In the first part of this series explaining the benefits of having a Living Trust, we touched base on 5 reasons a person would consider having a trust drafted as opposed to other testamentary documents. This post highlights two specific reasons why someone would prefer a trust: 1) the benefits of avoiding probate and 2)the advantages of a living trust as opposed to a joint tenancy.
A large portion of people that decide to go the living trust route do so in order to avoid the probate process. Odds are, unless your estate is under the 50K limit, probate will be necessary in the absence of a living trust. Probate is a court process, with or without a will, which determines the value and the distribution of a deceased person’s property. In a probate situation the court, not the family, would initially have complete control of the assets. Probate typically takes from 9 months to two years on average; however, some probates take much longer. The famous case of Marilyn Monroe’s probate taking 26 years is a classic example of how drawn out the probate process can be. Another negative with probate is the cost. A study conducted in the 90’s by the American Association of Retired Persons suggested that the cost of probate could run from 10 to 20 percent of the estate. Sometimes the probate process is beneficial for estates, but every situation is different. Speaking with an attorney could help you determine your specific needs regarding your individualized estate plan.
In cases involving real estate, probate can be avoided by either 1) creating a revocable living trust or 2) adding on another party (usually children) to the property as joint tenants. There are a few reasons why a living trust is the preferable option. First, should your child ever be sued, your property could be tied up in a court proceeding and/or targeted by creditors. This is because they are partial owners of the real estate, so liens can be attached. Furthermore, adding a joint tenant is considered a gift by the IRS, so the gifting must be reported and appropriate gift taxes must be paid. Third, the surviving parent (if applicable) in a joint tenancy would not be able to sell or borrow money on the home without the child(ren)’s approval and signature(s). If you add in the facts that the child would not be able to be removed from the joint tenancy without approval, could sell his/her interest without your consent, and considering the cost basis on the property would be substantially affected, one can see why joint tenancy should only be an option in very specific circumstances.
Of course, this isn’t to say that a living trust is the better option in all circumstances. An estate planning attorney will be able to determine what option best fits your situation. At McAvoy & Murphy, we usually determine the type of estate plan to be used at the conclusion of the initial consultation, an appointment that outlines in detail many facets of the plan structure. When contacting an attorney, make sure to disclose all pertinent information regarding your assets and family situation, because the more detailed you are, the more detailed your attorney can be in crafting your individualized estate plan.