Hopefully, there are readers who are wondering about a plan to dispose of their assets and take care of their family members. You may have seen newspaper advertisements or have been to seminars where revocable trusts, sometimes called “living trusts,” are touted. Often, the main reason why you need a living trust is to “avoid probate.”
At the same time, if you check the AARP’s web site, you will see a warning about scams associated with living trusts. In my experience, the most prevalent form of fraud involves selling a living trust to people as a way to avoid probate costs and estate taxes.
Most living trusts don’t avoid any estate taxes (for the few people who even owe taxes), probate costs are not the problem they are made out to be, and there are cheaper ways to avoid probate for many.
A will is a legal document executed with prescribed formalities that disposes of your assets upon your death. It requires the “executor” to enter into the probate process to pass the assets along to your heirs. It does not deal with assets that are jointly owned or that pass to a beneficiary on the basis of a designation, such as life insurance and many retirement accounts.
A living trust is a trust that can be revoked at any time by you, the “grantor.” The grantor is usually the trustee and the beneficiary. When the grantor dies, a successor trustee distributes the assets according to the instructions in the trust.
Here are the pros and cons of a will:
- A will can be used to appoint a guardian for minor children and a trust cannot.
- The probate of a will cuts off the claims of creditors. Usually, creditors have only 4 months from the date that a notice to creditors is published in a newspaper. In contrast, without probate, a creditor may have as long as 10 years to follow assets into the hands of distributees and make a claim.
- The probate process recognizes certain exemptions from the claims of creditors.
- Usually lawyers charge less for drafting a will than drafting a trust.
Here are the pros and cons of a living trust:
- Trusts are more private.
- If you own property in more than one state, a trust can simplify distributing that property.
- In most states, and especially here in Nashville, probate is not a particularly long or expensive process. The extra cost of having a trust drafted must be weighed against the cost of probate.
- There can also be costs of administering a trust after the grantor dies: the successor trustee should usually seek some legal advice about carrying out his or her duties.
- A living trust does not stop heirs from litigating their claims in court.
- Living trusts do not generally avoid estate taxes if any, in fact, are due.
- Living trusts don’t protect assets from creditors.
- If the grantor doesn’t get all of his or her assets titled in the name of the trust, there may still be the need for probate of the remaining assets.
- You can sometimes avoid probate without the need for a trust by titling assets in joint names or by designating beneficiaries of life insurance or retirement accounts.
- Living trusts can sometimes have a negative effect on a person’s ability to qualify for TennCare to pay for nursing home care.
So which do you need, a will or a living trust? It depends on your circumstances and your values. This is the time to consult a lawyer, not attend a free lunch or seminar designed to sell you a living trust.