If you sit down to discuss your family dynamic, your objectives, and your financial situation with a living trust attorney, you may decide that this type of trust is the ideal estate planning tool for you. To gain an understanding of the value of living trusts, let’s look at a hypothetical conversation with a living trust attorney.
Client: I have been successful financially, but I’m not a multimillionaire. A last will would be the right choice for someone like me, right? I’ve always been under the impression that trusts are only useful for wealthy people like Oprah or Bill Gates.
Living Trust Attorney: A lot of people feel this way, so you are not alone. Super wealthy people can be exposed to the federal estate tax. The tax can be applied on transfers exceeding $5.45 million in value. People who will be transferring more than this amount do use trusts that reduce estate tax exposure.
However, these would be irrevocable trusts. When a very wealthy person conveys assets into an irrevocable trust, the individual gives up direct ownership of the assets. As a result, assets in this type of trust would be removed from his or her estate, so there would be less there to tax.
This being said, things are different with a revocable living trust. As you can see, the ability to revoke the trust is a major distinction. Since you can take back direct personal possession of the assets at any time, you are retaining incidents of ownership, so assets in this type of trust would be part of your estate. Because of this, these trusts are not useful for very wealthy people.
Client: Why is a living trust better than a last will if you don’t have to be concerned about the estate tax?
Living Trust Attorney: There are a number of different reasons why a living trust can be a better choice than a last will. Probate avoidance is one of them.
You probably want your loved ones to receive their inheritances in a timely manner. A will would be admitted to probate, and the probate court would supervise the administration of the estate. This is a time-consuming process, and the inheritors don’t receive anything while it is underway. It will typically take close to a year, even if things run smoothly.
Expenses are another factor. There are those who assume that there are no expenses to address after you pass away if you use a last will instead of a trust. Since a trust is more expensive to create, they think that you save money if you use a will.
In fact, there are innumerable expenses that can present themselves during the probate process. There are filing fees, and the executor is entitled to payment for his or her time and trouble. An accountant may be brought in to handle final taxes, and a probate attorney will often be engaged by the executor to help with the probate process.
Since the executor has to prepare property for distribution to the heirs, appraisals can be required, and liquidation expenses can be added to the ledger. When you factor in miscellaneous expenses, a noticeable portion of an estate can be consumed during the probate process.
When assets have been conveyed into a revocable living trust, the trustee that is named in the trust declaration can distribute assets to the beneficiaries outside of probate, so these pitfalls are avoided.
Client: Will the trustee distribute everything to the beneficiaries in lump sums all at once?
Living Trust Attorney: This is one of the great things about a revocable living trust. The answer is no, the trustee does not necessarily have to distribute everything immediately. You control the nature of the distributions to the beneficiaries.
You can include a spendthrift provision when you create the trust, and it will become irrevocable after you die. As a result, there is asset protection from the beneficiary’s creditors. In the trust declaration, you can leave instructions that the trustee would be required to follow regarding the way you want the assets distributed.
It would be possible to allow for a certain amount to be distributed each month, or a certain percentage could be distributed each year. These are two possibilities, but the details are entirely up to you.
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