What is a living trust? A trust is merely a legal arrangement where one person, called a trustee, holds property for the benefit of someone else, called the beneficiary. A trust can be created by a person through a will, which is called a "testamentary" trust. A trust can also be created while a person is alive, which is called an "inter vivos," or living, trust.
In most instances, when a person creates a living trust, that person becomes both the trustee and the beneficiary. That way, to the outside world, how the property is held appears no different than if no trust were created. But, if a property is included as part of a living trust, the creator can establish rules about how the property is to be distributed after his or her death. That way, the property can pass to someone else without the need to go through probate. Probate is a court proceeding that can tie up an estate for several months before property can be distributed. In Virginia, when a probate estate is opened, a tax is applied based on the value of the property passing through probate.
Avoiding probate is the primary advantage of a living trust, and the reason this type of instrument was created. One thing to consider is that in Virginia, probate can be expensive. Filings, such as inventories and accountings, can come with filing fees of hundreds of dollars. That does not include the lawyer's and accountant's fees in drafting up the filings. However, there are some disadvantages that need to be considered before you decide to make a living trust.
The problem is that owning property through a living trust can be inconvenient. Property needs to be titled through the trust. Checks drafted on accounts held by the trust need to be signed by noting the signatory is the trustee. Thus, the benefit of avoiding probate should be weighed against the inconveniences and costs associated with setting up a living trust.
For example, in Virginia, real estate passes to the next owner upon the filing of the will. Thus, if the bulk of a person's estate is real estate, probate in Virginia can be a simple process. Moreover, for most pieces of property, the probate tax can be less than the price of establishing a living trust.
What, then, are some of the main reasons aside from avoiding probate to have a living trust?
One is to control the distribution of an inheritance to a minor or person who has not reached an age of maturity. Parents of young children, or even young adults, can establish a trust in order to place a responsible person in charge of an inheritance until the child reaches a certain age. For a plan like this, it may even make sense to designate the trust as the beneficiary of any life insurance or other pay-on-death accounts, such as retirement benefits.
Another reason is to have a living trust is to provide for your care if you become unable to manage your affairs because of disability. By naming a person to step in as trustee if you become disabled, you can ensure that someone can have access to your finances and pay your bills. In many instances, banks and other financial institutions are more willing to work with a trustee than a power of attorney.
Finally, creating a living trust can provide assistance to people who need help managing their money. If there is no one in the family or close friends that would be appropriate trustees, by creating a living trust and naming a professional as the co-trustee, you can provide some assurance that the trust will be managed properly.
A living trust is a very flexible document, and can be a useful tool for your estate plan. Whether to create one, and how to structure it are issues you should discuss with an attorney as you consider your own estate.
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