Your aging loved one may have recently received an invitation in the mail to a seminar that will discuss “living trusts.” Your neighbor may have mentioned they set up a living trust at the suggestion of their attorney. So, what exactly are trusts, anyway, and who should use them for estate planning?
What Is a Trust?
Basically, a trust is a legal arrangement in which a person transfers the legal title to certain property (cash, investment accounts, real estate, etc.) to another person (the trustee) who agrees to hold that property for the benefit of a third person (the beneficiary) according to the terms of the trust document. In fact, the same person can wear all three of these “hats.” You can be the transferor of the property, the trustee and the beneficiary. However, the transferor no longer owns the property, the trustee does. That is the key to the benefits of a trust.
Such a trust can either be amendable and revocable (a so-called “living trust”) or unchangeable and irrevocable (usually the type used for Medicaid planning or tax planning purposes).
Advantages of a Living Trust
One of the biggest advantages of a trust is that it allows you to spell out how the trustee should manage the trust assets in the terms of the document. Should you become incompetent, there are clear guidelines for who handles your assets and how. Managing assets this way is far superior to relying on a financial power of attorney document because:
- The trust will be recognized in all 50 states, unlike a power of attorney;
- If the original trustee has died or become incapacitated, the trust will contain detailed provisions for who the successor trustee should be; and
- The trust will be recognized by banks and brokerage houses as valid, unlike many powers of attorney, which are frequently challenged or ignored by such firms, rightly or wrongly.
Secondly, upon one’s death, the trust acts like a will and spells out how the trust assets are to be distributed, but these assets avoid the probate process entirely. This guarantees privacy of one’s distribution choices, helps surviving loved ones avoid dealing with the court system and saves on attorney fees.
Note, however, that probate avoidance is more important in certain states that have very complex and expensive probate procedures. Whether a person should use this kind of trust also depends on the type of assets they have in their name. For example, jointly held assets typically avoid probate through the “right of survivorship.” If one’s assets will avoid the probate process as they currently stand, then this approach may be redundant.
Disadvantages of Living Trusts
Too many people pay thousands of dollars to an attorney to draw up a detailed living trust but then they fail to transfer title to their assets into the name of the trust (called “funding” the trust) or they fail to keep up with the proper titling after they purchase new items or real estate. In such cases, these people are not taking full advantage of the benefits of the arrangement.
A second pitfall is thinking that a living trust will help a person avoid a Medicaid spend down. In fact, creating a living trust can have the opposite effect, since every asset titled in the name of a living trust will be considered a countable asset, even if it was considered exempt before it was put into the name of the trust!
Seek Professional Counsel About Living Trusts
When making estate-planning decisions, it is important to keep your individual goals in mind. Tools like trusts are not one-size-fits-all solutions. While living trusts have many advantages, be sure that your personal situation, assets and goals are such that the cost and hassle of establishing and continuing to fund a living trust will be worth the benefits. A reputable elder law attorney with experience in trusts and estate planning can help you decide if this tool may be right for you and your family. To find a legal professional in your area, search in the AgingCare.com Elder Law Attorney Directory.