What is a Living Trust?
A Living Trust is a will substitute that takes effect during your lifetime. It is basically a contract that you enter into with yourself. This contract sets forth the terms of how your assets will be administered if you become disabled, and how they will be distributed upon your death. You will serve as the trustee of your own Living Trust. You will transfer ownership of your non-retirement assets into your Living Trust which then become subject to the terms of the Living Trust.
The Living Trust has instructions as to whom you would like handling your affairs if you become disabled and when you die. If prepared and funded correctly, it avoids guardianship in the event of your disability and it avoids probate when you die.
How can a Living Trust avoid probate?
Probate is a court process by which it supervises the settlement of your affairs when you die. Probate only applies to assets you own in your own name. It does not apply to trust assets.
Although you do not legally own assets you transfer to your Living Trust (you as trustee of your Living Trust becomes the owner), you still control such assets because you control the trust.
Upon your death, the settlement of your Living Trust is done privately, beyond the court’s supervision, by those you choose as your Death Trustee.
Why do I want to avoid probate?
Probate is very expensive. Nationwide, settlement costs for probate average about 4%-5% of the value of assets being probated. In addition, the Register of Wills which oversees probate assesses probate fees, which can cost hundreds to thousands of dollars depending upon the value of the probate assets. Probate filings are matters of public records which means that upon your death, your personal affairs, your will, the assets that are subject to the probate process and the assets your beneficiaries inherit will all become matters of public record. In addition, most states require a probate to remain open for some minimal period of time. In Maryland, that minimum period of time is six months.
By using a Living Trust instead of a will, the settlement of your affairs:
- Remains private and does not become a matter of public record.
- On the average will cost about 1/3 of the cost of administering a probate.
- Usually take less time to complete than the probate of your will.
Will I still control my assets once they are transferred to my Living Trust?
You lose no control of your assets once they are transferred to your Living Trust. That is because:
- You control the language of your Living Trust.
- You determine the trustee and successor trustees of your Living Trust.
- You can amend or revoke your Living Trust at any time.
- You control the beneficiaries of your Living Trust.
What happens if I become disabled and unable to manage my affairs?
You will appoint disability trustees for your Living Trust who will manage your financial affairs upon your disability. He or she will step in your place and pay your bills, make investment decisions, and handle your financial affairs.
There will be no need to go to court and file for a guardianship. Doing so takes time and incurs considerable expenses such as attorney’s fees, court costs and surety bonds. Guardianship is a public procedure. By making sure your assets are properly retitled, you can avoid the time, expense and loss of privacy of a guardianship by using a Living Trust.
How does the Living Trust work when I die?
You will appoint successor trustees who will settle your Living Trust when you die. Your successor trustee will study your Living Trust, identify the value and nature of the assets in your Living Trust, identify and pay all expenses (such as taxes, creditors, appraisers, accountants and attorney’s fees) related to the settlement of your affairs, and distribute your trust assets as you instruct in your Living Trust. Your successor trustee is required to abide by the instructions in your Living Trust and could be held legally responsible for failing to do so.
How hard is it to fund my Living Trust?
Changing ownership of assets to your Living Trust is not difficult, but it takes time and patience. Often, your financial advisor and attorney can assist you with the funding of your Living Trust. You always want to be sure that you have fully funded your Living Trust because probate will be necessary for any assets which were funded when you die.
Do I need any legal documents besides a Living Trust?
Yes, there are several other documents that you should have besides your Living Trust. A will should be prepared in the event you die owning assets which did not get funded into your Living Trust. It is a special kind of a will called a “pour over” will because your Living Trust will be designated as its beneficiary. This way, even though probate may be necessary for such unfunded assets, the assets passing through probate will “pour over” into your Living Trust and be distributed according to the terms of the trust.
Powers of Attorney should be prepared in the event that you are not able to sign your name to legal documents because of disability.
An Appointment of Health Care Agent is useful so that if you are unable to make health care decisions for yourself, you can determine ahead of time who will make such decisions for you.
A Living Will is useful to advise your health care providers how you want them to proceed in the event you are in a terminal state of health or are in a persistent vegetative state.
A HIPAA Release will authorize your health care providers to release your medical records to your friends or loved ones so that they can make informed decisions about your health should you be unable to do so yourself.
How should I provide for my family when I die?
How you distribute your assets when you die is entirely up to you. Your assets can either be distributed to your beneficiaries outright and free of any trust, or you can create “post mortem” (after death) trusts for them. The are many advantages of creating trusts for your beneficiaries. Leaving assets in trust for your beneficiaries can:
- Provide creditor protection for your beneficiaries.
- Ensure that your assets do not end up with unintended beneficiaries (such as to the surviving spouse or the step-children of your surviving spouse).
- Provide bloodline protection to ensure that the distribution of your assets is limited to your descendants.
- Provide structure for spendthrift children or surviving spouses.
- Provide for the support and structured distribution for disabled beneficiaries.
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