Weighing the Pros and Cons of a Living Trust

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You may have received an invitation to a seminar that will discuss “living trusts.” Your neighbor may have mentioned they recently set up a living trust at the suggestion of their attorney. So what exactly are these things, anyway, and is it something you should use for estate planning?

Basically, a trust is a legal arrangement in which you transfer the legal title to certain property (cash, investment accounts, real estate, etc.) to a 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 “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 used for Medicaid planning or tax planning purposes).

Advantages of a Living Trust

First of all, should you become incapacitated, you have spelled out how the trustee should manage your trust assets in the terms of the document. Managing your assets this way is far superior to relying on a power of attorney document because:

  1. It will be recognized in all 50 states, unlike a power of attorney;
  2. If the original trustee has died or become incapacitated, it will contain detailed provisions for who should be the successor trustee and how they are to be selected; and
  3. It 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 your death, the trust acts like a will and spells out who gets the trust assets, but it avoids the probate process. This guarantees privacy of your distribution choices, avoids dealing with the court system and saves on attorney fees. Note, however, that probate avoidance is more important in certain states that have a very complex and expensive probate procedure. Whether you should use this kind of trust also depends on the type of assets you have in your name (for example, jointly held assets typically avoid probate through the “right of survivorship”). If your assets will avoid the probate process as they currently stand, then this approach may be redundant for your situation.

Pitfalls of Living Trusts

Too many people pay thousands of dollars to an attorney to draw up a detailed living trust for them, 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, they are not taking full advantage of the benefits of the arrangement.

A second pitfall is thinking that a living trust will help you avoid a Medicaid spend down. In fact, it 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 an exempt asset before it was put into the name of the trust!

Takeaway

When making estate-planning decisions, it is important for you to keep your 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.

K. Gabriel Heiser is an attorney with over 25 years of experience in elder law and estate planning. He is the author of "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets," an annually updated practical guide for the layperson.

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5 Comments

Great article. I'd like to add a couple of thoughts.....those "protect your $" free meal seminars although they may discuss trusts seem really geared to get you to buy an annuity (which is an insurance product & has commissions). You really need to carefully & cautiously vet whomever is sponsoring the seminar to get a bead on what their background is.

Also family needs to give careful thought as to how the costs of the trust are to be paid. Homes & land will still have insurance & property taxes, etc to be paid and it could be higher than that for an individual homeowner over 65. There could be new IRS filings to be done. Setting up stuff in a trust really to me needs a bank account with a funding stream to pay all the bills to & costs for the trust and an atty. or experienced advisor to oversee this. Turning things over to the various trustees or beneficaries is asking for a problem to happen...someone isn't going to do or pay for something that they don't actually own...... Ancedotally I've heard that about 20/25% of property tax sales are on living trust titled property.
Also property held in a trust can be tough to get lending on or use as collateral.
Trusts are invaluable & great with proper planning.
My dad set up a Revocable Trust and his two properties are in it. Your article states that banks will recognize the trust if the trustee becomes incapacitated. What documentation would they need to prove dad is incapacitated? The trust states 2 letters declaring he is incapacitated: one from his doctor and one from the agent. Would that be the proof?
Very informative and helpful.