Unlike a Will, a revocable living trust is a legal document created and utilized during an individual’s lifetime.  (A Will is only effective upon death.) A living trust is intended to allow for the easy transfer of the trust creator’s assets without the often complex and costly legal process of probate.  The trust owns the property or assets in it and designates a person to manage the assets, called a trustee.  A trustee is given responsibility for managing the trust’s assets for the benefit of the beneficiary (typically the person creating the trust) and eventual the heirs upon death, death beneficiaries.   You can be the trustee of your own trust and have the power to change and amend trust rules at any time. This means that you are free to change or add beneficiaries or even undo the trust altogether during your lifetime.  You also control your assets.  The use and enjoyment of your assets does not change because of the trust.

In contrast, with an irrevocable trust, typically the individual relinquishes certain rights of control to the trustee and the trust cannot be amended or have beneficiaries added to it.  This type of trust may help to reduce the creator’s taxable estate.

Which Assets Can Be Added to a Trust?

In order for a trust to work, it must be funded.  With few exceptions, almost anything with value can be added to a living trust.  In addition to money in bank and savings accounts, a trust may own investment accounts, vehicles, real estate, fine art/jewelry, intellectual property, business interests, and more.  In order to fund the trust, you would change the titles of those assets from your name (or joint names) to the name of the trust.  If you have a revocable trust, you can continue to buy and sell assets, and add and remove them from the trust throughout your lifetime without the help of an attorney.  (You only need an attorney if you amend the trust, such as change the persons named as beneficiaries or trustee.)  Your attorney can prepare a certificate of trust that will verify the trust’s existence and identify the trustee, so that you can satisfy the requirement of proof that some institutions may require when transferring ownership to a trust.  A certificate of trust keeps the contents of your trust private.

Some assets cannot or typically should not be added to a living trust, such as retirement accounts, including 401(k)s and IRAs.  If you were to add them to a trust, it would count as a complete withdrawal of funds from the account, and that amount would be taxable income for the year of the transfer.  Always check with your estate planning attorney before deciding which of your assets would be better off in trust.

Benefits of a Trust

  1. Avoid Probate

A common misconception is that a Will does not require probate.  The opposite is true.  A Will requires probate!  Probate is a court case where the court supervises the administration of your estate after your death.  Six months is typically the quickest a probate can be completed.  A probate often lasts a year or longer.  Because probate is a court case, it often costs $5,000 or more in Arizona.  (A lot more if the heirs fight over the property after the individual’s death.  A contested probate can cost $100,000 or more.)  Avoiding probate is a goal everyone should have.  A trust is designed to avoid probate.  No court supervision is required because it is a private entity.  Therefore, a trust avoids the cost of probate.

  1. Avoid Conservatorship

Although a trust costs money to create, it is less expensive than the alternative of conservatorship, should you become unable to handle your own financial matters.  There is no Arizona statute (law) that requires a third party to honor a durable power of attorney.  Without a living trust, upon incapacity of the creator, a conservatorship is needed if a financial institution will not honor the power of attorney.  A conservatorship is created when the court orders an appointed person to be in charge of your financial affairs.  It typically costs more than $5,000 in Arizona and takes 2 – 6 months to accomplish.

  1. Provide Asset Protection for Beneficiaries

A trust is able to provide the inheritance to your loved ones in a manner where creditors and bankruptcy court cannot take the inheritance away.  Further, if a beneficiary is on government aid, such as disability, the inheritance is held in a special needs trust.  A special needs trust allows the beneficiary to receive the benefit of the inheritance while continuing to receive government aid.  A trust can also direct money to an individual only, and not that person’s spouse, thereby keeping it from being divided or counted in any divorce proceedings.

  1. Maintain Family Harmony

A trust is more difficult to challenge because it is not supervised by the court.  Remember, yhere is no probate to administer a trust.  Therefore, in order to contest a trust’s provisions or administration, a lawsuit must be filed.  An attorney is almost always required.  The expense of an attorney is a barrier to a person due to the expense of paying for such attorney.  Because trusts are more difficult to challenge, family harmony is easier to maintain.

  1. Avoids Inadvertent Disinheritance

Under a Will, a person typically receives their inheritance all at once.  When such inheritance is received, it is now part of that heir’s estate.  The creator of the Will has lost control of the property as it is now directed by the heir.  This becomes a problem in two common situations.  First, a child receives their inheritance.  The child later dies.  The child’s spouse, NOT the child’s children inherit the inheritance.  When the spouse remarries, the inheritance has left the family and is unlikely to ever be received by the child’s children.

Second, in second marriages it is common to have children from a prior marriage.  Under a Will, the creator typically leaves most if not all assets to the surviving spouse.  The surviving spouse then Will’s the assets to his or her children.  There are too many cases to count where the children with the wealth in the marriage never receive a dime.  Instead, everything ends up with the step-children.  The only way to control the disposition of assets upon the death of the beneficiary is in a trust.  A trust can state that upon the death of a child, the child’s children inherit and not the in-law spouse who will likely remarry.  Also, a trust can state that upon the death of your spouse, your children will inherit.

6. Maintain Privacy

As discussed above, a trust does not require probate to administer.  Wills require probate and therefore the documents filed in a probate are available to the public.  It is possible for other parties to know what occurred in the probate.  A trust is not supervised by the court and is completely private.  This means your affairs and who you leave your property to is protected from public knowledge.

  1. Save Taxes

Trusts enable couples to maximize their lifetime estate and gift tax exemptions.  Further, capital gains taxes can also be avoided.  Taxes are great tools to reduce taxes upon death.

  1. Greater Flexibility

A will is limited in what it can accomplish.  However, a trust can literally do almost anything the trust creator desires.  Some individuals provide for pets.  Others require that beneficiaries earn a college degree or maintain a job in order to receive their inheritance.  Others limit the inheritance to education or other limited purposes until a certain age.  Grandparents sometimes create a grandchildren’s share to pay for education or other needs.  You could even delay the inheritance until your children reach age 65 in order to insure they had retirement funds.  If there are no children or descendants to leave trust funds to, a foundation for charitable purposes can be created.  There are very few limitations the law places upon you when leaving your property to your loved ones. Some individuals with unusual goals create a trust because it allows them the flexibility needed to accomplish their desires.

Whatever your plans may be to protect your assets while you are living, and after your death, an estate plan that includes a living trust can be the best answer.  This article was drafted by attorney, John Skabelund at Davis Miles McGuire Gardner, a member of the firm’s leading trust and estates practice.  Contact John and let him guide you in the right direction and establish the best legal plan for YOU. A living trust should be custom tailored to you and your goals.  Do not settle for a cookie cutter trust that is nothing more than a form.  Such forms or cookie cutter trusts often contain mistakes that are discovered after death.  By then, it is too late to fix.  If you are the heir or beneficiary of a trust or Will that is not properly handled, attorney John Skabelund can also help you.

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