular and flexible probate avoidance tool, known as the revocable living trust.  When many people hear the word "trust," they automatically think of other words like "billionaire," "complicated," or "trust fund baby."  However, rest assured that living trusts are relatively simple to understand.  They are widely used by middle class families across the country, and are becoming the most popular estate planning option for American families and their attorneys.  Here are the basic features of living trusts:

A Trust where You are the Boss

A "trust" is a simple legal concept.  Someone (a trustee) holds something of value (trust propertyin trust for a beneficiary.  There are many variables to this scenario, where the beneficiary might be a child, a disabled adult, a charity, etc.  However, the revocable living trust is one of the simplest types of trusts, because while you are alive, you are typically the boss of everything!

In the typical revocable living trust, you sign a document creating a trust.  You appoint yourself as the trustee.  You make your property the "trust property."  And the beneficiary of the trust while you are alive!   The IRS treats your trust property as personal property, so there are no changes to your tax situation or extra returns to file.  While you are alive and healthy, the trust is revocable, meaning you can change it or get rid of it at any time.  Essentially, after you create the trust and title your assets to the trust, you go on living your life as you did before. 

What Happens when you get Sick or Die?

While you are alive and well, you may not even notice the living trust is there, since it is largely a legal fiction where you are a trustee, the trust property is your property, and you are free to use it as you see fit. 

Where the trust becomes useful is if you become incapacitated or die.  When you draft the living trust document, you name someone trustworthy to serve as successor trustee in the event of your incapacitation or death.  At that point, the trust shifts from being revocable (changeable) to irrevocable (set in stone). 

In the trust document, you leave clear instructions to your successor trustee about how to handle the trust property (all the property you put into the trust).  In this respect, the living trust is a lot like a will, but there can be many advantages to the trust over a will:

Advantages of a Living Trust

When you die, your successor trustee can immediately get started on closing your estate.  As the new trustee, he or she has legal authority to distribute any trust property in accordance with your trust directions. 

Most attractively, there is no need for the trustee to go to probate court and wait for a year or more to close out the estate (as would an executor if you had left only a will).  Typically, trust property can be distributed in a matter of weeks, and the distribution is handled entirely out of court. 

Another benefit is that property handled through a living trust does not count as part of your "probate estate."  If you have a small amount of property that mistakenly didn't get titled to the trust, there is good news on that front as well:  In many states, if your remaining probate estate (anything left over that was not put in the living trust) is below a certain dollar amount, you can go through a highly simplified process to distribute that remaining property.  In Illinois, a probate estate containing under $100,000 and no real estate, and meeting certain other criteria, can be handled through without going to court.  The family uses a small estate affidavit and avoids a lengthy  and expensive process. 

For families that have gone through traumatic multi-year probate court proceedings, and have spent tens of thousands of dollars in legal fees, it can be difficult knowing that their loved one's estate could have been wrapped up at little or no cost and in a matter of a few weeks.  However, advanced planning is required -- once you are dead (without a well-crafted estate plan), it is too late.  Your loved ones are stuck with the baggage of the decisions you make while alive.

Aside from saving time and legal fees after death, a living trust has another benefit:  It is private.  Neighbors, curious members of the public, distant relatives, etc. are unable to access your living trust.  In contrast, any probate proceedings would be completely open to the public, even those
proceedings discussing your most sensitive family business.  Also, disgruntled relatives will have a harder time challenging a trust than a will, decreasing the chances of a protracted, expensive legal battle.

A Few Notes

Above I described the basics of a living trust.  Here are a few additional points to consider when discussing a living trust with your attorney:

Your attorney will likely spend more time drafting a living trust than he or she would spend drafting just a will, so expect to pay more up front for a trust.  However, remember that these extra fees now will often save your family far greater fees and months or years of court proceedings later on.

Additionally, contrary to popular belief, property held in a living trust can be reached by creditors (just like property held in your name).  The same is true if you are sued--trust property can be seized to satisfy a judgment against you.

Finally, even if you have a living trust, it is still important to have a will.  A will names guardians for your children.  A will also disposes of any property not covered by your trust.  You can put a provision in your will giving any non-trust property to the trust (a "pour over" provision). However, don't go without one.

In conclusion, a living trust is a relatively straightforward yet powerful probate avoidance tool.  It is a good fit for many American families.  Talk to a qualified estate planning attorney to see if a living trust is right for you.

Next Topic in the Probate Avoidance series:  Joint Accounts and Naming Death Beneficiaries

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  

Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 


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