Estate planning is not a one-size-fits-all practice. What is appropriate for you may not be appropriate for your friend, brother, or neighbor. I can’t count the number of times a client has said “my friend told me I need a trust,” only to find out the client didn’t know what that meant or why it was recommended.
Revocable Trust. Irrevocable Trust. Living Trust. Disclaimer Trust. Marital Trust. Family Trust. Disclaimer Trust. Credit Shelter Trust. Asset Protection Trust. Special Needs Trust. Cabin Trust. It’s easy to see why the word “Trust” is the most misunderstood word in estate planning. All of these types of Trusts, and more, are established and used for specific purposes. Purposes that require a longer discussion than I can write about in this post. All Trusts, however, share some common elements.
At its core, a Trust is a legal entity that owns property, just like an LLC or an individual person. There are typically three types of actors involved with a Trust:
- The grantor or settlor is the person creating the Trust.
- The trustee is the person/people managing the Trust assets.
- The beneficiary is the person/people receiving the benefit of the Trust.
More often than not, when people discuss Wills and Trusts, they are usually referring to a Revocable Trust agreement, also known as a Living Trust. A Revocable Trust is a document, much like a Will, that describes who will receive your property, when, and how. However, the key difference is the Revocable Trust, if set up correctly, avoids probate.
A Revocable Trust is created by an individual during his or her lifetime. Typically, the same person is the Grantor, the Trustee, and the Beneficiary of his or her Revocable Trust. The Grantor retains the power to revoke or amend the Trust or change its terms, therefore having complete control over the trust and its assets. Hence, the “revocable” nature of the Trust. The Grantor also typically serves as the Trustee, until he or she becomes disabled or dies, at which point a successor Trustee takes over.
The Trust controls only those assets transferred to it, so anyone looking to create a Revocable Trust has some homework that needs to be done. This means new deeds must be signed for real estate, most bank and investment accounts need to be retitled, and all personal property and business interests need to be assigned to the Trust. This is specifically pertinent to those who own real estate in more than one state. Those who own a family cabin in Wisconsin, farmland in North Dakota, or snowbird to Florida may greatly benefit from a Revocable Trust. Since probate is a product of each individual state, each state would require their own probate process to obtain title to the real estate. A Revocable Trust could avoid the hassle of two separate probates.
Assuming a Revocable Trust has been set up and funded correctly, the Trust has many benefits. The primary purpose of a Revocable Trust is to avoid probate. By titling all your assets to the Trust, it means you technically don’t own anything – your Trust does. And if you don’t own anything upon your death, there is no reason for probate. However, if an individual fails to title their assets correctly, it could mean a probate is still necessary. In addition to avoiding probate and the potential hassles that come with that, a Revocable Trust also allows for the management of assets upon the incapacity of the individual. This allows for a seamless transition to the successor Trustee to be able to continue managing trust assets.
Avoiding probate generally translates to a much easier transition for your loved ones after your death. And in the legal world, “easier” usually also means less expensive. I typically tell people that there are three benefits of avoiding probate through the use of a Revocable Trust – I call them the three “E”s:
- Expense. There are attorney’s fees, court costs, publication fees, and other miscellaneous fees with probate.
- Efficiency. The probate process takes time. There is paperwork that needs to be prepared by an attorney and general information needed to complete that paperwork. Once filed with the Court, the Court needs time to review the paperwork and possibly schedule a Court hearing (although not necessary in a majority of probates). There are publication and notice requirements to creditors and interested parties. If there are conflicts, all of this can add up to months or years of significant court involvement, which can be very inefficient.
- Exposure. Probate is all public record, including all relevant documentation. Therefore, any person can obtain probate documents from the County. The documents may include the Decedent’s Will, biographical information, asset information, and personal information of heirs and beneficiaries.
At this point, the question is usually asked, “Why doesn’t everyone create a Revocable Trust?” and I always go back to how estate planning is not a one-size-fits-all practice. A Revocable Trust may not be the best option for everyone based on assets, family dynamics, and many other factors. Further, a Revocable Trust is more expensive on the front end than a Will. As discussed, there is much more work that needs to be done to set up a Revocable Trust correctly and expense may play a factor in the decision making.
A common question I get regarding Trusts is whether or not a Trust protects your assets from your creditors or nursing home expenses. The answer is a resounding NO. At least not a Revocable Trust. There are many other types of Trusts, some of which were referenced in the beginning, that could provide this type of protection. While there are strategies to protect your assets, that would require its own long and complex article. Other types of trusts are usually created for very specific purposes and many can be found written into a Will or a Revocable Trust. Confused yet? Please let me know if I can answer any of your questions.
Paul Funke
651-332-8710