Financial Insights

What about Probate and Trusts?

In our series on estate planning over the past few weeks, we’ve specifically excluded trusts so that we can focus on basic estate planning documents, power of attorney considerations and the use of a letter of wishes.

While trusts have primarily been thought of for minimizing estate taxes (which applies to fewer people today), they can offer other benefits as part of a well-crafted estate plan.

What Is a Trust?

A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries.  Trusts can be arranged in many ways and can specify exactly how and when the assets they hold pass to the beneficiaries.

Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might when compared to assets that are transferred using a will, saving time, court fees, and potentially reducing estate taxes as well.

The most common use of a trust, and which is marketed to seniors on a regular basis, is a Revocable Living Trust.

How revocable living trusts work

When you set up a revocable living trust (typically with the help of a lawyer), you can appoint yourself as trustee, which gives you the authority to manage whatever assets you transfer in and are included in the trust.  Such assets might include your home or other real estate, stocks, bonds, or even cash (but not IRAs or retirement accounts).

While you’re alive, you can maintain control over your trust assets and reap any benefits from them as you see fit.  You also retain the right to amend the terms of your revocable living trust, or even terminate it altogether.  Upon your passing, whoever you name in your trust document as your successor trustee (typically whoever you name as executor of your will) will be responsible for managing the assets covered under the trust.  That trustee must then disburse those assets as per the terms of your trust.

Benefits of revocable living trusts

One major benefit of revocable living trusts, and the main selling point, is that they allow the assets they hold to avoid probate.

Probate is the legal process for settling an estate according to the will of the deceased.  Only assets in the deceased’s name will generally have to go through probate.  The typical probate process is where your executor (or an attorney on behalf of your executor) presents your will to the local “surrogate” court.  If you will is valid, then the surrogate legally appoints your executor, who is then responsible for settling and distributing your estate.  Probate may be complex and time-consuming, and sometimes it can also get expensive.  And often it’s not.  With a living trust, however, your beneficiaries can typically get their hands on whatever assets you leave them as soon as possible.

Another advantage of revocable living trusts is that they help protect your privacy.  If you create a will that’s filed with a probate court, that document becomes public record, whereas with a living trust, only your beneficiaries and trustee are privy to the information contained therein.  Furthermore, if you become incapacitated while your trust is in effect, your successor trustee can simply take over the management of the trust assets (like of a power of attorney).

Drawbacks of revocable living trusts

While there are plenty of good reasons to establish a revocable living trust, there are also some disadvantages to consider.  First, revocable living trusts cost money to set up—more money than you’d typically spend on a will.  The trade off to the up-front cost of a trust is that you might actually save money in the long run by avoiding the expense of probate.

Another downside of living trusts is that transferring assets can be both time-consuming and complicated.  If you hold a variety of assets, you’ll need to contact your different banks and agents to have everything you own moved over—a process that could involve a fair amount of paperwork.  The trust is only as good as what you transfer in.  If you transfer your investments, but not your house, for example, then your house will still be subject to probate.

Additionally, a living trust doesn’t negate the need for a will.  Most people who set up living trusts inevitably fail to transfer all of their assets.  If you have leftover assets not covered by your trust, you’ll need a will to dictate how those assets will be distributed after your death.  Furthermore, you can’t use a living trust to appoint guardians for your children; you’ll still need a will to accomplish that.

So what should you do?

If you or a loved one don’t have much in the way of assets, then you’ll likely be better off with a standard will instead of a living trust.  Many states today offer a quick and less expensive probate option for smaller estates and so the cost of setting up a trust won’t be worth it.

Because you’ll spend a fair amount of money to establish your trust (typically a few thousand dollars), from a purely financial standpoint, the only way to “recoup” that expenditure is by saving money on probate.  Probate is a process, but it’s not insurmountable and it’s reasonably manageable by a competent executor in most jurisdictions.

And there is another viable option to consider before creating the trust.  If your assets simply consist of a few taxable financial accounts and retirement accounts, then you can simply add a “payable on death” (POD) or “transfer on death” (TOD) designation to your taxable accounts, which allow for the naming of beneficiaries and, therefore, may transfer to beneficiaries like your retirement accounts without going through the probate process.

If you own real estate, then the TOD options depends on where you live and a revocable trust may still be necessary.  In New Jersey, there is no TOD deed option.  Also in NJ, the deceased’s estate needs to obtain a “tax waiver” for real estate located in New Jersey before the property can be transferred to your heirs.  This takes time and, for most of us, the services of an attorney.  Property held in a revocable trust in New Jersey is exempt from the waiver requirement and so a revocable trust will be needed in NJ if you want your NJ property to avoid probate.

In some states, you can prepare a deed now but have it take effect only at your death.  These transfer-on-death deeds must be prepared, signed, notarized and recorded (filed in the county land records office) just like a regular deed.  But unlike a regular deed, you can revoke a transfer-on-death deed.  The deed must expressly state that it does not take effect until death.

States that allow TOD deeds are Alaska, Arizona, Arkansas, California, Colorado, District of Columbia, Hawaii, Illinois, Indiana, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

A revocable living trust can be a useful estate-planning tool, but it’s not a one-size-fits-all solution so take the time to investigate whether it pays to set one up.  Or give us a call to discuss.  If you live in a state where the probate process is costly and complex, and you know that the value of your estate is high enough for it to be subjected to probate, you could consider a revocable living trust for all or a certain portion of your assets.

Similarly, if you’re worried about the estate tax, you might establish a living trust with strategic tax-planning provisions.  There are many other types of trust and uses beyond the scope of this week’s newsletter, but the use of a revocable living trust is probably the most common.

Please reach out to your wealth advisor to discuss these and any other questions you may have.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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