How Do I Know If I Need a Living Trust?

When people think about estate planning, the first thing that comes to mind is a last will and testament. While this document is useful for communicating your final wishes regarding the disposition of property, it may not be enough. A will can be sufficient for a smaller estate, or one without any unique circumstances. But the utility of a will can be limited. It can’t, for instance, determine how and when distributions will occur or preserve wealth for generations.

Advantages of a Living Trust

If you are young, have few assets and no dependents you may not need a living trust. However, if you have significant assets, or small children it may be a good idea. One of the biggest advantages of a living trust is that it avoids the probate process. The property in a living trust passes directly to your heirs, completely bypassing probate. This means your wishes are carried out, and your loved ones receive their inheritance quickly and without the time and expense of probate.

Other advantages may include state and federal tax advantages and the ability to control when an adult child can have access to the trust assets.

Considering Existing Contracts and Relationships

Living trusts have become a popular way to eliminate probate and to simplify the transfer of assets when someone dies. They work well for that purpose. At the same time, they can create new issues. Here is one of them.

Four dentists formed a partnership to own the building where they had their offices. The partnership agreement allowed the remaining partners to buy a deceased partner’s interest for less than FMV. One of the dentists, with the consent of the others, assigned his interest to himself as trustee of his living trust.

At his death, the surviving partners argued they had a right to buy the deceased partner’s interest at the price set by the partnership agreement. The deceased partner’s family argued the trust was a separate entity, not a partner and not bound by the agreement. The court of appeal agreed with them. (Even though this is a California case, the reasoning might apply to any state that has adopted the Uniform Partnership Act.)

The first lesson? When planning a trust, you need to consider the effect on your existing contracts and relationships. Don’t assume everything will continue as before. You can always find someone who will draft an inexpensive boilerplate trust, and they have their place. If your affairs are more complicated, ask us to schedule a complimentary Get Acquainted Call or request a fee for an Initial Case Evaluation.

(This court of appeal disagreed with an earlier court of appeal decision, which leads to the second lesson: “It depends” is the only answer to a legal question that is always correct. When looking for counsel, look for someone who exercises judgment to improve client outcomes.)