John is fifty-five years old and married with three children. Like 35% of the other high net worth individuals in the U.S., John earned his wealth through the business he founded and manages. He started the company almost twenty years ago and built it from the ground up. After his company recently went public, John’s shares in the company are now worth more than $20 million.

John and his wife did not grow up wealthy, like the vast majority of other high net worth individuals. Their middle-class upbringing taught them the values of hard work and discipline, but it did not provide them any experience in managing a large personal estate. Now that John and his family have significant wealth, he realizes they need to come up with a plan for managing and eventually distributing their assets. He and his wife care a great deal about their family and legacy and have many philanthropic goals. However, they also value their family’s privacy and prefer to pursue their charitable endeavors without much public fanfare.

After a discussion with their investment adviser, John and his wife are considering a living trust to help them accomplish some of their goals.

An Introduction to Living Trusts

A trust is a legal entity that can own, manage, and dispose of property. A living trust is simply a trust established during the grantor’s lifetime, as opposed to a testamentary trust that isn’t established until after the grantor’s death. Typically, a grantor gives certain property to the trust, which is managed by a trustee for the benefit of one or more beneficiaries. Generally a trusted family member or financial institution will serve as trustee, but the grantor may also serve as trustee of his or her own trust to retain greater control over the trust assets. The beneficiaries could be, among many other things: persons, public charities, religious institutions, and in some states even pets.

Reasons for Creating a Living Trust

People use living trusts as an estate planning tool for a variety of reasons. These trusts may provide the grantor various benefits, including guidance if the grantor becomes incapacitated, improved ongoing management of property, increased privacy, and avoidance of probate.

Guidance in the Event of Incapacity

Disability and incapacity are events that, while rare, still require effective planning to avoid potentially disastrous outcomes. When a grantor creates a living trust, he or she will usually also create a trust document that provides specific directions to the trustee on how to manage the trust property. If the grantor later becomes incapacitated, the trustee can use the trust document to ascertain the grantor’s intentions for the trust property and manage it accordingly.

For example, assume John and his wife transfer title of their family’s beachfront vacation property to a living trust. The trust document states that if he and his wife become permanently incapacitated and must be moved to a treatment facility, the trustee is to rent out the home and use the proceeds to pay for their medical expenses. Without a living trust, if John and his wife become incapacitated, their heirs may disagree on the best living arrangement for them and how best to pay for their treatment. John’s living trust can be structured to explicitly state the family’s intent for the vacation residence and prevent any disagreements from developing into family discord.

Ease of Modification

Life is full of unexpected changes. As Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.” A living trust gives the grantor the freedom to easily respond to the unexpected. In contrast, having to jump through the legal hoops of modifying a will with every change in circumstance can be quite burdensome.

Many individuals choose to hold property in a living trust because trust documents are usually easier to modify or update than wills, and thus make them a better tool for ongoing management of property. With a living trust, the grantor only needs to change the trust document him or herself, and it immediately becomes effective. With a will, the grantor/testator would have to comply with his or her state’s legal formalities for changing a will before the change would become legally binding. In South Carolina, for example, the will and any amendments must be written documents signed by the grantor/testator and two witnesses.

Increased Privacy

In general, wills become public documents once they are submitted to probate court. In contrast, trust property and documents rarely become public because when drafted and constructed correctly, they are not subject to probate. Additionally, creditors and salespersons may scour will records in search of individuals who have received large inheritances. This scenario is particularly acute for high net worth families who do not want an inheritance to result in a barrage of marketing calls and sales requests for heirs. So, if John is looking forward to living in his vacation home and eventually passing it on to his children, but wants to keep their land ownership private, a living trust may enable him to do so without the public process of probate.

Avoidance of Probate

As mentioned above, trust documents and property normally are not subject to probate. The probate process often involves increased time, costs, and administrative burdens. Since many high net worth individuals have large personal estates, the probate process can be even more costly and time-consuming. The living trust is one method of avoiding those headaches. For example, if John lives in South Carolina and dies with a $20 million estate subject to probate, the probate fee would be $49,400. So, if John and his wife want their children to enjoy the beachfront property as much as they did, holding that property in a living trust may ease the transition of ownership and avoid unnecessary expense.

Conclusion

Living trusts may be an effective tool to protect against the consequences of incapacity, enable the grantor to easily respond to life’s changes, increase privacy of family assets, and avoid probate. In John’s case, a living trust could prevent family discord and provide an explicit plan in the unfortunate event of his incapacity. It also allows his family keep the fact of their land ownership private and eases the transition of the property to heirs. While not necessarily ideal for everyone, living trusts can function as an important piece of an individual’s comprehensive estate plan.

If you would like more information about the estate planning and investment advice that Black Cypress offers, please contact us at info@blackcypresscapital.com or 904-553-1598.

 

 

 

Disclaimer: This content is presented for educational purposes only. It is not legal advice and is not intended to address all situations a person may face when planning his or her estate. Always consult a qualified professional before creating a trust or drafting a will.