In recent weeks, I have had several people come to my offices interested in a living trust … very interested in a living trust. It’s made me wonder if a “living trust salesperson” has been giving seminars in the area about all the wonderful things living trusts can do for you. Living trust sales pitches are the snake oil sales pitches of the legal system. When a person is overly interested in a living trust, they typically use certain catchphrases—privacy, keeping it in the blood line, taxes, and avoiding probate.
Before I can tell you why each of these sales points are silly, I need to explain some of the basics. A trust is a contract, a contract between the grantor, the trustee, and the beneficiary.
The grantor is the person who had the trust drafted and who puts his money into the trust. The trustee is the person who manages the money in the trust and makes distributions of the money to the trust’s beneficiary. The beneficiary is the person for whom the trust was designed to benefit.
A “living trust” is a trust that has legal effect during the grantor’s lifetime. A testamentary trust, on the other hand, is a trust that is contained in the last will and testament of the grantor and, therefore, has no effect during the grantor’s lifetime. The benefit of a living trust is that the grantor can place assets into the trust during his life; for instance, the grantor can re-title his bank accounts and real estate into the trust during his life.
Most living trusts are revocable, meaning that the grantor can revoke or modify the trust anytime he wants to do so. An irrevocable trust, on the other hand, is a trust that cannot be revoked.
A revocable living trust is frequently called a Will-substitute, because a revocable living trust is merely the last will and testament of the grantor. Typically, when a person has a revocable living trust, they also have a last will and testament that leaves their entire estate to the living trust after their death. In this way, the living trust governs who receives the entirety of their estate after they die.
So, let’s take the selling points of a living trust one-by-one. Privacy. Does a living trust offer privacy. The short answer is, No. A Will typically says something such as the following: “I leave my estate to my spouse and if my spouse predeceases me, to my children.” Why does someone need to keep that private. Moreover, if a person disinherits one of his children, everyone in his family and everyone who knows the family is going to know.
Keeping it in the bloodline. Living trust salespeople tell their audience that a living trust can ensure that their money never goes to their in-laws in the event of the death of their child or a divorce. The fact of the matter is, the only way to accomplish this effect is to put a sub-trust inside the living trust that holds the child’s money for the remainder of the child’s life. You can do the exact same thing in a Will.
Furthermore, having a trust that last the entirety of your child’s life just in case he divorces or for when he inevitably dies, you will have a trust that goes on for decades. Who is going to be the trustee of this trust? How much are they going to charge? How resentful will your child become when he doesn’t have access to “his money” many years after your death.
Taxes. There is no tax planning that can be done in a living trust that cannot be done in a Will. A revocable living trust—and extremely simply estate planning document—cannot, in and of itself, save you tax. A living trust, like a Will, must have tax planning provisions in it to help save your estate tax. That planning can be accomplished with a living trust or with a Will.
Avoiding probate. Probate in New Jersey costs about $150 and takes about thirty minutes. Nothing to avoid there. On the other hand, probate in some states, such as Florida, can be quite complex and quite expensive. For this reason, I draft living trusts all the time, because my clients own real estate in other states, such as Florida. But if a client doesn’t own real estate in another state, I see no reason to have a living trust.