How A Living Trust Can Protect Your Family Assets

First and foremost, a trust is a vehicle designed to hold all your assets. Assets include property, vehicles, bank accounts and everything else you own – EXCEPT 401k, IRA and other types of retirement accounts.

However, just because your assets are now in a trust rather than in your personal name, it doesn’t necessarily impact the fact that it is still your stuff and can be accessed and used by you at any time and in any manner. This depends on what kind of trust you have.

Now, saying “I have a trust” is a lot like saying “I have a car.” Well, that’s nice – but what kind of car is it, what color is it, how old is it, etc -- you get the point. There are as many kinds of trusts out there as there are vehicles – it all depends on the purpose of the trust and the provisions contained in the trust.

To delve more deeply into the main types of trusts, next we have to look at whether a trust falls into one of two primary categories:

• REVOCABLE – as the name suggests, these trusts can be amended or revoked at any time. While these kinds of trusts offer significant value in certain circumstances, revocable trusts do not protect the trust maker from creditors and/or Medicaid spend down. However, the revocable trust is usually what’s right for most individuals, as explained further below.
• IRREVOCABLE – again, as the name suggests, these trusts cannot be revoked or amended once created and funded.While there are many different types of irrevocable trusts, their general purpose is to protect your assets for a variety of reasons, such as a Medicaid spenddown protection or creditor protection.There are certainly other reasons to have irrevocable trusts, but those are the two most common reasons.

Next, we have to look at the term ‘living.’ This refers to the fact that the trust is created and in place while you yourself are still alive. However, this does NOT mean that this trust ends upon your passing. Another reason it is called a “Living Trust” is because upon your passing or your and your spouse’s passing, the trust can no longer be amended – the trust can only be amended or revoked by the person or persons who created it. If you pass, but your spouse is still living (or vice versa), the trust remains a living trust, and just continues on until your spouse also passes.

Avoiding Probate

All assets contained in a trust may be distributed to those people whom you designate in your trust on your passing without the need for a probate. But what's a probate and why is not going through it a good thing?

A probate is a legal process by which a court oversees distribution of a deceased person’s assets to their heirs and/or beneficiaries. The probate process is often lengthy (usually 6 months minimum) and expensive but can be avoided as long as all assets owned by the decedent (The person who has died) are contained within a trust.

This means a deed to all real estate from you and/or your spouse into your trust must be recorded reflecting title ownership in your trust (most estate planning lawyers after preparing your trust will prepare and file the deed for you, which will transfer the title into the trust).

Additionally, car titles should be moved into the name of the trust. This also means that all bank accounts (including checking, savings, money market, CDs, individual brokerage accounts etc.) must be renamed into your trust. Moving all these assets to the trust avoids the need for probate on those assets. Your lawyer will likely handle most of the funding (adding assets into the trust) for you or, at least, give instructions on how you can place these items into the trust yourself.

Reasons Probate Might Still Be Required And How To Avoid This

A big issue that we see a lot in our probate practice where there is a trust is that the trust was never initially fully funded. What does this mean? This means putting all assets – including houses and bank accounts into the trust immediately after the trust is created. The attorney drafting the trust should handle the initial funding, but when this doesn’t happen, it leads to probate.

If you have already created a trust, and you’re not sure if your lawyer fully funded it, reach out to your lawyer.

The second most common reason there is a probate when a trust exists is when subsequently acquired property is not purchased in the name of the trust. If you buy a new home or piece of property, you must buy it in the trust – if not, then it is not in the trust and would be subject to a probate upon your passing. If you open a new bank or investment account, open it as a trust account, otherwise it isn’t in the name of the trust and therefore subject to probate.

A third common reason we handle probates when there is a trust is when a retirement account does not have a designated beneficiary. It is easy to designate a beneficiary, so make sure that all of your retirement accounts have not only a primary beneficiary, but a contingent beneficiary.

Note, that the contingent beneficiary can be your trust. If you have a spouse, you should list your spouse as your primary beneficiary – there is no reason to list the trust as the primary beneficiary if you are married.

Protecting Your Beneficiaries

Living trusts contain a multitude of upsides that will help protect your heirs and beneficiaries.

First is the cost savings. Sometimes it can seem that hiring lawyers is costly – but the cost of setting up a standard revocable living trust is no where near as expensive as your heirs having to go through the probate process.

Secondly, living trusts give you wide discretion on how to leave your assets to your beneficiaries. This not only includes amounts, percentages and/or specific property distributions to go to your beneficiaries – you can also provide exact instructions as to when and how your beneficiaries can have access to their inheritance.

Third, your trust can create additional trusts, meaning that you can leave an inheritance to a beneficiary within their own trust. This means that upon your and your spouse’s passing (or just you if you are unmarried), your trust can create individual trusts for your beneficiaries. This opens up a lot of additional benefits to your heirs.

You can determine if or when each beneficiary may become the trustee of their own trust.

For example – parents of young kids setting up a living trust may state that should something happen to them while their kids are still under a certain age, the person they name as successor trustee may serve as trustee of each child’s trust until that child reaches a certain age, at which point they could either become co-trustee or sole trustee, whatever the parent designates.

Before a beneficiary can become sole trustee, the successor trustee named by you has full discretion as to distributions out of the trust for the benefit of each child.

The trusts set up by your trust provide three very important protections to your beneficiaries:

• Creditor Protection - All assets contained in your beneficiary’s trust, set up by your trust, are protected from any of the beneficiary’s creditors.
• Divorce Protection – All assets in your beneficiary’s trust created by your trust are NOT marital assets and cannot be divided in a divorce proceeding.
• Medicaid Protection – All assets in your beneficiary’s trust created by your trust DO NOT count against your beneficiary for the purposes of Medicaid qualification.

The trust that your trust creates, if needed for a beneficiary, can be a special needs trust.

If one of your beneficiaries is unable to manage their own affairs and/or is on any form of governmental assistance that any sort of inheritance could disqualify them from, the trust formed by your trust can be converted to a Special Needs Trust.

The special needs trust would contain all their inheritance from you, and you would be able to designate a trustee that controls those assets for them.

If an heir has special needs and will be getting an inheritance through probate because a trust was NOT in place, there will be the added time and expense in the probate to set up a special needs trust for that heir, something that could have already been done in your living trust.

How The Process Works With A Fully Funded Trust After You Pass

Upon your passing a successor trustee, who has been designated by you in your trust, shall marshal all assets of the trust and follow the instructions you provide regarding distribution of your estate. Often, this entails a simple equitable division among your children (for example if you have two children, splitting your estate 50% to each child), however you can always specify specific distributions to occur first – such as giving a specific monetary gift to an institution, then splitting the rest of the estate amongst your heirs. Regardless of the specifics of the terms, the successor trustee will make the distributions per your instructions.

If there is a house and/or vehicles or other tangible items of significant value, the trustee is authorized to liquidate those assets for ease of distribution should that be necessary and/or desirable. The successor trustee should also consult a CPA to determine tax obligations, if any, for the final tax return of the trust maker(s) and hold in reserve any funds needed to meet this obligation. Additionally, Oklahoma has no state inheritance tax – so your beneficiaries will not have to pay any tax on their inheritance from you to the State of Oklahoma.

There would only be a federal inheritance tax if the trust estate exceeds the federal estate tax exclusion amount. The current amount (as of the date of this blog) is around $12 million per person or $24 million for a married couple. For the vast majority of people, this means no beneficiary has to pay an inheritance tax.

Remember – if there is an asset that is not listed in the trust, then your personal representative (which is not necessarily the same person as the successor trustee, unless you have designated them as the same person) will need to start the probate process outside of the distribution of assets that are included in the trust.

Final Thoughts

Probates are lengthy and expensive legal proceedings. Having a will alone can certainly help streamline the probate process, but only a trust can protect your estate from having to go through probate.

Trusts are the best option for most people in avoiding probate, with the added benefit of providing invaluable protections to your beneficiaries. If you are interested in finding a solution for your heirs and helping your estate to avoid probate, please contact our office.