Frequently Asked Questions on Living Trust

• What is a living trust?
• Do I need a living trust?
• How does a living trust avoid probate?
• Is it expensive to create a living trust?
• Is it a hassle to hold property in a living trust?
• Is a living trust document ever made public, like a will?
• Does a living trust protect property from creditors?
• If I make a living trust, do I still need a will?
• Can a living trust reduce estate taxes?

What is a living trust?

A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust.

A "living trust" (also called an "inter vivos" trust) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.

Different kinds of living trusts can help you avoid probate, reduce estate taxes or set up long-term property management. For more details, see How Living Trusts Avoid Probate.

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Do I need a living trust?

The big advantage to making a living trust is that property left through the trust doesn't have to detour through probate court before it reaches the people you want to inherit it. In a nutshell, probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.

The average probate drags on for months before the inheritors get anything. And by that time, there's less for them to get: In many cases, about 5% of the property has been eaten up by lawyer and court fees.

Still, not everyone has to worry about probate, and some people don't need a living trust at all.

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How does a living trust avoid probate?

Property you transfer into a living trust before your death doesn't go through probate. The successor trustee -- the person you appoint to handle the trust after your death -- simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.

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Is it expensive to create a living trust?

A basic living trust isn't much more complicated than a will,.  An estate planning lawyer can  draft such a trust to carry out your intentions.  In the New Jersey area, expect to spend at least to $1,5000 to create a living trust (more complicated trusts will cost more).  

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Is it a hassle to hold property in a living trust?

Making a living trust work for you does require some crucial paperwork. For example, if you want to leave your house through the trust, you must sign a new deed, showing that you now own the house as trustee of your living trust. This paperwork can be tedious, but the hassles are fewer these days because living trusts have become so common.

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Is a living trust document ever made public, like a will?

No. A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate -- inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.

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Does a living trust protect property from creditors?

No. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate).

On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

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If I make a living trust, do I still need a will?

Yes, you do -- and here's why:

A will is an essential back-up device for property that you don't transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not think to transfer ownership of it to your trust -- which means that it won't pass under the terms of the trust document. But in your back-up will, you can include a clause that names someone to get any property that you haven't left to a particular person or entity.

If you don't have a will, any property that isn't transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.

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Can a living trust reduce estate taxes?

A simple probate-avoidance living trust has no effect on taxes. More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets.

One tax-saving living trust is designed primarily for married couples with children. It's commonly called an AB trust, though it goes by many other names, including "credit shelter trust," "exemption trust"; "marital life estate trust" and "marital bypass trust." Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save up to hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple's final inheritors. To learn more about tax-saving trusts, read Tax-Saving AB Trusts.

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