It’s been estimated that 6 out of 10 Americans do not currently have any sort of estate plan in place for after their death—be it a will or a living trust. Perhaps they are convinced beneficiaries can simply sort it out among themselves. Perhaps it’s too unpleasant of a thought. Or perhaps they find the subject too confusing. Too technical. Or simply too uncertain. After all, no one knows what the future can bring.
Perhaps you’re one of those 6 in 10. And while living trusts will take both time and forethought to construct, they’re not anywhere as complicated as it may seem. They can bring peace of mind—not just to your beneficiaries, but to yourself. It’s as much about your security as it is your assets. If you’re a homeowner who doesn’t know where to start, here’s what you need to know about living trusts.
What Is A Living Trust?
Both a will and a living trust can seem like interchangeable terms. But they’re not. While both can name beneficiaries for your property, a living trust offers you certain legal protections from court challenges and the process of probate. It requires you to transfer both physical property and cash assets to a legally named custodian, whereas property in a will can be contested in court; frequently to result in bitter and acrimonious results.
The definition of a living trust is a trust created while you are alive allowing you to transfer the title of your property to a named beneficiary—who essentially owns that property. Living trusts are frequently used to allocate property in a single document to ensure the legal and incontestable distribution of your assets after death. And while there are both benefits and disadvantages to a living trust, let’s look at the types of living trusts first.
What Types Of Living Trusts Are There?
There are two main categories to keep in mind when thinking of living trusts: revocable and irrevocable. Other types can, for the most, part be classified under either category; although the more common ones tend to be irrevocable.
While revocable trusts are sometimes used synonymously with living trusts, it’s better to think of it as a type of living trust—not the sole definition. So what’s the difference between revocable and irrevocable trusts?
A revocable trust refers to a living trust whose terms can be altered at any time, and for any reason, by the trustor. A trustor can remove and designate beneficiaries. They can modify the assets managed under the trust. In fact, they can even cancel a living trust entirely and revised if so deemed necessary. And this can present a few specific benefits over an irrevocable trust.
Once entered into a living trust, your assets are no longer your property. They belong to your trust. Assets don’t have to go through a lengthy probate process (which, in many states, can take well over three years) to be assigned out. And while your personal assets are still taxable and can only be transferred to your named beneficiaries after your death, they can still continue to generate claimable income depending on the terms of your trust.
The other benefit is control. The main disadvantage of a revocable trust is that modification requires the explicit consent of the named beneficiaries (or in some cases, a trustee)—not the trustor.
Not only can this lead to potential legal entanglements, it also requires good faith on your end. Not every beneficiary will be level headed or competent enough to manage your assets accurately; and while placing an irrevocable trust in the hands of a private wealth management company may seem like it provides assurance, keep in mind that wealth managers charge percentage fees based on your assets under management; sometimes up to 2 percent.
With revocable trusts, terms are flexible. Both trustees, beneficiaries and your attorneys can have as much or as little input into the process as you specify. And should an emergency occur and you need to cash in on any particular asset, contents of a living trust can be entirely modified at your explicit request.
But there are other disadvantages to a revocable living trust. Both federal and state government considers revocable trusts taxable as a result of ownership by the grantor. And that tax liability can be fairly substantial. However, a trust becomes irrevocable at the time of death.
The most common form of a revocable trust is known as a Totten, or POD (‘Payable on death’), trust. These are assets which are deposited into a bank account or CD which cannot be accessed by a trustee until a trustor’s death. Totten trusts are considered free from probate and legal proceedings. Keep in mind, however, that a Totten trust is only used in conjunction with bank accounts and cannot be applied to physical property.
Irrevocable Living Trusts
An irrevocable trust (frequently referred to as an “asset protection trust”) is best defined as a living trust where terms cannot be modified or amended without the consent of its named beneficiaries. Having effectively transferred all ownership of assets into the trust, a grantor’s right of ownership to the trust is subject to the specifications of a beneficiary. This can free assets from an unnecessary income tax liability; a liability which revocable trusts do not protect your estate from.
There’s another advantage to an irrevocable trust: protection from creditors. If drafted properly, future creditors cannot seize against assets in any sort of asset protection trust. And while they’re frequently included in amicable divorce proceedings, they’re also quite common in inheritance estate planning. While the benefits of creditor protection can vary by state law, Utah, for example, is fortunate enough to be one of those states allowing significant asset security as a result of irrevocable trusts.
In addition to asset protection, there are a few other categories of irrevocable trusts to take into consideration:
- As the name implies, charitable trusts are trusts in which assets directly benefit a charitable or philanthropic cause. It’s rare that a grantor will allocate their entire estate to a charitable trust (although it’s not unheard of); rather, the chief benefit is to help reduce estate taxes by transferring property to a charitable giving foundation.
- A constructive (or equitable remedy) trust can only be established by court order. It mandates that assets in a trust can be transferred to a beneficiary in cases of unjust or illegal obtainment on behalf of a trustor. While also rare, it’s not unheard of bankruptcy cases; especially with high value property.
Special Needs Trust
- A special needs trust is designed for the sake of a beneficiary who is on government assistance (either as a result of physical, mental or emotional disability) to supplement their regular benefits. The main reason for establishing a special needs trust is that they’re exempt by law from being considered part of the eligibility requirements for both state and federal subsidization (as opposed to leaving assets in a will, which subject property to legal consideration.)
- A spendthrift clause is a common provision in many irrevocable trusts. It restricts the right of the beneficiary to sell, pledge or exchange interests in a trust. They’re frequently administered by wealth management and advisory firms, particularly in instances where a beneficiary has a history of unstable investment behavior and credit risks. They’re not only used as insurance against creditors, but also as an assurance that funds will be secure and free from reckless behavior.
Tax By-Pass Trust
- A tax by-pass trust is established to pay income and principal from assets to a trustor’s spouse, particularly if the total amount of a trust exceeds state tax exemption limits. A set amount is removed at the discretion of the trustor’s estate (the transference is tax free), although certain additional clauses are sometimes allowed for limited emergency access. A tax by-pass trust is more common in high value estates where tax exemption and liabilities can sometimes be argued during the course of legal proceedings against a grantor. Estates with a value over $5 Million are considered subject to federal tax laws.
How Do Living Trusts Work In Utah?
As noted previously, one significant advantage of a living trust over a will is avoiding probate court; which can be both a costly, lengthy and frequently messy affair. While Utah has adopted the Uniform Probate Code of 1969 (which was initially intended to streamline the probate process), both beneficiaries, grantors and attorneys tend to agree that estate administration can still be a highly contested realm; one full of grey areas and liabilities.
By naming beneficiaries in a trust (either revocable or irrevocable), you’re the one who establishes legal ownership and distribution of assets—not a court. Not only that, but if you’re drafting an irrevocable trust, you’re saving both yourself and your beneficiaries a substantial amount of tax worry as well as buying protection from creditors.
But it comes with a cost. Irrevocable trusts are virtually inflexible so long as you’re alive. Anyone can be named a beneficiary, including yourself (and it’s far from unheard of for tax benefits.) While irrevocable trusts can sometimes be contested in court in very particular cases, for the most part they’re considered legally binding until you have passed away. It can be incredibly tumultuous for a family to contest a living trust after death; and while revocable trusts can save your family years of aggravation, they won’t necessarily provide beneficiaries with the adequate tax shelter irrevocable trusts can.
How Much Does A Living Trust Cost?
- Rates will vary given both the size of an estate as well as extenuating circumstances, but the average cost of drafting a living trust is estimated to be approximately $1,000 – $1,500 for individuals and $2,000 – $2,500 for couples who are married.
Who Owns The Property In A Trust?
- While the property in a living trust is owned by the named beneficiary (subject to term; and in the case of a revocable trust, can be modified at discretion), it is considered non-transferrable until the death of a trustor unless otherwise stated.
Questions About Selling Property Held In A Living Trust
Can you sell your home in a living trust?
- Legally, yes; so long as it’s in a revocable trust. But as indicated, no matter how flexible and accommodating a revocable living trust is you’re still subject to property tax as well as an additional capital gains tax; to speak nothing of attorney and retitlement fees. With a revocable trust, you’re legally required to pay taxes on a property—even if deeded to a beneficiary.
What is the definition of a trustor?
- A trustor is any entity (both individuals and institutions) who are gifting named beneficiaries with property according to the terms of a trust. For the most part, it only refers to property gifted after the death of a trustor. While a trustee may oversee your title, you are still legally required to make mortgage payments on your home while it’s in trust. Upon payment, your deed will be retitled under your name.
Who is the grantor of a trust?
- Both a grantor and a trustor are virtually interchangeable terms. Both terms refer to the holder of property being gifted to a named beneficiary. Grantors will typically designate a trustee with the responsibility of management, distribution and administration of property.
Who Can Be The Trustee In A Living Trust?
- A living trust legally requires a trustee to oversee the management and administration of property held. In most revocable trusts, you yourself act as the de facto trustee while you’re alive. Even if you’ve nominated an outside party or institution, you still have the right to remove any trustee if they fail to comply with your terms. In an irrevocable trustee, the designation of a trustee is legally binding and can include an attorney, a financial institution, a relative or a named beneficiary.
- Most living trusts will contain clauses nominating at least two alternate choices for a successor trustee. In the event of your death or mental incapacity, your trust becomes irrevocable. Trustees are not authorized to make health care decisions, nor are they responsible for property not held in trust.
How To Create A Living Trust
Because the process of creating a living trust requires extensive knowledge of federal and state laws governing administration, many grantors seek legal counsel in drafting one. And while attorneys frequently serve a dual purpose as trustees, they’re not always affordable. Preparation of a trust can reach well into the thousands; not counting retainer fees (which are typically based on a percentage of the trust.)
Living Trust Forms
Creating a living trust is a surprisingly simple process. All you need to do is to itemize your property, designate any beneficiaries and trustees, create a detailed trust document (including any title policies to property) and have it notarized. And resources are available to draft trust forms from both online providers such as LegalZoom and Nolo, as well as smaller firms specializing in the creation of legal documents.
But you’ll still need foreknowledge of applicable tax laws to ensure efficient and legal distribution. And you’ll still need a trustee with that same level of knowledge you can depend on for effective administration after your death.
A List Of Utah Attorneys Providing Living Trust Services
While we can’t personally vouch for all of the following attorneys, legal advice and administration for your living trust creation, a short list of list can be found below:
- Durham Jones & Pinegar 111 South Main St #2400 Salt Lake City, UT (801) 415-3000
- Dennis M. Astill, P.C. 7730 South Union Park Ave #130 Sandy, UT (801) 438-8698
- Carr & Woodall 1309 W. South Jordan Pkwy #200 South Jordan, UT (801) 988-9400
- Red Law Estate Planning 2650 Washington Blvd #201 Ogden, UT (801) 477-0733
- Mountain View Law Group 1104 Country Hills Dr #750 Ogden, UT (801) 393-5555
- Stephen W. Howard, P.C. 560 South 300 East Salt Lake City, UT (801) 449-1409
- Helgesen, Houtz & Jones 1573 South 1475 East #200 Ogden, UT (801) 544-5306
- Pearson & Butler 1802 South Jordan Pkwy # 200 South Jordan, UT (800) 265-2314
- Melling Law, P.C. 66 W Harding Ave Ste 5-C Cedar City, UT (435) 572-0807
Wrapping it Up
One alternative is to sell your home prior to establishing a revocable trust and repurchase it at a later date (perhaps when the value may be lower), modifying your trust for inclusion after transferring funds from the sale. This house buying company here even offers a sell now, move later program. It allows you several options ideal for a revocable trust; including renting your property post sale, flexible buy back options and utilizing the proceeds from your sale as a down payment on new property.
No, estate planning is never the most creative process. Especially when you’re in the autumn of your years. But it’s a necessary one. And there’s multiple options available to you—each with distinct advantages. And many with distinct disadvantages. But what you owe your children is the former.