Four out of five clients ask me whether they need a living trust. They ask me earnestly and with fear. They have seen ads. Their broker has told them they need one. Their friends tout them as the answer to all prayers. Sometimes my answer is: “Absolutely you should have one.” Sometimes my answer is: “It would be overkill and inappropriate for you.” The living trust is not a one-size-fits-all solution to the concerns you have about probate and taxes. It is, however, a tool worth considering.
What is a living trust and how does it work? A living trust, which is sometimes known as a revocable trust or an inter vivos trust, is a trust that you establish during your life (hence, “inter vivos”). As the person who sets up the trust, you are known as the grantor or the settlor and most often you are also the trustee. As grantor you set out the terms of the trust, which means you declare how the trust will operate during your lifetime and what will happen to the trust assets upon your death. After establishing your trust, you transfer your assets into the trust. For example, if you transfer the title of a brokerage account into a trust, the owner of the account would be the trustee. At your death the trustee would handle that account according to the terms set out in the trust document. Your will would not control that account at your death; therefore, that account would not be subject to probate (a term which has come to mean the process overseen by the clerk of court who ensures that the terms of your will are carried out).
Assets that are not held in your trust and which are controlled by your will are subject to probate tax that is paid to the clerk of court. This tax is not a large tax, forty cents for every hundred dollars, but it can add up. The tax is capped at $6000 and it does not apply to real estate or assets that are controlled by beneficiary form and pass to individuals. In addition, there is a filing fee for probating an estate, which currently is $89.00. Finally, there are usually legal fees paid to the attorney who handles the estate administration and these can range greatly depending on the complexity of the assets.
Another positive aspect to the living trust is that your estate plan will be private. No one can see your trust, unlike your will, which is filed in the county estates division in which you were domiciled at the time of your death. Whether this is important varies from person to person. I do not know of too many people who go to the courthouse to peruse the estate files but this may be a concern.
The type of assets that you own is a good indicator of whether you need a living trust. If all of your assets are controlled by beneficiary forms or are jointly owned, it is not likely that you need a living trust. If you own property in another state, a living trust is an excellent solution for avoiding ancillary probate, which is the probate that would take place in the state where the real estate is located. This process can increase your legal fees. To avoid those, you can establish a living trust and a deed can transfer title to the property into the trust. At your death no probate will occur.
You should be aware that there are ways to avoid probate that are not as costly as a living trust. North Carolina has had “transfer-on-death accounts” (for stocks, mutual funds, etc.) and “payable-on-death accounts” (for bank accounts) since 2005. These accounts allow you to name a beneficiary to receive the accounts at your death just as you can for individual retirement accounts and life insurance. They can be useful if you have beneficiaries who are cooperative and will pay your final expenses without the need for a court order.
If you are married and your estate is not taxable (next year estates larger than $1 million passing to someone other than a spouse are taxable), joint ownership can provide a seamless change of ownership upon the first death. After the first death, you might want to consider a living trust depending on the details of your estate plan.
A living trust is often a good option but do not feel overly concerned if you do not have one. Next time you visit your friendly estate planning attorney, ask if it makes sense for you.
Originally published in Southern Neighbor, August 2010