One of the most common misconceptions about trusts is that they’re only for individuals of high net worth with substantial estates. While it is true that anyone with significant wealth should consider a trust, those of more modest means can benefit from asset protection and other features offered with a trust.
There are two basic types of trusts: living and testamentary. The former is so-named because it is set up while the creator, also known as the grantor, is still alive. Testamentary trusts are tied to the grantor’s will and do not take effect until the person dies.
A living trust holds the grantor’s assets for their own benefit during their lifetime, then distributes them to designated beneficiaries by his or her chosen representative, called a “successor trustee.” Living trusts may be revocable or irrevocable, although for some professionals the terms “living trust” and “revocable trust” are synonymous.
A revocable living trust may be modified or rescinded throughout the life of the grantor, while no such changes may be made with the irrevocable version. The grantor’s assets belong to the trust and may not be withdrawn. There are advantages with irrevocable trusts, but here we’re going to focus on the more popular revocable living trust.
Why should you set up a living trust?
There are several reasons depending on your situation and your goals. For example, if you (and your partner) have young children, a living trust can help ensure they’re provided for if you die while they’re still minors. You can specify what they should receive from the estate, when they should receive it, and even for what purpose it should be used.
Some other reasons a living trust could be beneficial include:
Take Control of Your Assets
During your lifetime, you manage and use those assets as you normally would. After your death, assets are distributed to beneficiaries according to the specifications you set out in the trust, which can state specific dates or conditions for distribution.
If you have multiple beneficiaries and multiple assets (home, collectibles, cash, stocks), a trust may be the only way you can ensure who gets what. This will help curtail family disputes since there is a clear record of your wishes.
Avoid Probate Proceedings
A trust allows for probate avoidance, if assets are titled in the name of the trust at the grantor’s death. Probate proceedings can be time-consuming and expensive, not to mention being public. Assets placed in a living trust don’t have to go through probate. A living trust is a private document that only the trustees and certain beneficiaries will be able to read after your incapacity or death.
Living Trust vs. Will
A trust affords more privacy than a will. A will is made public after your death; a living trust’s provisions are kept private. Therefore, a trust can provide maximum protection during the incapacity of the grantor. This could be helpful if you have a blended family, privacy concerns, or family businesses. If you and your partner are without children, a living trust can keep your privacy intact.
Protection From Creditors
Once you transfer property to the trust, you no longer own it. Therefore, your creditors may not go after that property. Living trust forms also have provisions so that creditors of beneficiaries cannot go after trust property.
In Florida, on the other hand, trust assets are not protected from the claims of your creditors. The assets in a revocable trust are treated as if owned by you, and subject to the claims of your creditors as if you owned them in your personal name. (There are numerous exemptions and inclusion to this provision.)
Federal Estate Tax Exemptions
Your trust does not avoid estate tax, however there is a $5 million federal exemption. Only estates over this amount pay tax. A trust specifically written to pass assets from one spouse to another also avoids any estate tax that would be applied.
Who Should Manage Your Living Trust?
You have to name a trustee or successor trustee to manage your affairs without court intervention should you become incapacitated. If you become incapacitated, the trustee (or successor trustee) is authorized to continue to manage your trust assets, pay your bills, and make investment decisions. This may avoid the need for a court-appointed guardian of your property.
Selecting a trustee is one of major benefits of establishing a living trust. This is the person responsible for managing your trust assets and satisfying the wishes you have outlined in the trust document. Of course, you may name yourself as trustee, which is common in living trusts. In that case, you must also name a successor trustee (or trustees) to step in if you become incapacitated or die.
You can also name a family member or other individual, but remember to consider their qualifications, the potential for friction with other family members, and the potential burden you are placing on them. As a precaution, your trust should allow these individuals to hire qualified professionals to assist them in their duties, such as attorneys, accountants and financial advisors.
Other factors to consider:
- In Florida, it is not always possible to add your home to your trust, or you may need special language in the trust agreement to make this possible due to restrictions in the law.
- IRAs, 401(k)s and Keough plans are never eligible for placement in a revocable living trust.
- Assets placed in the trust do not go through probate, which can take months. The trust directs what happens to your assets and cannot be overruled. (Florida now has a simplified probate proceeding for estates totaling less than $75,000, making a trust an unnecessary expense for small estates. Most homeowners, however, would not qualify.)
- A living trust will not reduce your estate’s tax burden. If that is a major concern, ask your tax attorney or Trust officer about establishing an irrevocable or bypass trust that could accomplish some tax savings. For most people, however, the federal estate tax is not a concern. In 2017, you would have to have assets of more than $5.49 million to be subject to federal tax.
How Do You Set Up a Living Trust?
You could seek out a qualified and experienced professional, such as a Trust Attorney, Trust Officer, or Certified Trust and Financial Advisor. On the other hand, the legal website Nolo says you can do it yourself: “To understand why most lawyers charge too much for a living trust and why it is safe to do it yourself, it helps to know that a living trust is about as easy to prepare as a will.”
The route you choose to take may depend on the size of your estate and the complications it entails Regardless of how you choose to go, there are some things you should be aware of in your own planning or in working with your trustee.
Make sure everything you own is held in the trust. Your assets, including bank accounts, real estate and investments, must be formally transferred to the trust before your death. This is called “funding” the trust and requires changing the ownership of the assets to the trust.
If you leave something out, it will not automatically become a part of the trust and may be subject to probate. That’s why you should have a “pour-over” will to catch any assets that didn’t make it into the trust or your last will and testament.
Property and asset fluctuation are why it’s important to review your document periodically to ensure that all your assets are included. Be aware of any potential tax consequences (gift, estate and state inheritance) involved with property transfers.
Certain assets, however, should not be transferred to a trust because income tax problems may result. That’s another of the complexities that may require consulting with a lawyer or estate-planning advisor.
Choose a Management Services Provider You Can Trust
By establishing a trust relationship, you may ensure that your assets are managed tomorrow the way you manage them today, for your personal benefit and the benefit of your heirs. Our experts can help with all your investment needs; contact us to learn more.
About the Author
Executive Vice President, Director of Trust and Wealth Management
Lory manages the Trust and Investment Management Services division to help coordinate the diverse services provided. She has been involved in banking and finance since 1990. Her management and operations experience gives her the resources necessary to lead a team of professionals offering banking and trust products and services with a high degree of personal attention.
She is a graduate of the Florida Bankers Association’s Graduate School of Banking, Florida Bankers Association’s Trust School, and Leadership Charlotte Class of 2003. In addition, Lory has earned both the Florida Certification and National Certified Guardian designations. She serves on the Executive Committee of the Florida Bankers Association’s Trust and Wealth Management Division, volunteers with Tidewell Hospice and has served as a member of the Board of Directors of United Way of Charlotte County.