Living Trust Basics

The living trust, also known as the intervivos trust or revocable trust, is a useful and popular estate planning tool in Florida, and rightly so. In this post I tell you about key advantages of this versatile legal instrument. I'll also tell you about some common misconceptions.

The Advantages

Advantage: Avoid probate

In Florida, probate can be a long, drawn-out process, incurring both legal fees and court fees. If your personal representative (executor) is not local, it becomes an even bigger hassle. Some probates can take months, but others can literally take years. A living trust can streamline the process, allowing your heirs to receive their distributions more quickly.

Advantage: Avoid 2nd probate for out-of-state property

If you own real estate in another state, titling that property in the name of your living trust will eliminate the need for a secondary probate in that state.

Advantage: Privacy 

If you pass away and have a will, the will must be filed with the probate court. If you have left no valid death instrument - no will or no trust - a probate will still have to be opened up for your estate. As soon as your estate is in probate, it becomes public record, meaning anyone can examine the details of your estate plan. And that makes it easier for anyone unhappy with your plan -  a disgruntled, estranged child, for example - to launch a legal challenge. Fighting that challenge will cost your estate, leaving less money for your heirs.

Advantage: Greater control over distributions

You may not want certain heirs to get their inheritances in one lump sum. With a living trust, you can place certain controls and conditions on your heirs' inheritance. For example, you may want a younger beneficiary to get his/her distribution upon attaining a certain age, or a spendthrift beneficiary to receive only a limited amount of money in staggered distributions. Another way to exert this control is to have your estate pass under your will, go through probate, and leave the inheritance in a trust known as a testamentary trust under your last will and testament. Obviously, using a living trust is a more straightforward method to accomplish your goal. 

Advantage: Financial institutions more likely to honor your trust than your power of attorney

Your durable power of attorney authorizes someone to manage your financial affairs. In Florida, there is no one statutory power of attorney form. The document is only required to meet certain basic legal requirements, and financial institutions can be extremely picky about the document. It is not uncommon for an attorney-in-fact trying to do business for an incapacitated loved one to be turned away by a bank or brokerage because the power of attorney doesn't meet that institution's specific, unique requirements. If you have a living trust, the equation changes. Financial institutions are unlikely to reject the successor trustee your trust authorizes to handle your finances. 

Advantage: Retain full control until incapacity

In Florida, you may not create a "springing" power of attorney. That means that the person you designate as your agent under your power of attorney has immediate authority to act on your behalf, even if you are not incapacitated. This does not prevent you from acting, but it gives your agent legal authority equal to yours. 

Usually, with a married couple, that is not a problem. But many people are uncomfortable giving someone other than the spouse the authority to handle their affairs while they are still competent. With a living trust, you can be the sole trustee, and your successor trustee can take over for you only after documenting your incapacity. (Spouses usually designate one another as co-trustees, so both have equal authority to act. A third party, usually a child, is designated to take over when neither husband or wife can handle the finances.) 

The Misconceptions

Misconception: Creditor protection

As noted above, a living trust has many virtues. However, putting assets into your living trust does not protect them from creditors. 

Misconception: Living trust assets are not considered when applying for Medicaid benefits for long-term care

An asset in your living trust is available to you, and therefore is considered a countable asset if you apply for Medicaid for long-term care. Only an irrevocable trust can remove assets from consideration by Medicaid.

Misconception: Trustees have to be paid 

Successor trustees can be paid a fee, but if you are like most people, you will probably name a family member to serve as your successor trustee. Most family members decline to receive fees. If you do name a professional, third-party to serve as successor trustee, naturally there will be a fee for services. If you have a good reason to want a third-party successor trustee - for example, you have children who can't get along - those fees are money well spent for your peace of mind.

Misconception: You lose control over your assets

No! You can buy assets, sell assets, and do anything you would normally do.

Misconception: It's costly to set up and a hassle to maintain

You will have to re-title your assets in the name of your trust, but for most people this is not a big deal. (Note: some assets, such as IRAs, should not be placed in your trust. Your estate planning attorney will advise you about this.) You don't have to get any special tax numbers; you will file your taxes as you always have. And although the initial cost to set up a living trust exceeds the cost of setting up a will, it saves money at the back end in legal and administrative fees.

Misconception: Any lawyer can set up a living trust

Wrong. This is a complex instrument, and the devil is in the details. Since your trust will speak for you after you are gone, there can be no ambiguity. Every "t" must be crossed and "i" dotted! Beware trust mills, non-lawyers doing estate planning, online or preprinted forms, and attorneys not experienced in estate planning. Relying on an experienced estate planning attorney can give you the assurance that you and your family will get the protections you seek.

Check out my website for more on living trusts.