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Living Trusts: A Conversation Worth Having
"We have to talk," my mother said, in a tone that was serious yet somehow cheerful at the same time. Standing a few feet behind her, in obvious discomfort, my father forced a smile that suddenly reminded me of another little talk we had to have when I was about fourteen years old.
At first, I didn't think much of it. My mother's nervous preamble, however, about how I had nothing to worry about and that she and my father were fine quickly grabbed my attention. Suddenly, I found myself sitting on the couch, quiet and completely horrified by the prospect of what she might say next…
Turns out, there really wasn't anything to worry about at all. This was simply the best way they could come up with to tell me that they had set up a living trust and that I was the beneficiary. I had no idea what a living trust was or what being named beneficiary entailed. And, what I thought would be the hardest conversation I'd ever have with my parents, turned out to be a great source of comfort and relief. In the end, I'm grateful that my parents had the foresight to plan so far ahead.
In order to explore the subject of Living Trusts in more detail, my colleagues and I at YOU Magazine turned to Ken Devore, an estate planning attorney in southern California. According to Mr. Devore, it's important to first establish the difference between a Living Trust and a standard will. He explained that a will provides for distribution of one's assets at the time of death – and that's about it. A Living Trust, on the other hand, is effective immediately and is an efficient way to structure the management of one's assets in the event of incapacity, as well as their distribution at the time of death.
A Living Trust document begins with the naming of three parties. The first is the person(s) who owns the trust, known as the trustor(s). The second is the person named as the controller of the trust, or the trustee. The third is the recipient of the trust once the trustor passes away, also known as the beneficiary.
Devore explains that when a Living Trust is first executed, the trustor and the trustee is usually the same person. A successor trustee is also named within the trust document, and this individual will take over for the trustor in the event that he or she can no longer serve as the trustee (i.e., as a result of death or incapacity).
A Living Trust is "revocable and changeable" throughout one's life. The successor trustee, the plan of distribution, and the administrative provisions in the trust can all be changed by a trust amendment. When the trustor has minor children, he or she will often name a relative or trusted friend to serve as the successor trustee to manage the trust funds for the children until they become old enough to manage the trusts themselves. This way, if the worst case scenario were to occur, a worthy individual would be in charge of overseeing the trust until the children reached a proper age. Often times, as children grow older, the trustor will amend the trust and make a child the successor trustee.
Devore went on to say that Living Trusts also provide flexibility. For starters, almost everything from investments to physical property and heirlooms can be placed in a trust. One major exception is retirement accounts such as IRAs and 401Ks. For tax purposes, the government insists these types of accounts stay in the name of the person who owns them.
Another benefit of a living trust is that it can be drafted to influence a child's behavior. For example, parents of minors can stipulate how and when their children will receive money. Education is a very common reason for funds to be released. The trust could also stipulate that the grown child must be employed in order to benefit from the trust. Devore says, "The flexibility in this area is only limited by one's own creativity."
As for other benefits of a Living Trust, Devore points out, "It's the best way to avoid probate." If only a will is present, it generally must be adjudicated (settled) in probate court upon the person's death. This process can be very lengthy and very expensive, not to mention very public. The Living Trust, however, only appears in court if it's contested, if there is some ambiguity in the document, or if the trustee desires court approval in connection with the handling of the trust's affairs. Devore goes on to say, "If you own property in several states, a Living Trust is a must have", citing that each state will require a separate probate proceeding to clear title to the property in that state.
When drafted properly, a Living Trust can protect the beneficiary from lawsuits and divorce upon the trustor's death. Although it's not 100% impenetrable, Devore says a Living Trust makes it easier to fend off non-beneficiaries looking for money. He went on to say the only downside to Living Trusts is that they take time to set up and require some maintenance. For example, if a home held in the trust is refinanced, escrow will often times request that the property be taken out of the trust during the refinance. If the trustor does not make sure the house is put back into the trust, a probate will likely be required at the trustor's death. If new investments are made after the trust is established, the investment accounts must be titled in the name of the trust. These are the types of things which require due diligence on the part of the trustor.
If your assets are in excess of $100,000, or if you own a home in California (by virtue of its price tag), or if you have minor children, it makes a lot of sense to set up a Living Trust. Devore says that fees vary from state to state, but executing a trust through an estate planning attorney in California typically costs between $1,500- $4,000. This is far less than a probate hearing would be. He says, "Years ago, trusts were only for the rich. Now, they're for everybody." He added that although creating a trust does not require an attorney, it's definitely recommended. Devore calls doing it yourself, "The equivalent of doing surgery on yourself."
We asked Mr. Devore about some common mistakes people make when setting up a trust, and he listed two. First is the lack of maintenance regarding assets not contained in the trust. He says for investments such as 401Ks and IRAs, it's important to periodically revisit the beneficiary situation. He also recommends that the trust be structured so that the trust continues after the death of the trustor in order to provide the beneficiaries with creditor protection and estate tax advantages.
Devore's last bit of advice? He suggests that when you set up a trust, make sure that the trustee is aware of their newfound responsibility. He says outlining every detail is not nearly as important as informing them that they've been named and what to do in the event of your demise. He says if you have minor children, you may want to go into greater detail about how you'd like them raised. By taking the time to address these issues now, you'll obtain peace of mind and ensure the financial well-being of your loved ones down the road.
Ken Devore has practiced law for 11 years, focusing on estate planning for the last decade. He holds a BA in Psychology from the University of California at San Diego and an LL.M. in Tax, as well as a law degree from Golden Gate University. He is a certified specialist by the California Bar in Estate Planning, Trust and Probate law. He has also served as chair of the State Bar's Estate and Gift Tax Committee of the California Tax Section. He is currently practicing in Westlake Village, California and can be contacted at email@example.com.
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