Understanding Living Trusts
UNDERSTANDING LIVING TRUSTS
What Is "Probate"?
Probate is the legal process through which your debts are paid and your assets are distributed according to your will. In New York, a will is probated in the Surrogates Court, which oversees the distribution of the assets contained in your probate estate. To those who have not experienced probate, it is difficult to explain just how frustrating it can be to all involved Probate can last anywhere from 9 months to 2 years.
Why is probate so expensive?
Probate is expensive because it is extremely time consuming. Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs.
Probate can take anywhere from 9 months to 2 years. During this time, nothing can be distributed or sold without court and/or executor approval. If your family needs money, the court may grant a living allowance. Basically, probate is expensive because it is very time consuming and requires the assistance of an attorney.
Is Probate confidential?
Generally, your family has no privacy. Probate is a public process and any "interested party" can sec what you owned at your death.
What is a Living Trust?
A. living trust is a legal document that contains your specific instructions as to what should happen to your assets when you die. Unlike a will, a living trust generally avoids probate at death as the trust controls its own assets not the court.
How can a living trust avoid probate and prevent court intervention?
After setting up a living trust, you transfer assets from your name to your trust. As trustee, you fully control your assets.
Although as trustee you control the assets, you no longer legally own the assets, the trust does.
Although this concept is relatively simple, not enough estate plans include a living trust.
How do I transfer assets into the trust?
Transferring assets into your revocable living trust is not difficult but it will take time. However, you can do it yourself now, or have your estate pay an attorney and the surrogates court to transfer your assets at a later date.
The living trust will only help avoid probate for assets transferred to the trust. Any assets still held in your name will be subject to probate.
Who controls the assets in the trust?
As Trustee, you retain full control of all assets contributed to the trust and you can do anything you could do before the transfer, such as buy and sell assets. Also, since the trust is revocable, you can change the terms or even cancel the entire trust. It is relatively easy to change the terms of the trust and it is not normally recommended that the trust be cancelled, as it would defeat the original purpose for which it was intended.
If I die or become incapacitated, what happens to the trust?
Generally, in your trust document, you will appoint both you and your spouse are co-trustees. Each of you concurrently has full control over the assets. If something should happen to either you or your spouse, the other would be able to assume full control over the assets.
If something happens to both of you, or if you are the only trustee, a "successor" trustee, selected by you in your trust, will assume control over the trust. If the trust did not exist, your family would have to hire an attorney and commence a legal action for a guardian to be appointed.
What is a successor trustee?
If you are the sole trustee of the trust, or if a co-trustee has also become incapacitated or has passed away, your trust instrument will contain a provision for a successor trustee, usually a child or someone younger than you.
The successor trustee's term will depend on the situation. If you have passed away, the trustee will dispose of the assets according to your wishes, or manage the trust assets.
If you are temporarily incapacitated, the successor trustee will only manage the trust assets until you are no longer incapacitated.
Keep in mind that if the above events occur and you did not have a living trust or did not transfer your assets into the trust, the courts would become a necessary party to any and all proceedings and a legal guardian would be appointed to manage your affairs, rather than your handpicked "successor trustee".
What happens to the trust when I die?
Depending on the provisions in your trust, the trust can either distribute the assets to your beneficiaries, or the assets can remain in your trust, managed by the successor trustee you have chosen, until your beneficiaries reach a specific age before they can inherit your assets.
What is the difference between a living trust and a living will?
A living trust pertains to your financial affairs while a living will pertains to certain medical decisions (Health Care Proxy) regarding treatment that you want to be made, in case you become incapacitated.
At what age should I create a living trust?
Age should never be a factor in the decision to create a living trust. Death or incapacitation can arise at any time and unfortunately cannot be planned for.
Your Revocable Living Trust will only affect assets that you have transferred to it. Since it is always the case that some assets have not been transferred, you need a will to catch those assets. Your will is generally a pour over will, which simply transfers assets that you owned at death to your living trust. Thereafter, the living trust, which you executed years ago, will distribute your assets the way you specified.If you do not provide in a will how you want your assets to be disposed of, your assets will be distributed according to the law of the State where you are domiciled. Keep in mind that any assets not transferred to the trust will have to go through probate. Generally, if you have a living trust, you can provide that your will distribute any forgotten assets to the trust.
If my will creates a trust, is it the same as a living trust?
No, a living trust is created while you are still alive and the trust holds legal title to your assets. As trustee you control the assets but you do not individually own the assets, which allows your assets to pass directly to your family/friends without going through probate, since you technically do not own the assets on your date of death.
A trust created in your will is called a testamentary trust. Any assets passing from your will into the trust must pass through probate. Also, if you become incapacitated, your testamentary trust does not take affect, since you are still alive. Thus, a testamentary trust does not provide any benefits of the living trusts, such as avoiding probate and avoiding court and attorney fees in the event you become incapacitated.
A testamentary trust is generally used in case some beneficiaries are minors or to minimize estate taxes.
Doesn't joint ownership accomplish the same goals as a living trust?
No, Joint ownership does not accomplish any of the goals that a living trust would. First, joint property still passes through probate. Second, if you become incapacitated, the court will become involved to represent your interest in the property. Third, creditors of either joint owner can seize jointly owned property.
Doesn't a durable power of attorney accomplish the same goals as a living trust?
No, a durable' power of attorney allows someone to manage your affairs when you become incapacitated. Many institutions will not accept durable power of attorneys unless their forms were used. A durable power of attorney is very effective when used in conjunction with a living trust.
Also, a durable power of attorney does not have any affect on probate.
Summary of the benefits of a living trust.
- Significantly reduces the cost of probate.
- Keeps your affairs private as probate is public.
- Avoids court control over your assets in the event of incapacity.
- Allows you to choose who manages your assets in the event of incapacity.
- Beneficiaries receive assets much quicker (probate usually lasts 9 months to 2 years, or longer).
- Forces you to develop an overall estate plan.
- Inexpensive and easy to set up and maintain.
- Can be changed or revoked at any time.
- Knowledge that your loved ones will not have to go through the rigors of probate.
- Can help to reduce estate taxes and avoid the pitfalls of joint ownership.