What is a “Living Trust”? Living trusts (also known as “revocable trusts”) acts as a “will substitute”, but it allows your estate to bypass probate. 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 revoked.
Under New York law, the Grantor can also be the Trustee which means you retain control of your 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 may 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.
As long as most of the assets have been transferred to the living trust, the costs and delays involved with probate are largely avoided.
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, pays any debts of the deceased person, 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.
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.
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. 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 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.