What Physicians Should Know About Living Trusts

September 15, 2014

Living trusts exist in almost every estate plan, yet their uses and meaning are vague to most. Here is some guidance.

One of the least understood items in both a financial plan and with estate planning is that of a living trust.  These estate planning tools exist in almost every estate plan, yet their uses and meaning are vague to most.

What is a living trust?
Think of a trust as a bucket that holds assets.  A living trust is a bucket that holds assets while you are living.  Since you retain the right to put various assets in and out of the trust bucket during your lifetime (“living,” right?), it is a “revocable” trust.   This is a crucial understanding. A revocable characteristic means that you can be compelled (by a judge) to remove assets from the trust in order to satisfy a creditor judgment.  The majority of individuals with a living trust believe that it provides some asset protection, but it provides none.  This is perhaps the most important thing to understand.

There are two main groups of people involved with a trust: trustees and beneficiaries.  Trustees hold legal title to the assets in the trust and are instructed by the trust how to use the assets for the benefit of the beneficiaries.  The beneficiaries of the trust are those who ultimately benefit from the assets.  In some cases, the trustee and the beneficiary are the same person.

What does a living trust do? 
For younger individuals, not too much.  The trust does provide continuity of the control of assets (as you would want), but only after you are dead.  And even then, the trust property is subject to your lawful debts.  This would be a very unfortunate scenario for the ultimate beneficiaries. 

So, you have two choices here. The first is to have the trust own your assets during life (remember, you can put assets in and out of the trust bucket at will without taxes or other considerations).  This provides a very smooth transition when you die.  The trustee (or successor trustee if you were the trustee during life), just goes on to manage the trust assets according to the document and its instructions.  No probate, no publicity.

A second choice is to have the trust document written, but have it own little or nothing until your death.  In this case, your will would instruct your personal representative/executor to “pour over” all of your assets (after probate) into the Trust.  Note that when you die, your trust becomes “irrevocable,” since you are no longer around to change it.  An irrevocable trust is a totally different device that will be discussed in a separate column. 

Whether or not you should actually have your living trust own anything during your lifetime is an individual decision to ponder with your advisers.  One downside of doing so is the loss of asset protection afforded by certain types of asset ownership in certain states.  For example, a husband and wife in Florida can own assets “as tenants by the entireties” for asset protection purposes.  Moving the assets into even a joint living trust might void that protection. 

It is also important to note that for many assets, you cannot place them in the trust simply by listing them in the trust document.  For example, if you want to leave your home in a trust, you must sign a new deed showing that the trust owns the house. 

Lastly, do not forget that a trust is not a replacement for a will.  A will is an absolutely essential part of any estate plan, without which, any property not held in the trust when you die would be distributed according to state law without regard to your wishes.