If we flash back 20 to 30 years in time, the only reason anyone created a trust for estate planning purposes was to try to avoid paying some or all of the federal estate tax at death. Back then, trusts were seen as something only “rich people” needed. Since that time, the law of trusts has evolved significantly, to the point that the revocable living trust is one of the most popular estate planning tools in the attorney’s arsenal, for clients of all socioeconomic levels, regardless of current estate tax rates. A trust can offer a slew of benefits that are just not possible with a simple Will.
First – what is a revocable living trust? A trust is essentially a contract that sets forth terms for the management of your assets during your lifetime and after your death. You, the “Grantor,” create the trust, transfer the assets that you own to your “Trustee” (you can almost always serve as your own Trustee), and the Trustee holds, administers, and distributes those assets for the beneficiaries you have named. The “revocable” aspect refers to your ability to amend or completely cancel the trust at any time, and the “living” aspect simply refers to the fact that you created the trust during your lifetime, as opposed to a “testamentary” trust, which is created under your Will after death.
The trust’s most attractive feature, and that one that has made it so popular as an estate planning tool for the past few decades, is its ability to completely avoid the court-supervised probate process that is normally required to distribute an estate. With extremely limited exceptions, probate is required for the Last Will and Testament of everyone who dies within the Commonwealth, and involves significant fees paid to the local court and to the Commissioner of Accounts, a local attorney appointed by the court to supervise all probate matters within the jurisdiction. The court and the Commissioner will require your Executor to put the Will to record, notify all of the potential heirs of the estate, make an inventory of all of the assets under the Executor’s supervision, and prepare a comprehensive, verified accounting showing every expenditure from the estate and every distribution to the heirs before the estate can legally be closed out. There are fees and time limits associated with each step of this process:
On top of that, if you employ an attorney to help with the process, the attorney will charge fees either by the hour for the work performed, or a flat percentage of the total value of the estate, which by law can be as high as 5%. Simply put, probate can cost your heirs thousands of dollars, can require hundreds of pages of paperwork, and will take at least a year to complete.
Assets held in trust are not subject to probate. Legally speaking, those assets are actually owned by your Trustee, who is contractually obligated to distribute them according to the terms of the trust. The trust is never put to record, no Commissioner is appointed to monitor your Trustee’s progress, no accountings need to be filed, no fees are paid into court, and there are no hard time limits to complete the work. The difference can be downright astounding – what would normally take at least a year can be completed within a few days.
Trusts also have a definite advantage when it comes to placing restrictions on the distribution of assets or including customized instructions. Since trusts evolved from the law of contracts, rather than the old English Statute of Wills, they are much more difficult to successfully challenge if a beneficiary does not favor the terms. Trusts allow for much greater flexibility in drafting, especially with regard to managing assets for minor children or disabled beneficiaries, owing to the fact that the Trustee’s actions are not under the supervision of any court.
Of course, trusts can also be used for advanced estate tax planning, particularly for couples. Under current estate tax rules, there is an unlimited amount that can be given to a surviving spouse at death without any threat of an estate tax. However, when the second spouse passes away, if the total value of the remaining estate exceeds the applicable estate tax exemption, the heirs of the estate could end up paying up to 35% of the overages in federal taxes. By placing assets into a trust for the surviving spouse’s benefit, as opposed to giving them outright, the first spouse to die can preserve his/her entire estate tax exemption, and the survivor can later use his/her entire exemption, effectively doubling the tax-exempt amount. By using a similar technique – transferring assets to the final beneficiaries in trust instead of outright – those assets can be made permanently exempt from any future estate tax at each successive generation. Commonly called a “dynasty trust,” this type of trust can provide massive tax savings in the long run, and has the potential to multiply a family’s wealth perpetually.
So, what is the down side? As I commonly tell my clients as they decide between a simple Will and a trust, the Will is “back-loaded” and the trust is “front-loaded.” A simple Will is significantly less expensive to create, but carries with it a much larger workload and significantly higher fees for your Executor and heirs after your death. A trust is significantly more costly to create, and requires more work on your part to set up. Trusts simply do not work if they are not properly funded, i.e. your existing assets must be transferred to the Trustee before those assets can be made subject to the rules you have set forth in the document; so, you will have some homework to do. However, the process of administering a trust, even a complex trust that calls for the creation of multiple sub-trusts after death, is far simpler than going through probate, and can offer far greater continuing advantages than those available through a simple estate distribution.
Every person’s asset picture, family situation, and priorities are different, and the choice of which estate planning documents to use involves a thorough analysis of many factors. Contact us to start the conversation, and we can recommend the most appropriate tools for the job.