Littlejohn column: Why you may want to consider a living trust
Think trusts are only for the uber wealthy? Think again. Trusts play an important role in helping many families achieve their financial objectives.
What is a trust?
A trust is a legal arrangement between at least two people: a grantor and one or more trustees. The grantor transfers assets to the trust, which the trustee administers for the benefit of one or more beneficiaries. A trustee can be a financial institution, an advisor, a friend or a family member.
Although there are many types of trusts, the most common type is a living trust — and more specifically, a revocable living trust. In fact, about 20% of Americans have living trusts, according to HG.org. Once a grantor creates a revocable living trust, it goes into effect immediately. In addition, the grantor can modify or revoke the trust at will during their lifetime.
The primary benefit of a living trust is that it avoids the probate process. Probate court is where the deceased’s last will and testament is authenticated and their assets are located, valued and distributed. Since there are a number of disadvantages to going through probate court proceedings, sidestepping this process altogether has its benefits. There are also other benefits to establishing a living trust that are worth considering:
Most states require whoever is in possession of a deceased person’s will to promptly file it with the local probate court — regardless of whether or not there will be probate proceedings. Once someone files a will, its contents become public record. This means that anyone who is curious about the will can see it. Since a living trust doesn’t have to be filed with a court, it provides an additional layer of privacy.
That said, some aspects of a living trust can’t remain private, such as real estate ownership. In addition, if someone contests a living trust in court, the details of the trust become public record. Furthermore, some states require that the full terms of a trust be disclosed to beneficiaries — and in some cases, close relatives — upon the grantor’s death.
Fewer asset distribution delays
If your estate is somewhat complex, probate proceedings can take months or even years. One of the benefits of a living trust is that your beneficiaries may not experience such significant delays in the distribution of your assets when you die.
Moreover, while it’s rare for someone to challenge a living trust, it does happen. However, a trust is generally more difficult than a will to successfully attack in court. This is often the case because the grantor has ongoing involvement with the trust after its creation. As such, many courts interpret this as evidence that the grantor was competent to manage their affairs.
Potentially lower estate settlement costs
The cost of using a living trust to settle an estate is typically less than settling an estate in probate court. However, it’s important to note that the cost usually isn’t negligible. The legal and administrative fees can add up in some cases. This is one of the reasons why it’s important to consult with an estate planning expert to determine if a living trust is your best option.
While establishing a living trust can be an effective way to carry out your end-of-life wishes, it can also be helpful during your lifetime if you become ill or incapacitated. Having a living trust allows you to name a successor trustee to manage your assets in accordance with the terms of the trust should you not be able to do so yourself. Any successor trustee you name is obligated to act in a fiduciary capacity, which means that he or she is required act in the best interests of the trust beneficiaries.
Without these legal safeguards in place, it’s likely that a court would appoint someone to manage your personal and financial affairs on your behalf. In order to be granted that authority, one or more of your family members would have to go to the trouble of successfully petitioning the court. This can be an emotional and very public process.
Is a trust right for you?
A living trust certainly isn’t right for everyone. However, in many cases, a trust can provide you with peace of mind that your assets are protected and will be distributed according to your wishes — both during your lifetime and after your death.
You should consult with an estate planning attorney and/or fiduciary financial advisor to determine if a living trust is the best way to accomplish your specific objectives.
Brian Littlejohn, MBA, CFP®, CFA is the founder of Sherwood Wealth Management, an independent registered investment advisor (RIA) firm. He specializes in inherited wealth and works with clients in the Roaring Fork Valley and beyond.
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