One thing I’ve noticed over the years of practice is that most people for whom a living trust is appropriate know they probably need a living trust. They don’t always know why or what the purpose of the living trust is, but the word is out there enough that people have a pretty good idea that a living trust can help protect their families. (See my Frequently Asked Questions for background.) We’ve talked about the new tax law and the living trust recently, so today we’re going to talk about what you do once you have one.
Many people have a common misunderstanding that after they’ve signed their living trust they’re done. Unfortunately that is a huge mistake. Typically, the only way for a trust to be effective is to fund it…otherwise you’re left with a useless stack of expensive papers. This is one of the many pitfalls with do-it-yourself planning. So, what is “funding?” When you set up a living trust, you need to transfer assets from your name to the name of your trust. (Typically, you will control the trust yourself.) The transfer might be from “John and Jane Smith, husband and wife” to “John and Jane Smith, trustees of The Smith Living Trust dated January 1, 2011.” One of the chief reasons that the living trust should own all of your assets is for the avoidance of Probate Court Proceedings (“Probate”) when you die. If you die owning the asset there could well be a Probate to transfer title to the assets to those who are entitled by your Will or, if none, by the law of the state. However, the Office of the Trustee is considered to never die. So even if the individual Trustee dies, the law takes the position that the office is still “alive” and just needs to be filled. The assets are then transferred by whomever becomes the Trustee (usually specified in the Living Trust document) to those entitled under the Living Trust. Therefore, no Probate is necessary to transfer the title A similar situation occurs if one loses mental competence. So with a Living Trust no conservatorship/guardianship is necessary while without a Living Trust one would probably be required.
Estate planning is a process, not an event. Think about it, wouldn’t you agree it’s virtually impossible to create a plan one time to cover your family for all of time? Once your assets have been properly funded, you still need to make sure your estate plan is up to speed with changes in your life and in the law. I’ve heard some of my colleagues say that creating and funding the Living Trust is half the battle; the other half is keeping it up to date. I agree.
The approach we take in our office is really three fold: First, we keep our clients up to date with a monthly newsletter. Second, if the client sees something in the newspaper or on TV, we want the perosn to call us to ask. But since no system can by perfect, we encourage our clients to come in every 2-3 years to review their situation. Not only does the law change frequently, but more importantly so do family dynamics. That periodic review allows us to take a look at changes in the client’s life and family and, at the same time, see how changes in the law may affect the existing documents.
If you had your estate plan done more than 5, 10, 15+ years ago the odds are high that either your family, your assets or both have undergone changes. It is important to review with your estate planning attorney what those changes are and what may need to be done to your estate plan to account for these changes. And by all means, make sure to fund your living trust and keep it up to date!