The Utility of a Living Trust

If you've even only thought about planning your estate, many people assume that any plan must include a living trust. While I agree that the living trust can be a useful document, I also believe that it is not for everyone. Before you make any decision whether to create a living trust, take into account your individual situation and the advantages and disadvantages of including a living trust in your estate.

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.

Taking on a Guardianship or Conservatorship

Becoming a guardian or conservator is not something a person should take lightly. These are fiduciary positions, and as such require great consideration before assuming them.

A person may need to have a guardian or conservator appointed if that person has become incapacitated, and can no longer take care of his or her own affairs. The incapacitated person is called the ward. A guardian is the person appointed by a court to make decisions of a personal nature for the ward, such as health care decisions. A conservator manages the ward’s money, enters into contracts, and handles the financial affairs.

In Virginia, guardians and conservators are bound to act in the best interest of the ward. They are required first to qualify for their positions, and then to make regular reports. Persons with criminal backgrounds, or who have bad credit histories will have great difficulty qualifying.

A guardian must make annual reports to the Department of Social Services. The guardian should check in with the ward regularly, and see to it that the ward’s personal needs are being met. Generally, in Virginia, when a person is appointed as a guardian, that person will be required to sign a bond, or a pledge to follow the law and act in the ward’s best interests. However, surety may not be required. Surety essentially means that the person signing the bond would have to find an insurance company or surety company to cover any wrong doing.

A conservator will also need to sign a bond. However, because the conservator manages money, surety will almost certainly be required. The amount of the surety bond will normally be 130% of the sum of the amount of annual income of the ward plus the ward’s assets. That does not mean that the conservator will have to post that amount of money. Rather, the surety will promise to pay that amount of money for any wrong-doing of the conservator. In return, the surety will require the conservator to pay annual premiums.

The conservator will also be required to make regular reports. The first of these reports is the inventory. That means that the conservator will be required to report all of the ward’s assets, and their value. After the inventory, the conservator will be required to make annual accountings, detailing the income received and the expenses paid. All reports are made to the Commissioner of Accounts of the court having jurisdiction over the ward.

A conservator must be meticulous in his or her bookkeeping. Every penny must be accounted for. This means that the conservator must keep receipts. This also means that the conservator must be careful in making disbursement to himself or herself. Such transactions will be highly scrutinized by the Commission of Accounts, and as such the reason for such transactions should be documented completely. A conservator should keep in mind that malfeasance can result in criminal liability.

A guardian and conservator must also be mindful of the possible need to seek court approval before acting. Such approval is necessary, for example, if the guardian wants to move the ward out of Virginia. In fact, even if the ward is moved out of Virginia, the Virginia courts will not relinquish jurisdiction. Annual reporting must continue.

A conservator should be careful about gifting, and spending the ward’s money for anyone other than the ward. Gifting is limited to $500 per year, and only $100 of that can go to any one person. If the ward is wealthy, and would made gifts of higher amounts, that must be shown to the court for prior approval before any such gifts can be made. Indeed, gift giving may very well be a valid plan to reduce the estate tax. But, such a plan must be presented to the court before it can be implemented.

Likewise, if the ward is married, and the ward would normally take care of his or her spouse, this is an issue that should be brought to the court’s attention. The court would have to approve the use of the ward’s money for any purpose other than the benefit of the ward.

A person assuming the role of guardian or conservator, therefore, should enter into the office with seriousness and wise counsel. The rule of thumb should be, when in doubt, seek court approval. By keeping meticulous records, and being mindful of the fact that the guardian or conservator is acting in the best interests of someone else, the guardian or conservator should be able to avoid any serious legal trouble for improper action.■