In order to fully understand the concepts behind a “living” trust, it is important for you to understand the difference between the three basic types of trusts.

  1. Today, when the term "trust" is used, it is likely being used in reference to what is known as a "living trust."
  2. The second broad category is a testamentary trust. A living trust is created by you during your lifetime. In most cases the living trust is revocable, which means that you may terminate or modify it. A testamentary trust, on the other hand, is created by your Will upon your death.
  3. A third type of trust is an “irrevocable trust,” commonly referred to as a “Medicaid Trust.” Medicaid Trusts are particularly useful if you wish to plan to protect your assets from the potential costs associated with nursing home care.

Creating a Trust

Creation of a living trust entails a two-step process. The first step is the execution of the physical document which will be referred to as a trust. The second and all-important step is the transfer of all the property out of your name as an individual and into the name of the trustee of the trust. The execution process is relatively simple. Where people go wrong with living trusts is with the next step: the transfer of assets to the trust. It is important to note that living trusts only avoid probate to the extent that the trust owns your assets (or your assets are controlled by joint ownership or beneficiary designation). If you own assets individually at the time of your death, probate will still be required.

The title to your home, bank accounts, stocks, life insurance, and all other major assets must be changed so that the records indicate a transfer has been made to the trust. When some people hear this requirement, they fear that somehow they will lose control and possession of their property. This fear is due to a misunderstanding of what occurs during the transfer process. In short, as long as you are alive and able, the trust can be drafted so that no one can totally take away the management or control of your assets.

Advantages and Disadvantages of a Living Trust

The major advantage of the living trust is the elimination of most types of court interference. If you become disabled, the living trust avoids the necessity of having the court appoint a guardian to administer your financial affairs. If you die, the living trust avoids the necessity of probating your estate.

The primary disadvantage of the living trust, unfortunately, is the establishment cost. Because of the additional time it takes to explain the inner-workings of the trust, and then to create it, the out-of-pocket cost to you is many times greater than the cost of a Will. The second disadvantage of a living trust is the nuisance factor.

After the trust is created, you must be willing to incur the inconvenience and cost of transferring assets to your trust. You must also be willing to accept responsibility of maintaining the trust for the remainder of your life, including the proper transfer of any assets purchased after the creation of the trust. In short, you must be willing to place a bigger burden on yourself in order to lessen the burden on your heirs at the time of death. The third disadvantage of a living trust is the possibility of mismanagement by the successor trustee. By removing the court from the administrative process, the risk of mismanagement of the estate is increased.

This disadvantage is eliminated or reduced by proper selection of the individual who will serve as trustee or successor trustee. If one trustworthy person cannot be found, then two persons can be named to serve as co-trustees. If no individuals can be found, then the trust department of a bank or other institution may be called upon to serve as the successor trustee. Finally, living trusts do nothing for long term care planning (planning for Medicaid eligibility).

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