One of the most common questions I get is the following: “is a Will good enough, or should I also have a Living Trust?” The answer is that it depends, but please allow me to explain to you how a Living Trust – more accurately called a “Revocable Living Trust” – works…
A Living Trust is a written agreement which creates an entity recognized by every State as a legal method of holding title to property. It is almost like setting up a corporation or LLC to hold title to your property, but it is far simpler to manage and will actually save thousands of tax dollars and fees or costs. Like a Will, the agreement contains your specific instructions regarding how you want your property managed and distributed in the event of your incapacity or death. However, unlike a Will, it is a private document, and every asset held in the name of the Trust you set up is exempt by law from probate proceedings which would be required if the property were not held in your Trust. The Trust is set up during your lifetime (thus the term “Living” Trust). The assets you place in the Trust are controlled and owned solely by you. Your family or friends you name in the Trust will be able to transfer your assets upon death to themselves, instantly and privately, without anyone else’s authority or permission.
The benefits of a Living Trust are numerous:
- AVOID PROBATE: Eliminates any probate proceedings (for the property in the trust). Reduce probate fees because assets in trust do not pass through probate. Probate fees in North Carolina can be as much as $6,000 (not including attorneys fees). Real estate, located out of state, if “titled” to your trust will avoid foreign probate (called “ancillary administration”). (Note: A revocable trust does not avoid the probate process altogether. Certain procedures, such as Notice to Creditors, must still be completed).
- AVOID ESTATE TAXES: Reduce or eliminate estate taxes. Estate taxes are what the government takes when property passes from a decedent to the heirs. You can pass an unlimited amount to a spouse with no estate tax. You can also pass an unlimited amount tax free to qualified charities. You may pass up to $5,340,000 tax free to other heirs. Above $5,340,000 the tax rates start at 45%! Everything you own is included, regardless of the form of title. Even the death benefit from insurance you own is included.
- FLEXIBILITY: A flexible and easily amendable document that can be used to consolidate assets and establish your plans for the future that can be adjusted for foreseeable and unforeseen circumstances. You can plan, in great detail, how you want your assets handled in the future knowing that your revocable trust is flexible and amendable if circumstances change or you simply change your mind. Flexibility assures your intended beneficiaries do not bear an unequal burden for estate debts.
- MANAGEMENT: Management of business affairs, pre-death, if you become incompetent or if you simply wish to reduce the stress of handling day-to-day asset management. If this occurs, then the successor trustee (chosen by you) simply steps in and manages the trust assets and your current investment advisor can continue to carry out the investment strategy that you established. (Note: You could use an attorney-in-fact under a Power of Attorney, but then certain other risks are incurred for which remedies are problematic).
- COSTS: Reduce administrative and professional fees by minimizing (not eliminating) the estate administration work to be completed at death. Without a revocable trust, administrative and professional fees can be as high as Five Percent (5%) of your estate. Most Trusts cost $2,500-$3,500 to set up and can save the average estate $10,000 to $20,000!
- STATE LAW: Through appropriate trust language, you can authorize (and even require) your trustee to “move” the trust to another state when the beneficiaries move, or to obtain better tax treatment.
- PRIVACY: The privacy of not having your estate plan become part of the public record and open to anyone who wished to read it and examine the individual assets of your estate. Under North Carolina law your will becomes a public document when you die and each individual asset in your estate at your death must be reported along with its value at the date of your death. However, if your will simply references your revocable trust (not a public document) as the document that controls all the assets, then your entire estate plan does not become public record.
- BENEFICIARY PROTECTION: Your beneficiaries’ creditors cannot attach or take your property (if proper “spendthrift” provisions are used). You can preserve and protect assets for less responsible or less capable family members.