Common Misconceptions about Living Trusts
People often hear things about living trusts from friends, family members and the media, and just assume they are true without taking the time to check them out. Here are some common misconceptions—and the facts.
1. 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.
2. Trusts are for wealthy people and I don’t 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’s easy to see how trusts got that reputation. In recent years, however, the benefits of a revocable living trust for all size estates have become more known and desired. Generally speaking, costs for probate and court conservatorships/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.
3. 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 assets are properly titled, your assets will not go through probate. There are only three reasons why your assets would go through probate: 1) you didn’t transfer all of your assets into it; 2) your trust is not properly written (you need the services of an experienced attorney to do that); 3) 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.)
4. I would have to give up control over 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/sell, 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; your trustee can make periodic distributions, but assets that remain in your trust are protected from irresponsible spending, creditors, even 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.
5. 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, they will only charge a fee when they start to act for you; usually it is a small percentage of the trust assets and, given all the services they provide, most people find the fee to be reasonable.
6. I’d have to have a separate tax ID number and file a separate tax return. Although you may choose to have a separate tax ID number and separate tax return, while you are living, you continue to use your own social security number and file your normal tax return. (The IRS 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 ID number and tax return.
Jon
