Q: I keep hearing that it is beneficial to have your home in a trust versus owning it in your own name. What are the benefits or non-benefits?
A: Back in the 1960s, Norman Dacey wrote a book titled " How to Avoid Probate." His recommendation: Create a living trust. Such trusts have become seminar and cocktail party conversation topics, and certainly should be considered in estate and retirement planning. However, you must explore all of the pros and cons, as well as other alternatives before deciding to create a living trust.
A trust means that legal title to property is held by one or more trustees for the benefit of someone else. Thus the meaning of the word "beneficiary." Depending on the kind of trust involved, the trustee is often responsible for the maintenance and upkeep of that property for the ultimate beneficiary of the property.
A revocable trust is created while you are living. This is often called an "inter vivos" trust, which is Latin meaning "between the living." This trust is revocable, which means that the individual creating the trust (called the "grantor") has the right to change its terms or cancel (revoke) the trust at any time, for any reason, during his or her lifetime. Upon death, the trust becomes irrevocable, and the trust property is distributed by the trustee in accordance with the terms of the trust.
The primary reason that people establish a living trust is to avoid probate proceedings, which can be a time-consuming and costly process. Under state laws, the trustee — and not the individual (the grantor) — owns the property, and in general only property owned by the deceased individually is probated. Property held jointly will automatically pass to the surviving owner, without having to go through probate.
There are other advantages to a living trust. For example, if you own property in more than one state, on your death, probate proceedings may need to take place in each state where property is located. These are usually referred to as "ancillary probate." When property is held in a living trust, these ancillary proceedings may not be necessary.
Another advantage is privacy. Probate is a matter of public record, whereas living trusts are private. Some individuals may not want to disclose who their ultimate beneficiaries will be, and the living trust provides a modicum of privacy.
However, there are also pitfalls in the use of the living trust. Although I have indicated that for ownership purposes, the trust — and not the grantor — is the legal title owner of the property, for tax purposes, the property in a trust remains the property of the grantor. Contrary to popular opinion, living trusts do not save estate taxes, and they do not save income taxes.
For income tax purposes, you — the grantor of the trust — still have to pay tax on income obtained from the property; for estate tax purposes, even though you have transferred assets to a revocable (living) trust, those assets remain — and are included — in your taxable estate.
There are also increased costs as a result of the creation of such a living trust. Lawyers will charge you a fee for creating the trust, and these fees can cost several thousands of dollars, usually significantly more than to prepare a last will and testament. Furthermore, you will have to incur administrative and recording costs. The paperwork that the trust has to handle may be as great a burden as having to go through the probate proceedings.
There is one additional negative which people often forget. Just because you have transferred property to a living, revocable trust does not mean that those assets are protected as against creditors. If someone gets a judgment against you — for example in an automobile accident where the judgment is higher than your insurance coverage — the judgment creditor can attach all of your assets so as to satisfy the judgment, even those assets which have been transferred to a living trust.
More importantly, even if you set up a living trust, you must still have a will. Most people own more than their house, and especially if there are children involved, or other assets, it is imperative to have a will to make clear your intentions as to how any property not titled in the name of the trust will be disposed of on your death. With a will, even if there is a cumbersome probate proceeding, at least your intentions have been made known; without a will, the intestacy laws determine who receives your assets.
Living trusts are an option to be considered. However, you should do a complete asset check to determine how serious your estate will be impacted by the probate proceedings. For example, other assets may already be probate proof, such as life insurance proceeds, IRAs or other retirement benefits.
Everyone should consult a financial adviser before taking any action that could be costly to you and your heirs.
Benny L. Kass is a practicing attorney in Washington and Maryland. No legal relationship is created by this column. Send questions to firstname.lastname@example.org.