Updated: Jul 31, 2019
What is a Living Trust?
A Living Trust is a type of revocable (can easily be changed) trust that is primarily designed to avoid probate and better protect one’s beneficiaries. A trust is a legal device where one party (the trustee) holds legal title over the trust assets for the benefit of another party (the settlor) that holds equitable title (an ownership interest). The trustee of a Living Trust is typically also the person who holds that ownership interest; in this situation, other eventual beneficiaries must be named. Generally, a Living Trust will be set up as follows: A person transfers all her assets to a trust and makes herself the sole trustee and a beneficiary; she also names a successor trustee and other beneficiaries. She still has full control over all the assets, but the assets will now avoid probate and can offer creditor protection for her future beneficiaries.
What is Probate?
Probate is the process of proving a Will under the supervision of a court. All Wills must be probated in order to be effective and all probate assets are subject to probate (unless the estate is worth less than $25k) regardless of whether a Will existed. However, not all assets are subject to probate. This means that a properly drafted Will may not control the distribution of all your assets. Some assets are legally considered non-probate assets, which means that these assets transfer by operation of law, such as beneficiary designations (life insurance, 401k, IRA, etc.), joint ownership with right of survivorship (real estate title, vehicle title, etc.), and payable on death or transferable on death (POD, TOD) accounts (checking accounts with a listed POD beneficiary, etc.). Not all assets go through the probate process. A properly drafted and funded Living Trust can allow an estate to avoid probate entirely.
Why Avoid Probate?
Probate is often expensive, long, public, stressful, and creditor favorable. Most estates hire attorneys to represent the estate during the probate process. These attorneys often charge by the hour. Given that the probate process lasts at least 8 months due to a creditor waiting period (unless the estate is worth less than $25k), it is common for estates to pay thousands of dollars in attorney's fees during this time and possibly even triple that amount if anything gets contested. Many estates take over 1 year to complete the probate process which is a long time to tie up an estate, keep beneficiaries waiting, and have an attorney working. Furthermore, probate is a public process. People may find out about the estate’s net worth and maybe even some family issues that were meant to be kept private. Lastly, probate requires that the estate give notice to any potential creditors to settle any remaining debts. This is often difficult for estates to correctly verify as the person who entered into the alleged contract has passed. Probate essentially welcomes all creditors to file claims and further complicate the entire process.
Transfers that occur outside of probate are faster, private, less costly, and generally free of court oversight. It often takes as little as two weeks to transfer all assets of a Living Trust to the beneficiaries after the death of the settlor whereas probate would take at least 8 months. The successor trustee can easily transfer assets to each beneficiary without court oversight or needing to pay any attorneys. Creditors would likely be unaware of any transfers, as no notice is required. It is much harder and more expensive for relatives to contest non-probate transfers than probate transfers. Non-probate transfers offer a much smoother distribution of estate assets.
If one or more of the following is true, a Living Trust is likely the better option:
· You own real property or likely will at your death.
· Your desired heirs are bad with money or have creditor issues.
· You want your estate and its distributions to be private.
· You want your estate to be distributed quickly and with ease.
· You don’t want your heirs to have to deal with the stress of probate.
· You don’t want your estate to pay an attorney by the hour for probate work.
· You will likely have questionable creditor claims against your estate.
· You want to control your assets after your death.
· You want to ensure a spouse is taken care of.
· You want to save money by avoiding future probate costs.
Frequently Asked Questions about Living Trusts
Will the Trust have to file its own taxes?
No. The Trust would be a grantor Trust and everything would be filed on your personal return just as usual. It is a tax neutral device, there is no tax benefit or detriment.
Will I lose control of my assets?
No. You will still have full control over all Trust assets.
Do I still need a Will?
Yes. A simple pour over Will is recommended to catch any assets that may have been left out of the Trust.
How is the Trust funded?
Assets will have to be transferred to the Trust. For assets without a title this is as easy as declaring the Trust owner of the assets. For assets with a title, a more formal transfer and, generally, a new title will have to be obtained.
Will the Trust protect my assets from creditors?
No. Creditors will still be able to get to the Trust assets. However, upon death, creditors will have a much harder time collecting from your estate than if the assets went through probate. Additionally, the Trust may offer some creditor protection for its beneficiaries.
-This is for informational purposes only. Do not use as legal advice. Information is South Carolina specific-
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