To understand what a living trust is and does, it is necessary to understand the probate process.
When a person dies, if they are holding any property (real estate, bank accounts, investment accounts and other) in their sole name, that property must go through the probate process to be distributed to loved ones.
In Maryland, a probate proceeding can take between 8-12 months or longer. Filings are made to the Register of Wills in an administrative probate that include such items as an inventory of the assets and liabilities of the deceased, accounting for monies into and out of an estate account and other matters. All these filings are public documents and available to anyone. A Personal Representative, whose job it is to make the filings, is appointed under a Will. If a person dies without a will, the probate court will appoint someone to be the Personal Representative. Many times, the Personal Representative will call upon an attorney to help them create the filings necessary. Legal fees generally range up to 3.5% of the probate assets.
So, probate takes time, is public and costs money in legal fees.
To avoid probate, the living trust was created. This is a trust a person creates during their lifetime, and the person is the trustee of their own trust. When they die, they appoint someone to be the successor trustee of the trust. All of the person’s property (real estate, bank accounts, investment accounts, etc.) is re-titled into into the name of the person’s trust. When the trustee dies, the successor trustee appointed under the trust becomes the trustee of the trust. Since the property is already titled in the name of the trust, it is not held in sole name and therefore there is no probate. The assets pass immediately to the beneficiaries named in the trust. There is no waiting 8-12 months for distribution of the property as in a probate proceeding. There are no legal fees necessary when death occurs, and, importantly for some, the trust is private not public.
Because your living trust is revocable, you can revoke or amend it at any time. As a revocable trust, there is no tax effect to placing your assets into the name of your trust. For example, there are no transfer or recordation taxes to deed real property into the name of a person’s trust.
Your ability to buy and sell your assets is not hindered by the trust. If you want to sell your house that is held in the name of your trust, it is a simple matter for you to sign the documents for sale as the trustee of the trust.
The concern about the living trust structure is to ensure that your assets are always in the name of your trust. For example, suppose you sell your house that is in the name of the trust, but deposit the proceeds from the sale into a bank account in your sole name. If you die without putting the bank account into the name of the trust, that account will be held in your sole name and therefore probate is necessary to distribute the assets to loved ones. It is a mistake not to make sure your assets are held in the name of your trust; however, if you do make a mistake, we use a different type of will, called a “pour over” will to put the assets back into the trust. This still means you will have to probate those assets, but at least they will go where you want them to go. The moral is not to make mistakes.
For this reason, after you have prepared your trust, it is wise to meet with your counsel periodically to update the trust. What you want to do is ensure that all assets are always held in the name of the living trust.
Another feature of the living trust that is important is that if the trustee is declared incapacitated and cannot take care of themselves, the successor trustee can use the assets of the trust to take care of them. A will cannot provide this level of protection.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them” (2013 ebook download available at LegalStriegel.com.). Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.