WHAT YOU NEED TO KNOW ABOUT ESTATE PLANNING

WHAT IS A LIVING TRUST?
A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in the trust.

Different kinds of living trusts can help you avoid probate, reduce estate taxes or set up long term property management.

DO I NEED A LIVING TRUST?
One big advantage to making a living trust is that property in the trust does not have to detour through probate court before it reaches the people you want to inherit it. The average probate drags on for months before the inheritors get anything. And by that time, there is less for them to get: in many cases, about 5% of the property has been eaten up by lawyer and court fees.

A second reason to do a trust is non-economic. If something happens to you and your spouse that would make it difficult, or impossible, for you to manage your own affairs, a trust can really simplify the process of taking care of you. Without a trust, someone in your family will need to apply to the probate court to be appointed as your guardian and conservator of your estate. They will have to post a bond, and will have to file annual accountings with the court. If your family members cannot agree on who should be the guardian and conservator, there will be litigation to determine it, along with the hard feelings and damaged family relationships that go along with the lawsuit. You can eliminate this possibility by creating a properly drafted living trust.

HOW DOES A LIVING TRUST AVOID PROBATE?
Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee – the person you appoint to handle the trust after your death – simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.

IS IT EXPENSIVE TO CREATE A LIVING TRUST?
A trust can be as complicated or as simple as you want it to be. Like most things, the more you need it to do, the more complicated it becomes and the more expensive it will likely be. A basic trust for a married couple, along with the normal ancillary documents such as durable powers of attorney, medical powers of attorney, living wills and what is known as a pour-over will usually run between $1800 and $2500. Like most legal documents, you get what you pay for, and using a kit or a “legal document preparer” may leave your heirs with a problem that can be very expensive to fix.

IT IS A HASSLE TO HOLD PROPERTY IN A LIVING TRUST?
Making a living trust work for you does require some crucial paperwork. For example, if you want to leave your house to the trust, you must sign a new deed, showing that you now own the house as trustee of your living trust. This paperwork can be tedious, but the hassles are fewer these days because living trusts have become so common.

IS A LIVING TRUST DOCUMENT EVER MADE PUBLIC, LIKE A WILL?
No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate – inventories of the deceased person’s assets and debts, for example. The terms of a living trust, however, need not be made public.

CAN A LIVING TRUST REDUCE ESTATE TAXES?
A simple probate-avoidance living trust has no effect on taxes. More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets.

One tax-saving living trust is designed primarily for married couples with children. It’s commonly called an AB trust, though it goes by many other names, including “credit shelter trust,” “exemption trust,” “marital life estate trust” and “marital bypass trust.” Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save up to hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple’s final inheritors.

DOES A LIVING TRUST PROTECT PROPERTY FROM CREDITORS?
No. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

Generally, after your death, all property you owned – including assets held in a living trust – is subject to your lawful debts. For example, if your house is held in trust and passes to your children at your death, a creditor could demand that they pay the debt, up to the value of the house. Ownership of real estate is always a matter of public record, so creditors can always find out who inherited real estate. It can be more difficult for creditors to know who inherits other property, however (because a trust document, unlike a will, is not a matter of public record), and they may not bother tracking it down.

On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the debt and given a chance to file claims. If they miss the deadline to file, they are out of luck forever.