A living trust is a legal document that places all of your assets into a trust while you are still living, and then transfers those assets to a designated beneficiary (or designated beneficiaries) upon your death. The assets are transferred by a chosen successor trustee.
The primary advantage of forming a living trust is that it helps your family avoid the time and expense of having to go through probate. It can also provide protection from court challenges that may override your wishes.
While there are many benefits to a living trust, there are some things that you will need to consider when forming one.
1. The Number of Successor Trustees
When you form a living trust, you will be the trustee until your time of death and your spouse will be the co-trustee. Successor trustees are named to serve in the event that you and/or your spouse pass away.
Aside from designating successor trustees, you will also need to consider whether you want them to start acting as trustees right now, and whether they will step in after one or both of you become incapacitated or die.
2. Whether Your Spouse Can Change the Distribution of Trust Assets
It is not uncommon for trusts to give surviving spouses power of appointment to change the distribution of trust assets after death. While this arrangement can allow for some flexibility in cases where family circumstances change, it can also lead to complications.
Consider whether you want to remove this provision. Doing so may give your children and grandchildren protection in case your spouse remarries after your death.
If you do not remove this provision, your surviving spouse may very well attempt to redistribute all of your assets to future children from future marriages.
3. Providing Protection for Children and Grandchildren
When drafting your living trust, you may choose to have it extend for the lifetime of your children and grandchildren. Opting to go this route will provide protection from creditors and divorce.
Also, you will need to consider the age at which children and grandchildren will receive their inheritance. You may choose to allow the heirs to withdraw the entire inheritance (if they wish) at a certain age, or permit the withdrawal of a portion of the inheritance at different ages (e.g. half at 22 and the other half at age 33).
4. Trustee Removal and Appointment
While you are living, you can change the trustees of your living trust any time you please. When you pass away, would you like your heirs to have this same right, or would you rather limit this capability?
Allowing for trustees to be removed by heirs can be beneficial should there be communication issues between the trustee(s) and your heirs. However, limiting this ability may help prevent your heirs from simply appointing a trustee that will allow them to do whatever they please.
5. Retitling Assets and Renaming Beneficiaries
One of the primary advantages to forming a living trust is that it prevents your family from having to go through probate. Failing to retitle your assets into the trust’s name can completely undermine this benefit and also limit your estate tax protections.
Retitling assets into the trust’s name will help avoid this potential pitfall.
A similar issue can arise with naming beneficiaries of investments and retirement plans. Naming individuals as beneficiaries rather than the trust itself can present problems after your death.
If you do name your trust as the beneficiary of your retirement plans, you will also need to ensure that annual required distributions are carried out for as long as possible.
6. Estate Tax Protections
Estate tax laws are changing on both the state and federal level. It is important to ensure that your trust is up-to-date for the estate tax laws in your state. A review of your trust should be performed every five years and/or if you move to a new state.
Living trusts provide privacy while saving your family time and money. However, the above-mentioned points need to be taken into consideration when drafting your trust. Working with a competent and experienced estate planning attorney can help you avoid many of these issues, so you can rest assured that your family will be taken care of after your death.
The Micklin Law Group, LLC is a New Jersey law firm specializing in family law and estates. Attorney Brad Micklin was recently named to The National Advocates list of Top 100 attorneys from each state. Brad has a special expertise in working in estate planning. You can read more on this topic by visiting our divorce blog. To set up a consultation, call 973-562-0100.