Living Trust Frequent Questions
1. What is probate?
Probate is the legal process of paying the deceased person’s debts and distributing the remaining estate to the rightful heirs. The probate process usually includes:
a. Appointment of an individual by the court to act as “personal representative” or “executor” of the estate. This person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
b. Proving that the will is valid. (Colorado also allows for a self-proving will.)
c. Informing creditors, heirs, and beneficiaries that the will is probated.
d. Distributing the estate by the personal representative in accordance with the will or state law.
The spouse or personal representative named in the will must file a petition with the probate court after the death. There is a fee for the probate process. Depending on the size and complexity of the estate, probating a will may require legal assistance from a probate attorney.
Assets that are jointly owned by the deceased and a survivor are not subject to probate.
Proceeds from a life insurance policy, annuity, Individual Retirement Account (IRA), 401k, bank account, or brokerage account that are paid directly to a beneficiary are also not subject to probate.
Real estate ownership may avoid probate by using a beneficiary deed.
NOTE: In Colorado, small estates valued under $64,000 do not have to go through probate. (See Small Estate Affidavit form and instructions in legal forms section.)
2. What is a living trust?
A trust, like a corporation, is a legal entity that exists only on paper, but is legally capable of owning property. A person or entity, however, must actually be in charge of the trust property (known as the “corpus”); that person or entity is called the trustee. You can be the initial trustee of your own living trust, keeping full control over all property legally owned by the trust, while you are living and in good health. When you die, or if you are incapacitated, a successor trustee that you name takes over as the trustee.
There are many kinds of trusts. A “living trust” (also called an “inter vivo” or “intervivos” trust in Latin) is simply a trust you create while you’re alive, rather than one that is created at your death, under the terms of your will (testamentary trust).
All living trusts are designed to avoid probate. Some also help you save on death taxes (estate taxes), and others let you set up long-term property management.
3. Do I need a living trust?
You may want to consider a living trust as a way to avoid probate. If you don’t take steps to avoid probate, after your death your property will probably have to go through probate court before it reaches your beneficiaries.
For sizable estates, many months can pass before full distribution is made to inheritors. If you own real estate in another state, you will usually have to also go through probate in that state, known as “ancillary probate“.
Using a living trust can avoid probate and ancillary probate. Some real estate owners and investors own real estate in a land trust, which is a type of living trust. Some people own personal property in a personal property trust, which is another type of living trust.
During the probate process, some of the property will be spent on attorney, personal representative, executor and court fees. The exact amount will depend on state law and local practices. Probate attorneys often charge about 5% of the estate value for their services. So, a $200,000 estate might cost $10,000 in legal fees, plus executor and court fees.
If you can set up a living trust for less than the cost of probate fees, it makes financial sense to do it.
4. How does a living trust avoid probate?
Property you transfer into a living trust before your death doesn’t go through probate. The successor trustee, the person you appoint to handle the trust after your death, simply transfers ownership to the beneficiaries you named in your trust.
In many cases, the whole process takes only a few weeks, and there are no attorney or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist (terminates).
5. Is it expensive to create a living trust?
The expense of a living trust comes in setting it up, while the often bigger expense of probate comes after your die. Many attorneys will charge relatively little for drafting your will, in hopes of collecting big fees later from settling your estate as a client. They typically charge higher fees for a living trust. So, choosing a will rather than a living trust may save you money now, but cost your estate more money later.
Some people chose to save money by using a self-help book or a self-help legal form to create a Declaration of Trust (the document that creates a trust). They may consult an attorney if they have questions that the self-help publication doesn’t answer. There is a risk of problems they don’t see, that a lawyer could help avoid if consulted. Whether you hire an attorney or not, it is wise to read more about living trusts and estate planning so you can educate yourself on this topic.
6. Is a living trust document ever made public, like a will?
A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate, inventories of the deceased person’s assets and debts, for example. The terms of a living trust, however, need not be made public.
7. Does a living trust protect property from creditors?
Holding assets in a revocable living trust doesn’t shelter them from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name. There are other types of trusts that can provide more protection, such as an irrevocable trust or an asset protection trust (APT).
Life insurance policies are often owned by an Irrevocable Life Insurance Trust (ILIT). This removes life insurance death benefits from the estate.
After your death, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate owned in your name or your trust’s name, which is a matter of public record). It may not be worth the creditor’s time, effort and expense to try to track down the property and demand that the new owners use it to pay your debts.
On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they’re out of luck forever.
8. Do I need a living trust if I’m young and healthy?
At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your early death, your property is distributed how you want it to be, and, if you have young children, that they are financially cared for. Writing a will, and buying life insurance, can accomplish these goals. But a will is only used to distribute your assets after you die.
A living trust can also name a successor trustee who will look after your assets while you are seriously ill, injured, incapacitated or disabled, such as following a car accident, workplace accident or sporting activity accident.
Even if you are healthy, an accident could occur at any time. If you are active in sports, physical labor at work or home, or do lots of driving, your chances of an accident may be higher. So, if your risk of serious injury is higher, a living trust may be more useful than a will.
9. Can a living trust save taxes?
A simple probate-avoidance living trust has no effect on either income or estate taxes. If you have a large estate, however, there are more complicated living trusts that can reduce your federal estate tax bill, if you expect your estate to owe estate tax at your death. These are known as credit shelter or bypass trusts. Seek professional guidance to set up complicated trusts.
Trust Diagram by Anja Bauer (Extracted from ) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons
Disclaimer: This information is for educational purposes only, and is not legal advice. For legal advice, contact an experienced attorney.
Disclosure: ABC Legal Docs, LLC is an affiliate of LegalZoom, which offers a living trust at an affordable price, backed by their 100% Satisfaction Guarantee.