First off, a trust is something that allows a party called a “trustee” to hold legal title to property for the benefit of another person, called the “beneficiary.” A person can act as the trustee to a trust they set up and fund themselves, thereby giving them complete control over all the assets held in the trust. Many people elect to create living trusts because when they are funded during life, they avoid probate after the person’s death, allowing the beneficiary to access the trust assets more quickly and easily. A trust made by a person during their life is referred to as a “living trust,” and differs from other trusts only in that it is not created by a person’s will, after their death. The following is a discussion of several commonly asked questions regarding living trusts, which may help you determine whether a living trust would be a good estate planning tool for you. If you have questions regarding creation of a trust be sure to contact one of our Albuquerque trust and estate planning attorneys.
The main advantage to setting up a living trust is that any assets or other property put into the trust will then avoid going through the probate process after the person who set up the trust, often called the “settlor”, “trustor”, or “grantor,” dies. As you may or may not be aware, probate is the court-supervised process of distributing a person’s estate after their death. Though probate is not inherently bad, it can tie up assets for months or even years, and create stress for those involved. Additionally, probate is expensive. In some cases, a large amount of the value of the estate can be consumed by attorney’s fees and other estate fees, leaving the beneficiaries of an estate with substantially less inheritance than they were originally entitled to. However, there are several other probate avoidance devices, and a living trust is not necessary or ideal for everyone.
Any assets which are put into a living trust during your lifetime will avoid passing through the probate system after your death. This is so because the trustee, who is appointed to oversee the trust distribution after your death, can simply transfer ownership of the assets to the selected beneficiary or beneficiaries. This is generally a much quicker process than probate if the terms of the trust indicate that the assets can be paid out immediately rather than over a longer period of time. Also, there are usually no attorney or court fees involved, unless you appoint an attorney or trust company as trustee, which is not required. When the entire contents of the trust have been distributed to the designated beneficiaries, the trust will simply terminate.
Like a simple will, a basic living trust is relatively uncomplicated to create. Though hiring a lawyer is not always necessary, you may be wise to consult with an experienced estate planning attorney who can assist you in creating a living trust.
Though there are many things more difficult than creating a living trust, funding a living trust does require the completion of certain important paperwork. For example, if you put your home into a living trust (which you absolutely can do), you would be required to execute a new deed to the home, indicating that you then own the home as trustee of your own living trust. Though such paperwork can be time-consuming, it is generally less of a hassle than it has been in the past, given the increasing popularity of living trusts. We tell clients that their choice is either they jump through hoops now (by transferring properties into the trust, or utilizing other estate planning techniques) or their heirs jump through hoops after their death (and through a probate). The cost is usually greater when going through a probate.
The terms of your living trust would not be made public, unlike a will which becomes public record after a person is deceased and the will goes to a probate court. Likewise, other documents associated with the probate process are made public. The details of a living trust however will at no point be made public by a court, as they avoid the probate process entirely.
Creditors may be able to access assets in a living trust to which they are legally entitled due to an outstanding debt. However, a creditor will usually first have to take the matter up with a court. If they receive a favorable judgment, they can invade a living trust so long as the assets are held in the name of the person who owes them a debt. This is because in general, after your death, property owned by you is subject to creditor’s claims. For example, if you put your home in a living trust during your life, and you die with $200,000 of outstanding debt, a creditor can likely get at your home if the remainder of your estate does not cover the full amount of your debt. At this point, it would become irrelevant who you specified as beneficiaries of the trust, as the creditors have a legal right to satisfy the debt owed against the collateral (and the deficiency against the estate).
Alternatively, the probate process actually can offer some protection from creditors. During the probate process, all creditors with claims against your estate must file such claims within a certain time limit, and if they miss the deadline, they cannot recover from your probate estate. A living trust which avoids probate does not receive this kind of protection.
Setting up a trust during your life does not negate the need for a formal will. This is because any property that you do not put into the living trust will need to be included in a will, in order to be distributed according to your wishes after your death. The living trust covers only the property you put into it during your life. Though you could potentially put all your assets into a living trust, imagine that you acquire certain property shortly before your death, for example, and do not get a chance to transfer the title of the property to your living trust. Upon your death, the property may not end up where you would have wanted it to go, unless you have a will to cover all the assets that are not included in your living trust. In a will, you can always name a “residuary beneficiary,” who will inherit all the property you owned which you did not specifically name in your will. We provide clients that decide to form a New Mexico trust a “pour-over” will which designates the trust as beneficiary of any assets that are subject to the will and not placed into trust beforehand.
Unfortunately, a simple living trust generally will not have any effect on the amount of estate taxes your estate could potentially owe after your death. However, do keep in mind that under current law, estate taxes are only owed by estates which exceed $5.25 million dollars. Furthermore, due to a recent law enacted in 2010, a concept known as “portability” was created that allows individuals to utilize their deceased spouse’s estate tax exemption (in addition to their) without the need of a trust; thus simplifying tax planning for married couples with less than 10.5 million dollars in assets. As such, not many people need worry about estate taxes at all, let alone reducing them via estate planning devices.