LIVING TRUST – IS IT RIGHT FOR YOU?

by Michael Kutzin Goldfarb Abrandt Salzman & Kutzin LLP

 

What is a “Living Trust”?  Living trusts[1] (also known as “revocable trusts” and “revocable living trusts”) are often useful devices that can be used, in tandem with something called a “pourover will” (discussed below) to avoid probate or reduce the probate process’s affect on your loved ones after you die.

A living trust acts as a “will substitute.”  Property, whether real estate, bank accounts, or other tangible or intangible wealth (but not IRAs or other retirement accounts), is transferred into the name of the trust while you are alive.  The trust provides for what happens to the property in it once the person who contributed the property (called the “Grantor” or “Settlor”) dies.  The living trust is revocable and amendable, so if the Grantor changes his or her mind about who should inherit or how much, the trust can either be amended or, less frequently, revoked.

Under New York law (and the laws of most jurisdictions), the Grantor can also be the Trustee.  That means that, until you are either incapacitated or die, you retain complete control over the assets in a living trust.  In effect, while assets have a different title, the assets remain yours, you can use your assets as you please, and when you die, the assets in the trust are not subject to probate.

Even if you create a living trust, you still need a will.  A “pourover will” provides that any asset you failed to properly transfer into the name of your trust passes to the trust to be disposed of as you directed in your living trust (it “pours over” into the living trust).

Often, even people who diligently transfer assets to their living trusts have assets that are not added to their trusts before they die, such as insurance reimbursement checks that arrive after they die.

Even so, as long as most of the assets have been transferred to the living trust, the costs and delays involved with probate (which will be discussed below) are largely avoided if most assets were properly transferred to the living trust during the Grantor’s lifetime.  Moreover, where the living trust may create further trusts for the Grantor’s beneficiaries, even where the Grantor failed to transfer most of their assets during lifetime to the living trust, there will be fewer delays involved if successor trustees must take over one of the trusts established in the living trust for beneficiaries, as there is no need for court involvement.

What is Probate?   In New York, probate is the process by which a Surrogate’s Court recognizes a document as someone’s Last Will and Testament, and then gives the named Executor something called “letters testamentary.”  The Executor gathers probate assets (i.e., assets that do not have a named beneficiary, like life insurance or retirement accounts), pays any debts of the deceased person, pursues any claims, like lawsuits or any assets wrongfully in the hands of others, pays taxes, and ultimately distributes the assets as provided in the Will.  Once the will is “admitted to probate”, unless a controversy arises or the Executor seeks to have something called a judicial accounting to approve his or her actions and be discharged as Executor, the Surrogate’s Court has little further involvement with the estate.

How is Administering a Living Trust Different from Probate?  The primary difference is that the living trust does not have to be admitted to probate by the Surrogate’s Court.  That means that, not only is there no need to pay a filing fee (which can run to $1,250) other than if there is a need to probate the pourover will (and that usually involves a much lower filing fee if most assets are in the trust), but that there is no delay in administering the trust.  A living trust names a successor trustee to take over for the Grantor upon death or incapacity, so that person can take control of the assets, which are already gathered in the name of the trust, pays the last bills and taxes, and can make distributions in a timely manner.

Does a Living Trust Save on Taxes?  No more so than a properly drafted will.  Like a will, a living trust can provide for trusts that can be used, when appropriate, to reduce or eliminate Federal or State estate taxes.  But a living trust alone does not provide any particular tax savings.  The assets remain the assets of the Grantor for income taxes, and the Grantor will be taxed on the interest, dividends and capital gains just as before.  In addition, all assets held in a living trust are treated as belonging to the Grantor for Federal and State estate tax purposes.

Who Should Consider Establishing a Living Trust?  Until recently, I believed that the cost of establishing a living trust and the fact that there is almost always a need to probate the pourover will limited the number of New York residents who should consider a living trust.  Indeed, in my article, Ten Biggest Mistakes You Can Make in Your Estate Plan, with certain exceptions, I concluded that, in part because of unscrupulous attorneys, unwitting clients, or both, the living trust was usually not appropriate for New York residents.  However, as will be discussed below, due to recent developments, I now believe that living trusts are now appropriate for almost everyone.

As I said in my earlier article, anyone with property in more than one state should strongly consider transferring their property into a living trust in order to avoid having to have more than one probate.  For example, if you are a New York homeowner with a Florida condominium, you should consider transferring both residences into a living trust in order to avoid having your will probated in two states.

Another case that clearly calls for consideration of using a living trust is where your surviving family members are more distant relatives, such as cousins, especially if you have lost contact with those family members.  In such a case, not only would the Executor named in your will (or the lawyer he or she hires) have to demonstrate “due diligence” to locate all family members, but if one or more of them cannot be located (or are unknown), then the Executor will have to obtain something called an “Order of Publication” and spend hundreds or thousands of dollars of the estate on one of those legal ads that no one ever reads to notify these people about their potential interest in the estate, regardless of whether or not you named them in your will.  In addition, the Surrogate’s Court will have to appoint a lawyer as “Guardian ad Litem” to protect the interests of these people and to investigate whether the will is valid.  All of these costs will come at the expense of your heirs, and this protracted process can substantially delay when anyone can expect to receive their inheritance.

As discussed in Ten Biggest Mistakes You Can Make in Your Estate Plan, if you anticipate someone contesting your will, having a living trust instead can help to avoid litigation for your intended heirs.  It is not foolproof, but it avoids the immediate need to involve family members who might decide to cause trouble.

Also as discussed in Ten Biggest Mistakes, a living trust is not a public document, unlike a will submitted for probate.  So, if you are concerned about privacy, then a living trust may be right for you.

In the past, the examples described in the prior four paragraphs were the only situations where I viewed living trusts to be useful, and usually preferable, to having a will as the centerpiece of an estate plan.  However, because of severe budget cutbacks in the New York State judicial system, many of the Surrogate’s Courts have been horribly backlogged.  Even what most practitioners would consider to be a simple probate or a simple, routine matter relating to an estate can, depending on the Court in question, take weeks or months to process.

This can leave a beneficiary who is supported by a deceased relative (like a spouse or parent) in dire financial straits while the will is winding its way through the court system.

In addition, as discussed above, suppose your will provides for trusts for your children, either as part of estate tax planning or because someone is unable to manage wealth, such as a minor or a ne’er do well.  If your original trustee dies, even if your will names a successor, that person will have to go back to court with an application to be granted “letters of trusteeship.”  In addition, if your original trustee wants to resign, that person also must apply to the court for permission to resign, and the court is free to refuse that resignation!

Prior to the dramatic cutbacks in court personnel due to budget cutbacks, the delay in question would not have been substantial.  However, due to the cutbacks, and depending upon the court in question, the delay may be extreme and a hardship to your beneficiaries.  A properly drafted living trust addresses this problem by providing for what happens when a trustee resigns or dies, and provides a simple mechanism for the successor trustee to take over.

In short, except for the very simplest of estates (i.e., all to spouse, and if spouse predeceases to adult children outright) AND no one has an urgent need for access to your property immediately, you should consider making a living trust, along with a pourover will, the centerpiece of your estate plan.

Make sure, though, that you actually see a reputable trusts & estates lawyer to help you decide what is right for you, and, if a living trust is desirable, that (i) you are not simply purchasing a fancy binder that was mass-produced by a “trust mill” with inappropriate language or that was not tailored for your needs, (ii) you execute a pourover will AFTER you sign your living trust (this is very important under New York law), and (iii) you actually transfer your assets into the trust after you sign the trust agreement.

 


[1]   As a matter of law, any trust formed during your lifetime, rather than by your will, is a “living”, or “inter vivos” trust.  However, for purposes of this article, I am using the term “living trust” as it is popularly known – a trust used as a will substitute to avoid probate.