Living Trusts 101

Dear Clients and Friends,

This weekend’s reading is short and sweet, but it answers a very common question and hopefully resolves a common myth. The questions at hand are: what is a living trust and why is everyone telling me that I need one?

Well, first of all, in very few cases does anyone “need” a living trust. It brings a few benefits, but also costs money to set up.  So let’s review briefly what a living trust does and does not do….

What is a Living Trust?

Legally, a living trust is a separate entity that you create while you are living to "own" property, such as liquid investments, a house, boat, etc. The trust is revocable, which means that you can make changes to it, or even end it, at any time. For example, you may want to remove certain property from the trust or change the beneficiaries. Or you may decide not to use the trust anymore because it no longer meets your needs. Technically, living trusts can be either revocable or irrevocable. However, insomuch as most people who use the term “living trust” are referring to the revocable flavor, such will be the theme of this article.

What does a Living Trust do, and what does it not do?

A revocable living trust allows you to pass the trust’s property outside of probate when you pass away. The two primary benefits of this are the following: 1) Probate is not private.  If someone wanted to, and if they knew where to find the information and in which county the will was probated, and they were willing to file the proper paperwork and pay the necessary fees, a person could indeed read a decedent’s will and find out that they left money to their grandchildren. 2) Probate takes time. A living trust expedites the transfer of assets to the next of kin because the assets in the trust are distributed by the trustee, according to the terms of the trust, with little delay. 

While these two benefits may seem appealing, these trusts may be over-used for a few reasons: 1) A living trust does not avoid estate or income taxes, nor does it protect your assets from potential creditors. 2) Setting up these trusts usually costs anywhere from $2,000 to $5,000 in attorney’s fees.  3) From state to state, and depending largely on the complexity of one’s estate, the time it takes to complete probate can vary dramatically.

So we encourage our clients to ask themselves several questions: 1) How private do you want your estate to be?  Are you a public figure? Are there people outside of your family of beneficiaries who would have an interest in seeing your probated estate, and do you care if they do see it? If privacy is important to you, let’s have a chat about a Living Trust. 2) How urgent is it that your heirs receive their inheritance?  Are the beneficiaries of your estate materially dependent on their inheritance? This is a serious consideration, for example, if a child of a decedent has special needs. 3) How much money do you want to spend on your estate plan? If privacy is not really an issue, if your beneficiaries are not substantially dependent on their inheritance, and if you don’t feel like spending several thousand dollars on your estate documents, then a living trust may not be necessary.  That said, we often discriminate between what we “need” and what we “want,” and to that end, it is not uncommon for people to implement the benefit of a living trust regardless of whether or not it is absolutely necessary.

One other possible benefit of a living trust is that in some circumstances, the terms of the trust, which are decided by the person who creates the trust, can include more specific instructions and/or more specific control over the trust assets than a will can. This is a case-by-case consideration and usually is only a benefit to more complex and larger estates, which is why our clients use living trusts more often that the average American. Again, however, this is a case-by-case consideration, and applying this logic over a broad swath of the general public would likely encourage over-usage.

In conclusion, revocable living trusts provide some very convenient and, in some cases, absolutely necessary flexibility and control. While the vast majority of MORWM clientele have complicated estate plans, we regularly identify new clientele who come to us with unnecessarily complex estate plans, who have spent tens of thousands of dollars on a document that they hardly understand.  The best advice that I can give is to ensure that your estate plan is a team effort between your estate attorney and your financial counselor. An estate plan is a marriage between finance and law, and lacking either element is a recipe for an ill-balanced plan. I also encourage you to take the referral of your financial counselor in this endeavor very seriously. It is this person who likely has the best understanding of your financial needs and the financial needs of your children, and who therefore can best assist your attorney in planning for those needs after you pass. 

I hope this helps our readers understand a little more about living trusts, an instrument readily growing in popularity. In no way should any of this article be considered legal advice of any kind. MOR Wealth Management provides estate planning services, but does not render legal advice.

We wish everyone a lovely weekend.

 

Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC


1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |


601 21st Street, Suite 300
Vero Beach, FL 32960
P: 772-453-2810

matthew.ramer@morwm.com | www.morwm.com

The majority of this content was written and distributed MOR Wealth Management, all rights reserved. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency.