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November 28th, 2022 |

What You Should Know About Trusts

Reading Time: 8 minutes

We’ve all watched that scene in a movie in which the family gathers around to hear the reading of a loved one’s last will and testament. The document is intoned, everyone listens solemnly, and we assume everything’s taken care of. So it’s no wonder that most Americans write a will to indicate their wishes regarding inheritance and leave it at that.

But the truth is that for many American families today, a trust— legal arrangements that give a person or a group of people the right to hold and manage specific assets—is a much better way to protect your estate and make sure that your money, property, and other possessions go directly to those you wish to inherit them.

A trust may not be a wise choice, however, if someone:

  • Has set up most property ownership in joint tenancy or pay-on-death transfers.
  • Owns very little valuable property.
  • Doesn’t have a person he trusts to oversee his property.
  • Is involved in divorce proceedings, as some state laws bar creating such trusts once a divorce is filed.

Should you establish a trust?

When a loved one dies without having established a trust, many families are dismayed to find themselves with a host of unexpected expenses and time-consuming hassles. (And yes, these situations can happen to anyone—emergencies occur at every age).

Here are five risks you need to be aware of that might necessitate a trust.


Risk #1: You Won’t Be Able to Directly Transfer Your Family Home

The number-one reason to establish a trust, experts say, is to smoothly pass on your home and any other real estate you own. When property has been placed in a trust, it is transferred at death directly to the designated “successor trustee” via a relatively straightforward process that can be accomplished within a few months, if not weeks.Without a trust, even if your loved one specifies in her will that her home is to go to you, that transfer can’t be done directly but must go through the court. Why is this? Because any estate worth more than $100,000 must go through a court-supervised verification and distribution process called probate that will tie up real estate and financial transfers for much longer. And given the value of real estate in most of the U.S., by the time the value of a home is added to savings and other assets, your family will be over this limit.


Risk #2: You’ll Be Tied up for Months or Even Years With Court Hassles

No question about it, the probate process is a complicated one. Even when there’s a will, property must be inventoried, real estate appraised, relatives notified and debts paid, all before the court distributes the property. This typically takes somewhere between 9 and 18 months, but some cases drag on longer. Because you’re subject to the court’s schedule, there can be delays while you wait to get hearings or for orders to be approved and processed.

If there is no will (which is known as dying “intestate”), there are even more steps because the court has to decide who inherits based on a hierarchy of next-of-kin starting with spouse, moving on to children and then to other relatives.

However, when you establish a trust, things work quite differently. You’ll place savings and investment accounts and other significant assets into the trust, as well as your home. And like your home, these will pass directly to your trustee.

As you can see, while you’ll spend a bit more time up front setting up a trust, your loved ones will save that time in multiples later on, as your assets are distributed. You’ll still need a will when you have a trust, but it covers mostly personal property and smaller items.

Keep in mind that where you live, the size of your estate and many other factors will affect what’s best for you.


Risk #3: Probate Can Cost You a Lot of Money

Probate is not only time-consuming and extremely frustrating, but it can be expensive as well. The rules governing estate distribution are both strict and complicated, and a large number of people including accountants, appraisers, attorneys and the court itself are involved in the verification and accounting process. And as we all know, legal fees tend to be steep.

Probate costs are calculated using a complex schedule in which both attorneys and the court itself get a set percentage of the estate’s total value. These start at 4 percent (each—both for attorneys and for the court) for the first $100,000 and descend from there, typically averaging about five percent of the entire estate.

So for an estate that’s ultimately worth $400,000, these fees would generally run to $20,000 or more; for an estate worth $1,000,000 (not as much as it seems if you live in an area with high-value real estate, such as California or New York), fees might run to $45,000 or more. The fees are deducted from the estate before it’s paid out, so they cut directly into the inheritance.

There are fees associated with a trust as well, but they tend to be quite a bit lower. The trustee who administers the estate typically charges 0.75 to 1.5 percent; sometimes more for big estates. However, trustee fees are on a sliding scale, and a trustee who’s a family member administering a small estate may choose to take a smaller percentage to save the estate money.


Risk #4: Your Cash Is Tied up Without Funds Available to Pay Bills

While a will is probated, the assets of the estate are frozen so the court can take an accounting of them. This means that there won’t be money available to pay any bills or expenses incurred during this time, such as funeral costs and medical bills. Utilities and maintenance costs for a parent’s home would still need to be paid out of pocket for the length of probate, even though the home will not yet have been transferred to the heirs. How long does it take before money is freed up? It depends on the estate, where you live and many other factors, but typically at least several months and often much longer.


Risk #5 Your Estate May Be Subject to Inheritance Tax

In the U.S., inheritance taxes aren’t a big issue for most people, since they apply only to estates worth more than $5.4 million, and only 0.2 percent of all Americans fall into this category. However, if you do fall into this percentage, there’s a different kind of trust called an irrevocable trust that may protect at least some of your property from these taxes.

The good news is that it’s not as hard as most people think to set up a living trust. Whether you’re drawing up a will, creating a trust or doing both, you’ll want to work with a trusted estate lawyer who will guide you through the process.


Revocable Trusts


The Benefits of a Revocable Trust

Like a will, a trust is not a universal, one-size-fits-all solution to everyone’s estate planning needs, and it’s important to understand the nuances of creating a trust.

One general difference between estate planning trusts is that some are “revocable” (meaning that the individuals can change their terms at any time, as long as they are mentally competent to do so) while others are “irrevocable” (they can’t be changed or amended once created).

These days, the most common type of estate planning trust is a revocable living trust, which allows people to enjoy and control the trust’s assets during their lifetimes and then automatically shift ownership of the property in the trust to a named trustee or trustees at death. The arrangement operates much as a will does, except that upon death, the trust property won’t be processed through probate—which, as we’ve seen, can add administrative and legal costs and also delay the time it takes for the property to transfer to the beneficiaries.

To begin, a revocable living trust is one of the single most important documents for older adults—or anyone with assets—to have in their estate plan. They don’t need to be rich or have vast assets—a life insurance policy, checking account, house or any asset of value merits establishing a revocable living trust.

There are other important advantages to this type of trust. “While a will is a matter of public record, a trust isn’t. You may have an issue in your family that you don’t want the public at large to know about, but anyone can get access to a recorded will,” says Ashley Biteler, a trusts and estates attorney in Chesapeake, Virginia.

What’s more, a revocable living trust lets a trustee control who inherits what—and when.

Revocable living trusts also give elders control over the distribution of their assets in a way no other legal vehicle can. “A lot of parents are worried about a child’s money-management ability, or they’re concerned that a child’s marriage seems rocky. Leaving them their inheritance in trust is a lot safer than leaving it to them outright,” says Biteler.

Why? A revocable living trust offers what Biteler calls “creditor and predator protection.” A properly drafted trust ensures that the assets can’t be tapped via a lien to pay a beneficiary’s debts, nor will a divorcing in-law be able to lay claim to the assets. It can also prevent children from a first marriage from being intentionally or unintentionally disinherited.

For example, if your mother dies and your father remarries, typically your father will hold his assets jointly with his new wife. Without specific provisions, his assets would pass to his second wife at his death. She likely has a will that would pass those assets on to her own children, not her second husband’s children. A revocable living trust, in which your father would have named specific beneficiaries, avoids this potential problem.

The bottom line, says Biteler, is that a revocable living trust “allows you to have more control over your assets and money, even when you’re gone. You can make sure your assets go exactly where you want them to go.”


Transferring Control of a Revocable Living Trust

Biteler says many people are initially concerned that they’ll lose control of their assets if they set up a revocable living trust. “That’s a myth,” she says. “As long as they’re mentally capable, they’ll have complete control over their assets.” This is accomplished by naming the grantors—the people setting up the trust—as the trust’s primary trustees.

It’s only when those trustees choose to relinquish control, or when they lose the capacity to manage their own affairs, that the “secondary trustee” takes over. Biteler recommends that a person’s doctor be the one who decides when he or she has lost that capacity. Otherwise, it’s the trustee’s decision to decide when control transfers.

If someone is concerned that they’ll lose control of their trust too quickly, they may have chosen the wrong person to be his secondary trustee.

“If that’s the concern, then that person shouldn’t be the senior’s agent,” Biteler says. He or she should name someone they trust completely. That doesn’t have to be a family member. In fact, in some families it makes sense for a trusted family friend to fill that role instead. In rare situations, Biteler says, people don’t have anyone they’re comfortable appointing as secondary trustee. In that case, nonprofit organizations such as Catholic Charities or Jewish Family Services can provide someone to serve in this role for a fee, which would be paid from the estate.

Once the last surviving trustee dies, it’s this secondary trustee who carries out the primary trustee’s’ wishes, making sure assets go to the beneficiaries named in the trust.


Funding a Revocable Living Trust

A revocable living trust alone isn’t enough to avoid probate. Once the trust is constructed, it needs to be “funded.” This means the people creating the trust need to retitle their assets, such as real estate or brokerage accounts, as belonging to the trust. The trust itself is like an empty box; its value is determined by what’s been put inside it. A trust can only avoid probate to the extent that assets are in it. “It doesn’t do any good to have a beautiful trust with nothing in it,” Biteler says.

Generally, all of the person’s assets should be placed in the revocable living trust. The exception would be an IRA, which doesn’t go into the trust; instead, either the trust or a specific individual is named as a beneficiary of the IRA. Life insurance is usually handled in the same way. A financial planner and attorney can and should assist the trustee in transferring his assets into the trust.


Drafting a Revocable Living Trust

When creating a revocable living trust, a person may find the help he needs in a good self-help book, software package or forms he’s found online. One caveat is to make sure that such resources are state-specific and current, as state laws controlling living trusts differ and also change over the years.

Some people prefer to go directly to an attorney to draft and finalize the living trust document for them. If your family member wants to go this route, look for a lawyer who has experience in estate planning.

As a third option, your family member may be most comfortable learning about living trusts by reading a book or reviewing software, then doing a draft and hiring an attorney who will agree to review it before it’s made final.


Revoking the Trust


A revocable living trust means just that—the trust can be revoked. Very few people do this, but most people can and should revise their trust periodically. It can be amended or restated in its entirety. (When your family member amends or restates their trust, they don’t need to retitle his assets.)

“People think estate planning is static, but it’s not. Trusts should be reviewed and revised, just like your investments and your insurance,” Biteler says.

Every five years is a good benchmark. Laws change, and family situations and assets may have changed, too. The trustee may have changed their mind about whom they want as their secondary trustee. Secondary or contingent beneficiaries may have died or gone through a divorce. New grandchildren may have been born. Updating their trust ensures that their assets will go to those they intend, no matter what the law or circumstances.

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