In the estate planning world, the living trust has been all the rage for some time. Unfortunately, it often does not live up to the hype.
Pushers of the living trust cite its ability to avoid probate—the court-supervised procedure for administering a deceased person’s assets. They claim probate is expensive and time-consuming. Living trust proponents also assert that, unlike a will, a trust cannot be challenged. Further, they tout a living trust’s ability to protect assets and avoid guardianship issues if you become disabled.
Their claims are not entirely meritless. A living trust accomplishes many of the things they claim, but proponents leave a lot out of their sales pitch. So, when should you use a living trust and when should you use a will?
A few states have made the probate process a nightmare. However, in North Carolina, probate is straightforward and relatively cheap. As of 2019, North Carolina’s probate court charges $4.00 per $1,000 of probate property (i.e. not real estate) held by the estate. The fee has a maximum cap of $6,000 and you can avoid most fees by naming a beneficiary or using a transfer on death designation on your financial accounts.
In addition, a living trust is much more expensive to setup and maintain than a will. A living trust often costs between $1,000 and $3,000 to establish versus $400 to $800 for a will. Administering a living trust after your death is not cost free either. The advice of an Attorney or CPA is often required to help file the appropriate tax forms and distribute the assets of the trust to the beneficiaries.
Another common issue with living trust is that they are often not setup or maintained correctly. Many people fail to properly transfer their property into the trust, defeating its entire purpose. They paid the premium price for a living trust to avoid probate, but they ended up in probate court anyway.
North Carolina has a number of streamlined probate options too. Thus, a full estate administration can often be avoided, saving significant amounts of time and money. I have seen people spend thousands of dollars to avoid a few hundred dollars in probate fees. Regrettably, a lot of the advertised cost savings of a living trust never materialize.
Protecting your Assets
A living trust is also known as a “revocable” trust. This means that a living trust does not protect your property from creditors or lawsuits while you are alive. Once you die, beneficiaries or potential heirs can also file a lawsuit challenging the validity of a living trust, just as they would with a will.
After your death, a living trust does not cut off claims from your creditors against the property you placed in the trust while you were living. In fact, settling the estate through probate provides protections you do not get with a living trust. The biggest of those protections is that probate starts the clock on the amount of time creditors have to bring a claim against your estate.
Another repeated myth is that a living trust will reduce your estate taxes. The bottom line is that most of us will never be subject to a Federal or State estate tax. First, North Carolina does not have an estate tax and the current Federal estate tax exemption for a married couple is $22,400,000.00. However, even if you were subject to the Federal estate tax, a living trust would not reduce your estate’s tax burden.
It is true that a living trust can name someone to manage your affairs if you become disabled. However, a Health Care and General Power of Attorney can accomplish the same thing at a fraction of the cost. Appointing a guardian for minor children and avoiding court interference is another common benefit cited by living trust proponents. Yet, this too can be accomplished with a will, and having the court involved is not always a bad thing. Often the court can serve as a check on a guardian or trustee, ensuring they are spending your assets responsibly.
Finally, some sales people or online document mills may have ulterior motives in selling you a living trust. They use the living trust to find out what assets you own. Then they try to sell you other financial or insurance products, or they may sell your personal information to other companies.
When to use a living trust
You own property in another state. This is the number one reason in my practice for recommending a client use a living trust. Without a living trust, your estate will need to be probated in every state where you own property. It is usually more cost effective to avoid probating your estate simultaneously in multiple states.
You have a child with special needs. Families with special needs children need to be mindful of how a direct inheritance could affect their child’s ability to qualify for certain public benefit programs. Many public assistance programs require that the individual meet strict financial eligibility criteria. A properly drafted living trust can ensure a child with special needs continues to qualify for programs such as SSI and Medicaid, while still receiving the benefit or their inheritance.
You have a beneficiary with addiction issues. Similar to families with special needs children, if you have a child or grandchild with a substance abuse problem, providing them with a direct inheritance could cause them more harm than good. A living trust can help ensure they spend their inheritance wisely, or in the extreme, they are not harmed by it.
A living trust can be useful planning tool for certain individuals in specific situations. However, in North Carolina they should not be the default planning tool. If someone is recommending a living or revocable trust to you, make sure to ask lots of questions as to why. If their biggest reasons are avoiding probate and protecting assets, you may want to consider getting a second opinion.
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