A properly funded revocable living trust can pave the way for a smooth, quick transfer of assets at death without the expense and hassle of probate. Probate is where the court supervises the administration of assets at death and assets held in revocable living trust can avoid the probate process.
Why Do I Care About Avoiding Probate?
There a several reasons a person might want to avoid probate.
- You have concerns about privacy. When assets pass through probate, the Executor or Administrator of the estate must file accountings in the Estates Division at the Clerk of Superior Court’s office. These accountings list all of the property that the decedent had at death as well the decedent’s final debts. The accountings are public record and anyone who wishes to see them can request them from the Clerk’s office. You may not want the world to know what assets you held at death and even more importantly, you may not want strangers to know what your spouse or children have inherited.
- Probate can be expensive. There are fees associated with the probate process. These fees may include: the probate fee paid to the Clerk of Court, which is based on the size of your estate; filing fees; newspaper publication fees; and attorneys fees. If the decedent’s assets are held in a revocable living trust, the assets can bypass probate and probate fees can be avoided.
- Probate can take a long time. A typical probate estate in North Carolina will take a minimum of three months and in many cases will take up to a year or longer. This means a delay in your beneficiaries receiving their inheritance. This can be difficult if beneficiaries, such as a spouse or children, will rely on that property to pay bills or living expenses. Assets held in a living trust can generally be administered to the beneficiaries quickly and interim distributions can be made while any final expenses are being wound up.
Does a Living Trust Save Taxes?
This is one of the most common misconceptions about revocable living trusts. If you set up the trust, you are considered the grantor of the trust. In many cases, you will also be the trustee and primary beneficiary of the trust during your lifetime. As such, the income of the trust is considered yours and will be reported on your personal income tax return.
At your death, the trust assets are part of your estate for estate tax purposes. However, if your assets are above the amount which can be exempt from estate tax, your trust can be drafted to include tax saving measures such as a credit shelter trust, a marital deduction trust and charitable giving.
Another common misconception is that a revocable living trust will protect your assets from your creditors. To the extent that you have control over your assets, they will be still be available to your creditors and will not be protected if you get sued.
I Have Minor Children; Should I Have a Trust?
If your children are minors it is very important to set up a trust for any assets that they may receive if you die while they are under the age of 18. A trust for minor children can be part of your living trust or it can be established by your Last Will and Testament.
If your minor children receive property outright (not in trust) at your death, the court will appoint a guardian to control the assets until your children turn 18. The guardian is selected by the court and may not be the person you would have chosen. In addition, there are fees that must be paid to establish a guardianship estate, similar to those fees paid for a probate estate. The guardian will have to get permission from the court before spending any of the assets on your children.
On the other hand, if you establish a trust for your minor children, you can select the person who will be in charge of the assets and give that person the discretion to use the trust funds for the needs of your children. A trust can be administered without court involvement. In addition, you can set the age at which your children will receive assets from the trust. Instead of your children receiving the assets at age 18, you can delay the receipt of the assets until they are older and more mature. The Trustee will still have the discretion to use the trust funds for tuition, housing or your children’s other needs, but there is less risk of the assets being spent quickly by an eager beneficiary.
Is a Living Trust Difficult to Set Up?
A Living Trust plan typically costs a little bit more to set up than a Will based estate plan, but as shown above, can save your beneficiaries time and money in administering.
It is important that assets are titled in the name of the trust in order to avoid probate. The biggest mistake people make is setting up the trust and then never transferring assets to it. However, it is not usually that difficult to title your assets in the name of the trust. It may require completing new forms with your banks or new beneficiary designations. For real estate, you will need to execute a new deed. Your estate planning attorney can assist you with ensuring that all assets are properly titled.