Do Most People Need a Living Trust?
Living trust and estate planning form on a desk.

Do Most People Need a Living Trust?

Avoiding the costs and extensive time needed to settle an estate through probate is one reason people like to use trusts in estate planning. This type of trust allows you to designate a trustee to manage the assets in the trust after you have passed.  This is especially important if heirs are minor children or adults who cannot manage a large inheritance. A living trust, as explained in the article titled “The Lowdown on Living Trusts” from Kiplinger, has additional benefits. However, there are some pitfalls to be cautious about, especially concerning transferring assets.

Certain assets do not belong in a living trust. Regardless of their size, some assets should never be placed in a living trust, including IRAs, 401(k)s, tax deferred annuities, health savings accounts, and medical savings accounts and others .

Placing these assets in a trust requires changing the ownership on the accounts. Don’t do it! The IRS will treat the transfer as a distribution. You will be required to pay income taxes and penalties, if any are triggered, on the entire value of the account.

You may be able to make the trust a beneficiary of the retirement accounts. However, it is not appropriate for everyone. Changes to IRA distribution rules from the SECURE Act may make this a dangerous move, since the trustee may be required to empty the IRA within ten years of your death.

For practical purposes, assets like cars, boats or motorcycles do not belong in a trust. To transfer ownership to the trust, you will need to retitle them. This would result in fees and taxes. You would also have to change the insurance, since the insurance company may not cover assets owned by trusts. The cost may outweigh the benefits.

Assets belonging in a trust include real estate, especially your primary residence. Placing your home in a trust will minimize the hassle of transferring the home to heirs, if this is your plan. If you own property in another state, transferring the title to a living trust allows your estate to avoid probate in more than one state. Remember to get a new deed to transfer ownership to the trust. If you refinance or take a home equity line of credit, you may need to transfer the property out of the trust and into your name to get the loan. You will then need to transfer the property back into the trust.

Financial assets can be placed in a trust. Stocks, bonds, mutual funds, CDs, money market funds, bank savings accounts and even safe deposit boxes can be placed in a trust. There may be a lot of paperwork, and in some cases, you may need to open a new account in the name of the trust.

Once the trust has been created, do not neglect to fund it by transferring assets. Retitling assets requires attention to detail to make sure all of the desired assets have been retitled. The trust needs to be reviewed every few years, just as your estate plan needs to be reviewed. Be sure to have a secondary trustee named, if you are the primary trustee.

Trusts are an excellent option if you live in a state where probate is onerous and expensive. Assets placed in the trust can be distributed with a high degree of specificity, which also provides great peace of mind. If you believe your oldest son will benefit from receiving a large inheritance when he is 40 and not 30, you can do so through a trust. The level of control, avoidance of probate and protection of assets makes the living trust a powerful estate planning tool.

Reference: Kiplinger (March 24, 2022) “The Lowdown on Living Trusts”

Write a Letter of Instruction for Loved Ones

A letter of intent is frequently recommended for parents of disabled children to share information for when the parent dies. However, letters of intent or a letter of instruction can also be a helpful resource for executors, says the article “Planning Head: For detailed instructions consider a letter of instruction” from The Mercury. This is especially valuable, if the executor doesn’t know the decedent or their family members very well.

For disabled children, legal documents address specific issues and aren’t necessarily the right place to include personal information about the child or the parent’s desires for the child’s future. Estate plans need more information, especially for a minor child.

The goal is to create a document to make clear what the parents want for the child after they pass, whether that occurs early or late in the child’s life.

For a disabled child, the first questions to be addressed in the estate plan concern who will care for the child if the parent dies or becomes incapacitated, where will the child live and what funds will be available for their care. Once those matters are resolved, however, there are more questions about the child’s wants and needs.

The letter of intent can answer questions about the special information only a parent knows and is helpful in future decisions about their care and living situation.

The letter of intent concerning an estate should also include information about wishes for a funeral or burial and contain everything from directions for the music list for a ceremony to the writing on the headstone.

Once the letter of intent is created, the next question is, where should you put it so it is secure and can be accessed when it is needed?

Don’t put it in a bank safe deposit box. This is a common error for estate planning documents as well. The executor may only access the contents of the safe deposit box after letters of administration have been issued. This happens after the funeral, and sometimes long after the funeral. By then, it will be too late for any instructions.

Keeping estate planning documents in a safe deposit box presents other problems. If the bank seals the safe deposit box on notification of the owner’s death, the executor won’t be able to proceed. This can sometimes be prevented by having additional owners on the safe deposit box, if permitted by the bank . Any additional owners will also need to know where the key is located and be able get access to it.

The better solution is to keep all important documents including wills, financial power of attorney, health care powers, living wills, or health care directives, insurance forms, cemetery deeds, information for the family’s estate planning attorney, financial advisor, and CPA, etc., in one location known to the trusted person who will need access to the documents. That person will need a set of keys to the house. If they are kept in a fire and waterproof safe in the house; they will also need the keys to the safe.

If the parents move or move the documents, they’ll need to remember to tell the trusted person where these documents have moved., Otherwise, a lot of work will have been for naught.

Reference: The Mercury (Jan. 19, 2022) “Planning Head: For detailed instructions consider a letter of instruction”