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Common Misconceptions about Living Trusts
People often hear things about living trusts from friends, family members, and the media and assume they are true without taking the time to check them out. Here are some common misconceptions—and the facts.
- A living trust is expensive. A well-drafted living trust will have a higher initial cost than a will. But when comparing costs, the true cost of a will should include the costs of probate when you die, the costs of a conservatorship if you become incapacitated and the costs of a guardianship if you leave assets to a minor child. There may be some costs associated with transferring your assets to your trust when you set it up, but there are frequently similar costs associated with properly titling assets when a will is used as the primary estate planning document. Properly titling assets is essential to either a well-drafted living trust plan or a well-drafted, will-centered estate plan. When you compare the total costs of both plans, the living trust-centered plan will frequently be less expensive.
- Trusts are for wealthy people, and I do not own that much. Trusts have been around for hundreds of years, but because they were used mostly by the wealthy who needed special tax planning, it is easy to see how trusts got this reputation. In recent years, however, the benefits of a revocable living trust for estates of all sizes have become more understood and desired. Generally speaking, the costs for probate and court conservatorships or guardianships (which a living trust can avoid) take a higher percentage from smaller estates, which can least afford it, than from larger ones. In addition to the cost savings, most people choose a living trust because they want to spare their loved ones the hassle of dealing with the courts. Depending on the state where the probate is administered and the character of your assets, a probate administration could take many months or even a few years to conclude.
- Most people end up going through probate anyway, so a living trust is a waste of money. If your living trust is properly prepared and all of your assets are properly titled, your assets will not go through probate. There are three main reasons why your assets would go through probate: you did not properly account for all of your assets, your trust is not properly written (you need the services of an experienced estate planning attorney to do that), or you do not have a revocable living trust. (A trust that is part of your will is not a living trust and will not avoid probate; it can only go into effect after your will is probated.)
- I would have to give up control of my assets. If you are your own trustee, as most people choose to be, you will be able to do anything with your assets that you could do before they were in the trust: buy and sell them, change your trust, or even cancel your trust. If you name someone else to be your trustee, you (and generally your beneficiaries later on) can replace the trustee if you are not satisfied. Trustees must follow the instructions in the trust or they can be held legally liable. You decide when your loved ones will receive their inheritances, and your trustee can make periodic distributions according to the terms of your trust. You can choose to draft your trust so that after you die, assets that remain in your trust for your beneficiaries are protected from their creditors, including divorce proceedings. Bottom line: a living trust lets you keep full control over your assets while you are living, if you become incapacitated, and after you die.
- I would have to pay trustee fees. As long as you are your own trustee, you do not pay any management fees. Successor trustees are entitled to receive a fee, but family members often do not take one. If you choose a professional trustee, the trustee will begin charging a fee only when it officially accepts the position of trustee; usually it is a small percentage of the trust assets and, given all the services professional trustees provide, most people find the fee to be reasonable. Typically, the trustee is entitled to an annual trustee fee.
- I would have to have a separate Tax Identification Number and file a separate tax return. While you are living, you continue to use your own Social Security number and file your normal tax return. (The Internal Revenue Service considers a living trust to be a “non-event” because it can be canceled at any time.) Only if your trust will continue after you die will it then need a separate Tax Identification Number and tax return.
Unlike a will, which operates only after you have passed on, a trust provides benefits to you and your family both during your lifetime and after your death. Arguably, if you are worried about situations like incapacity or probate, a trust is essential to your estate planning needs. While preparing and properly funding a trust may take a little bit of time and effort, once the trust is in place, you will have peace of mind knowing that you and your family are taken care of according to your terms. A trust may not be for everyone, and that is why it is important to discuss the advantages and disadvantages of a trust with an estate planning attorney who can recommend an estate plan appropriate for your needs.