In recent years, “Revocable Living Trusts” have gained popularity as valuable estate planning tools in New Jersey. More and more clients come in to ask for them specifically. However, our experience is that most people do not fully understand what they are and how they might help with their planning.
Most of our clients understand that a will is a legal document that takes effect at someone’s death. A will is considered a testamentary document because it takes effect at death but has no legal significance prior to death. Conversely, a living trust is an inter vivos trust because it is established (and often funded) while a person (known as the “grantor”) is alive. To obtain the benefits of a living trust, assets must be retitled into the name of the trust prior to the grantor’s death. At death, a living trust takes the place of a will and describes to whom and in what manner assets should be distributed. While alive, the grantor does not lose any control over the assets transferred into the living trust. The grantor can also be both the trustee (the person who manages the trust) and the beneficiary of the living trust. Except for the legal title of the assets being changed into the name of the trust, nothing really changes.
The major benefits of a living trust occur at death. When a living trust is used, the administration of the grantor’s estate is often much simpler for the decedent’s family. All of the grantor’s assets that are retitled into the trust during the grantor’s lifetime pass to the designated beneficiaries at the grantor’s death without being subject to probate. Without a living trust, probate proceedings are required to transfer all of a decedent’s assets other than those which pass by operation of law (i.e., because of joint ownership or beneficiary designation). New Jersey is considered a probate-friendly state. However, probate could still take several months (in some cases, years) and expenses could be incurred for attorney’s fees, court costs and publication of creditor notices. In the event of a family dispute, the costs can sky rocket. If a living trust is utilized and properly funded, probate proceedings can either be avoided entirely or be significantly reduced.
Furthermore, the fee to which a trustee is entitled is much less than the fee to which an executor is entitled. Under New Jersey law, the maximum trustee commission is one percent (1%) of the amount in the trust as compared to an executor commission, which starts at five percent (5%) of the probated estate.
Another advantage of using of a living trust arises where the grantor owned real estate in more than one state. Probate proceedings are generally required in each state where a decedent owned property. The fees involved in probating an estate vary from state to state, as the procedures are different in each state. For example, while probate in New Jersey may not take more than an hour, costs an average of $200 and does not required the aide of an attorney, probate in a state like Florida is a court supervised process which can take months, often requires the aide of an attorney and can be very expensive. If a grantor transfers ownership of such out-of-state property to a living trust, then it can avoid probate in that foreign state.
A living trust can also be beneficial if a person becomes incapacitated, mentally or physically. A will provides no benefits during a person’s lifetime. A problem of incompetency or incapacity may be dealt with through a “Durable Power of Attorney,” court appointment or a living trust. In a living trust, the successor trustee, selected in advance and declared in the trust document, has automatic and legal authority to manage the assets of the trust when the original trustee (usually the person establishing the Trust) becomes mentally or physically incapacitated. Therefore, when a Living Trust is used, the creator of the trust knows that the trust assets will be managed by a person he or she has selected rather than someone appointed by a court. Also, family members will not have to worry about asking a court to appoint them as guardian.
Absent from our discussion up to this point has been any mention of estate tax savings from establishing a living trust. That is because there are no estate tax savings from the use of a living trust. If you are interested in saving estate taxes, then there are other we might discuss. However, a living trust is not designed or used for tax planning purposes.
One drawback of establishing a living trust is the that process of retitling your assets into the name of the trust can be daunting. Fortunately, Fendrick Morgan, LLC can assist with that process.
In summary, there are a variety of reasons why a living trust may be a beneficial piece of your estate plan. If you are interested in meeting with an attorney to learn more about living trusts, please contact us today or call our office at 856-489-8388.