The most important aspect of the Living (aka “Living” or “Inter Vivos”) Trust is that it’s often used in place of standard Wills where families don’t wish to make the details of inheritance public through the Probate process (you may recall from earlier articles that Probate involves a court hearing of public record to sanction distributions to beneficiaries under the Will). That said, be careful about selecting a Living Trust over a Will for just this reason. Consider this too:
6 Key Takeaways:
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A Living Trust (aka “Lifetime Trust” in New York law) – distributes your assets to your loved ones when you pass on without having to put your estate in Probate. Probate is a matter of public record and requires a court hearing. Living Trusts are private and do not require a court hearing for distribution to beneficiaries.
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A Living Trust requires that you transfer your inheritable assets to a trust while you’re still living, hence the word “Living”. Ownership of the assets are moved from you to the trust. The trust transfers ownership of the assets to your intended heirs (beneficiaries) when you pass on.
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A Trust can be revocable or irrevocable. This is an all-important distinction that is about ownership and control of assets put into the Trust. A Revocable Living Trust allows the Trustor (Grantor) to maintain complete control over the assets transferred to a Living Trust during the lifetime of the Trustor even thoug the assets are held by a Trust.
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If you’re a parent with minor children, you still need a Will to set out Legal Guardian choices. Only a Will’s Guardianship clauses are legally effective; having the same clause in a Trust has no legal effect. Trusts are not the proper legal document for the Guardianship of Minors.
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If you have any assets left over that are not included in your Lifetime Trust at the time of demise, you will need a Pour-Over Will to ensure that they are properly distributed to your heirs. If not, such assets will be considered “intestate” assets, which means your intended beneficiaries will have to go to Probate Court to legally receive these assets. Pour-Over Wills can also include Legal Guardianship clauses if you have minor and/or special needs children.
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If you own property in more than one jurisdiction, transferring the non-NYS property to a Living Trust may be an effective way to streamline your estate planning. Once your RLT holds your out-of-state property, there is no post-death transfer or probate proceeding required for that property. For instance, if you live in New York, and own a home in Florida, your Executor will need an initial probate proceeding in NYS to name an executor and then an “Ancillary Proceeding” in Florida to manage a property there. By transferring all of your assets to a Revocable Living Trust while you are living, your Executor no ,longer needs a New York and a Florida proceeding. . He or she simply carries out the instructions of your trust document. If you have successfully moved all of your assets to your RLT, a probate proceeding may not be required at all.
New York State Law on Trusts
The starting point for all Trusts that relate to a New York resident’s estate is contained within the New York Consolidated Laws, Article 7. Article 7 and its sub-sections elaborates on the rules governing trusts, including trustee responsibilities and where creditors stand as regards trust assets. It’s the starting (and usually ending) point for the law as regards Living Trusts, setting out rights, duties and limitations.
Key Advantage of A Living Trust over Wills: Privacy
Anyone can obtain a record of the probate of your Will from the Surrogate’s Court (which is what we call the Probate Court in New York state i.e. the Court that has jurisdiction over all Estate matters). If you are particularly concerned about maintaining the privacy of your estate distributions, you will want to avoid probate. Probate is necessary when you die with a Will. Probate is also necessary if you pass on without a Will or other estate planning document that specifies what is to be done with your assets/estate (i.e. you pass on “Intestate”). You can read more about Wills, and Probate (including Intestacy) on my website/blog.
In short, you can avoid Probate by creating a Living Trust, thereby maintaining privacy as to what assets you leave behind and to whom. The Trust holds the title to your assets while you are alive, so that upon death, you have no “estate”. If you have no estate, then your loved ones and intended heirs do not have to go to Surrogate’s Court to have your estate distributed (“administered”). The Living Trust will have a Trustee (or Co-Trustees, if that is your wish), who will distribute your assets to your intended heirs, per terms laid out in your Trust document. This distribution and the terms thereof will be done in complete privacy, involving only the beneficiaries and the Trustees, and legal advisors such as attorneys and financial advisors, where applicable or preferred.
Do not confuse a Living Trust with a Living Will – the latter is a type of Advanced Directive that contains instructions as to your medical and health care should you become incapacitated. You can read more about Living Wills on my website/blog.
Also, don’t mistake a Living Trust for a Testamentary Trust. The latter only comes into existence when the maker of the Trust passes on. There are also several very important legal differences between these two types of Trusts.
Trustees of your Living Trust
When you set up your Revocable Living Trust, you are the Trustee. This means that you retain control over your trust assets as Trustee, even as the Trust now owns them, not the Trustee. This continues until you pass on, at which point your Successor Trustee will take over (mainly to carry out the distribution of your estate to your Trusts’ beneficiaries).
In an Irrevocable Living Trust, you can’t be the Trustee of your own Trust; you must appoint Trustees. A Trustee must be someone you trust to fulfill his/her fiduciary responsibilities. As the person with control over the Trust assets, the Trustee must be both trustworthy and capable of managing the trust. There are firms that act as professional trustees for large and complicated estates with a myriad of assets. For most of us, however, a close friend or relative can be a Trustee, and with the guidance of an attorney, that person should have not problem carrying out the duties required of him/her.
Trustees of Living Trusts can also be beneficiaries. Note, however, that the fiduciary standard of care for Trustees are taken seriously; if there is even the slightest chance that other beneficiaries will resent a fellow beneficiary’s appointment as Trustee, you should consider appointing someone you trust who is not a beneficiary. It’s not unusual for some estates to fall into litigation because some beneficiaries allege that a Trustee-beneficiary has abused her Trustee powers for her own advantage.
Funding the Trust (Moving Asset Ownership/Title)
The first and most obvious step to setting up any estate planning document or vehicle is to make a list of all your inheritable assets. This ensures that everything is accounted and catered for. You want to avoid leaving any valuable assets left out of your estate plan as they would be the subject of an Intestate proceeding when you pass on. This can be both time-consuming and costly for your loved ones, not to mention emotionally stressful.
What assets can be transferred to a Living Trust? Much depends on the nature of your ownership of such assets. If you’re a Joint Tenant owner of your family home with your spouse, upon your passing, your spouse receives full title to your shared home, by operation of law. When I say “by operation of law”, what I mean is that the transfer is automatic, without your spouse having to go to court to become full owner of your family home. In short, this is an asset that, by virtue of the type of ownership (i.e. Joint Tenancy), makes it unnecessary for you to move the title of your share of the property to a Living Trust. Or even put it in a Will.
Living Trusts may also not be necessary in the case of certain financial assets: if you have a 401K with your employer, plus and IRA, you don’t need to put them in the Living Trust. You could set up stand-alone Beneficiary Designations for each of these assets. With Beneficiary Designations, you avoid both probate and the need to set up a Living Trust. You can read more about such designations on my website/blog. Be careful though – don’t make the Trust the beneficiary of your retirement accounts. This can complicate matters.
You’ve probably noticed that the above types of assets allow for a legal document (property deed, beneficiary designation forms) to effectively ensure inheritance by those you choose without need for a Will or Living Trust. With some other assets, the absence or lack of such legal vehicles makes it necessary for them to be provided for in a Will or Living Trust. Such assets could include valuable art work and jewelry, additional pieces of property you own alone, and heirlooms you wish to leave to specific persons. As there are no “deeds” for such assets, it suffices to simply include a list of such assets in the Living Trust, with a clause stating that these assets constitute property to be held by the Trust.
What about your business? If your business is a single-member LLC or sole proprietorship, there is no legal separation between you and the business for income tax purposes. But for estate planning purposes, your business could still be an asset with value and that which you wish for your children to inherit. If so, you need a succession plan for the business itself,
Revocable Vs. Irrevocable Trust
When a Living Trust is Irrevocable, it generally requires a Court order to changes its terms or terminate it before the maker (Grantor/Settlor) passes on (exceptions exist, but only in very strict, limited circumstances). Once you transfer title of assets to an Irrevocable Trust from yourself, you can no longer take those assets out of the Trust and back into your own ownership and control. Nor can you add or remove beneficiaries. With a Revocable Living Trust, changes can be made during the Grantor’s lifetime, especially if that Grantor is also his own Trustee. Assets can be added or removed, sold or transferred; beneficiaries and successor trustees can be changed. In a Revocable Trust, you effectively retain control of the assets.
This legal distinction of control and ownership is key when it comes to issues of estate taxation and of protection of assets from creditors.
Protection From Creditors
You may have heard some so-called “experts” say that you can protect your assets from creditors by putting them in a Living Trust. Or that you can also have protection against claims from a divorcing spouse when you put your assets into a Living Trust. Some of this is true in some states, but not all.
In New York, you can’t use any kind of Living Trust to protect your assets from creditors. Per Article 7, specific assets such as retirement accounts (401K, IRA, annuities) are indeed protected from creditors when put into a Living Trust, but other types of assets are not necessarily protected from creditors. Case law (litigation) has affirmed this. In short, you can’t use a Living Trust – whether Revocable or Irrevocable – to shield the assets other than retirement assets from your creditors. Neither can you employ it to shield your beneficiaries from their creditors, which means that if a beneficiary’s creditors find out that she inherits from you via the Living Trust, they can sue her for the outstanding debt when she receives her distribution from the Trust.
Estate and Income Tax on Trust Assets
It’s important to understand the difference between estate tax and income tax. I’m not a tax attorney nor an accountant, so I can only speak in broad, informational ways about this (it’s best you consult your tax advisors if you have questions). Estate tax is tax that the estate has to pay on the total value of the assets you leave to your heirs (inheritance tax is what heirs/beneficiaries pay on their inheritance but this type of tax does not exist in New York state). Income tax is tax the Trust has to pay on income generated by the assets before and up to their distribution to your heirs. What is interesting about Living Trusts is that income from assets contained within your Living Trust is taxable as part of your personal income. Unlike other trusts, you don’t need to obtain a tax ID number for your Living Trust, which makes tax filing all that much easier. Make sure your tax filing professional is aware of your Trust.
Few of us will meet the federal estate tax threshold of $11.58 MM per individual for estate tax (as of 2020). There is, however, state estate tax to consider — in New York state, estates worth $5.85MM or more will be taxed between 5% to 16%, depending on the total value of the estates/assets (as of 2020). For married couples, though, there is the unlimited marital deduction at the federal and state level – all assets left to spouses are exempt from any federal or state estate tax.
Note: If you’re married to a non-citizen spouse, and you’re a citizen, the unlimited marital deduction does not apply. Obviously, this “benefit” to married couples has no impact if your estate is not worth $5.85 MM or more. That said, singles and unmarried US citizen couples, can’t avail themselves of this highly impactful tax benefit that only married citizen couples enjoy.
It’s important to keep in mind that tax levels change with every Administration; it’s entirely possible that at point of demise, estate tax thresholds at both the federal and state levels could be reduced to capture more taxes, thereby leaving less for beneficiaries. It’s not unreasonable to think that by the time you are aged and pass on (perhaps a few decades from now), the New York (and Federal) estate tax thresholds could come down considerably, while your estate increases in value such that your heirs will be left with much less in their inheritance because your estate by then would reach the tax threshold. In any case, I highly recommend that you speak to your financial and tax advisors about your potential estate taxes before you rush to set up a Living Trust for tax planning reasons.
A Living Trust Can Include Your Children’s Inheritance (but not their Guardianship)
A Living Trust can be used to leave property to your minor children, provided your Trust document lays out the requirements of adult management of the assets meant for your kids. Recall that minor children can’t own property in their own stead, and so you’ll need the Trust to state that such assets would be transferred into another trust (e.g. a Child’s Trust or UTMA) for the children until they are of age. This latter trust, for obvious reasons, will only come into existence upon your demise. You can certainly start with a Revocable Living Trust for your assets, and structure it such that when you die, this Trust breaks into separate Irrevocable Trusts for your children, if they are still young.
Living Trusts, however, are NOT the proper legal documents to govern the Legal Guardianship of Minor Children, should one (if the parent is a single parent) or both parents pass on at the same time. Only your Will can appoint a Legal Guardian (or Joint Guardians). What most families do today is to have a Living Trust, plus what we call a “Pour-Over” Will. The latter can serve as a “catch-all” for assets that you may acquire later and forget to include in the Living Will, plus cater for a Legal Guardianship clause. You can read more about Legal Guardianship of minors in the estate planning section of this website.
Young Families & Living Trusts
Living (Lifetime) Trusts are very useful estate planning vehicles. They allow for privacy, and flexibility and are a popular choice for most families. Save for persons with immense wealth, the large majority of us don’t use Living Trusts for estate tax reduction purposes simply because we don’t meet the very high federal and state estate threshold (see above). Which leaves privacy as the key objective since Living Trusts do not have to be probated in a public court hearing. In setting up a Living Trust, choosing one’s Trustee(s) and properly transferring title to assets are perhaps the two areas that require great care and attention to detail.
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