What exactly is a living trust and how does it differ from a will?
A living trust serves as a will substitute and is one of many types of trusts available. Its primary functions include avoiding probate and providing privacy for estate matters. However, it’s important to understand that living trusts don’t minimize long-term care costs or death taxes, as assets still benefit the grantor during their lifetime. Unlike a will, which simply dictates where assets go after death, trusts are agreements with specific purposes, such as special needs trusts for disabled beneficiaries or marital trusts for blended families.
When does it make sense to have a living trust?
Living trusts are particularly valuable for people who own property in multiple states. While New Jersey has a straightforward probate process, states like Florida and California have more complex and expensive procedures. Having out-of-state property in a living trust helps avoid ancillary probate, which can cost thousands in legal fees. For instance, handling probate for Florida property can cost $3,500-$5,500 just to initiate the process.
What are the potential downsides of having a trust?
While living trusts offer benefits, they have limitations. They cannot protect assets from long-term care costs or taxes as some mistakenly believe. Certain assets, like IRAs or 401(k)s, shouldn’t be transferred into a trust as this triggers immediate tax consequences. The main disadvantage is cost – living trusts typically require a few thousand dollars in legal fees, which may not be necessary for everyone, especially in states with simple probate processes.
What common mistakes do people make with trusts?
A frequent error is creating a trust but failing to fund it properly. Other mistakes include relying on healthy siblings to care for disabled family members without proper legal structures, creating support trusts that disqualify beneficiaries from government benefits, or leaving inheritances to young adults at inappropriate ages. Some trusts lack appointed trustees, requiring court intervention later.
Why are people often misinformed about trusts?
Misinformation often stems from internet sources promoting a “one-size-fits-all” approach to estate planning, despite laws varying significantly by state. Some unethical attorneys and trust mills frighten people with misrepresentations about probate costs and complexity. They may falsely claim executors receive 10% commission or that probate takes months and costs thousands, when in reality, New Jersey probate can be completed in 10 days for under $200.
How should someone approach estate planning decisions?
The best approach is consulting with a qualified estate planning attorney who can provide personalized advice based on individual circumstances. While document preparation can be automated, the real value lies in professional guidance that considers factors like blended families, disabled children, potential long-term care needs, and state-specific laws. A qualified professional can help determine whether a trust is necessary or if simpler solutions would better serve your needs.