Over the years, numerous clients have asked me, “Do I need a living trust?” A living trust is often used as a Will-substitute, meaning that the trust is used as a substitute for a last will and testament. There are a great number of books that have been written on the subject of living trusts, and celebrity financial planners often tell their audiences that they should have a living trust as part of their estate plans.
These books and celebrity financial planners tell people that the primary benefit of having a living trust is the avoidance of probate. “Probate” is the process of proving the validity of a last will and testament, which is typically accomplished by submitting the Will to probate before the surrogate of the county in which the decedent died domiciled.
InNew Jersey, the process of submitting a Will to probate is extremely simple and extremely inexpensive. The process takes about thirty minutes inNew Jerseyand costs about $150. The fact of the matter is, a living trust would cost you more than probate will cost your estate and takes a lot more time than it takes to set up a living trust properly.
This is not to say that I never use living trusts in my practice. I use living trusts quite frequently. When a client tells me that he owns real estate in another state, for instance, a condominium inFlorida, I advise the client that he should have a living trust as part of his estate plan.
By titling theFloridaproperty into the living trust, I will tell the client, his family will avoid the need to probate his Will inFlorida. A person’s Will must be probated in every state in which the decedent died owning real estate and in the state in which the decedent died domiciled. So, if Mr. Smith has his primary residence inNew Jerseybut owns a condo inFlorida, his Will must be submitted to probate inNew JerseythenFlorida.
Probating a Will in two states can be very costly for your estate and very confusing for your executor, who may have to retain legal counsel in two states. Plus, probate in some states, such asFlorida, is very expensive. Probate inFloridacosts between 3% and 5% of the value of the probate property. If Mr. Smith’s condo is worth $200,000, submitting his Will to probate inFloridamay cost anywhere from $6,000 to $10,000. That is an expense worth avoiding, and a living trust can be an excellent tool for accomplishing this goal.
Recently, I learned of another benefit of living trusts—increasing the owners FDIC insurance coverage for bank accounts. Many of my clients are concerned about putting too much money in any one bank because deposits that exceed $250,000 are not protected by FDIC insurance.
A living trust can increase the FDIC insurance coverage of an account. For instance, assume that Mr. Smith has $1,250,000 and four children. Mr. Smith wants to purchase a CD at High Interest Bank. High Interest Bank has a jumbo CD product that offers 2% interest, which by today’s standards is pretty good. Mr. Smith wants to invest his entire $1,250,000 in a CD at High Interest Bank, but he is concerned about the CD exceeding the FDIC coverage limit.
Mr. Smith informs me of his desire, and I draft a revocable living trust for him that states he is the lifetime beneficiary of the trust and his four children will receive the monies remaining in his trust upon his death. In other words, I draft a living trust for Mr. Smith that is really just a Will-substitute.
Mr. Smith takes the living trust to High Interest Bank and opens a CD account in the name of the trust using his Social Security number as the tax identification number for the trust. Since he is the owner of the trust and there are four beneficiaries, the trust’s deposits are insured up to $1,250,000—$250,000 for each of the five people (the owner, Mr. Smith, and the four beneficiaries) named in the trust.
Mr. Smith gets what he perceives to be a great interest rate, and his entire deposit is backed by the FDIC.
A living trust is often discussed as an estate planning tool, but its value frequently extends beyond the transfer of assets. For many families, the greatest benefit comes from knowing that important decisions can be handled smoothly if circumstances change. That added flexibility can be just as valuable as any probate-avoidance strategy.