In Which We Debunk Some Myths About Trusts

Last month we tackled common misunderstandings about wills. Now it’s time to debunk some myths about trusts.

You need to “fund” your trust

One of the more common myths about trusts: if you sign a trust, you will avoid the need to probate your estate. It’s not that simple.

The primary reason many people sign a “living” trust (that is, one that you create while you are alive — as opposed to one contained in your will) is to avoid the necessity of probate. But simply signing a trust document doesn’t do the job.

A trust avoids probate by “owning” pretty much all of your assets. Since the trust never dies, it doesn’t have to go through the probate process. But if it doesn’t own your assets, there might need to be a probate.

How will we know? It’s simple, really. If you hold assets in your own name, with no beneficiary and no survivorship provision, we will need to probate your estate at your death in order to get the property to its intended successor. The test isn’t what estate planning documents you’ve signed, or what your family situation is. The test is just title on the assets.

There is an exception in Arizona, for personal property worth less than $75,000. That much can be collected by a simplified affidavit process, but only if all of your probatable personal property is worth less than that $75,000 figure. And there is no similar exception for real estate.

So, to avoid probate you will need to retitle most (or maybe all) of your assets to your new living trust. For some assets you might choose a beneficiary designation. Generally, though, everything should move into the trust’s name.

You still need a will

Another of the common myths about trusts is that they completely replace the need to sign a will. While the trust will take care of disposition of your property, you still need to have a will — usually what is called a “pourover” will. It’s called that because all it does is to “pour over” your assets into your trust.

But why do you need it? Isn’t everything titled to your trust? And haven’t we avoided the need for probate altogether?

Good questions. Yes, the will is only effective in probate court. If you’ve successfully avoided probate then it will not make any difference whether you have a will or what it says. The problem is that it doesn’t always work out that way.

Maybe, after you sign your estate planning documents, you change banks or brokerage houses. Perhaps you refinance your home mortgage. You might even acquire new assets by inheritance or earnings — and forget to title them to the trust. That’s why you need that pourover will — just in case.

Your trust still requires administration

Another of the common myths about trusts: some people seem to think that their beneficiaries can show up at the funeral and pick up checks for their inheritance at the end of the ceremony. Of course it’s not that simple.

Someone still needs to prepare, sign and file your final income tax return. The trust might have an income tax return of its own. And banks and brokerage houses can take weeks or months to actually complete the transfer of assets into the new trustee’s name and update valuations. So it is uncommon to close out a trust administration sooner than about six months after the death of the trustor (the person who signed the trust).

Incidentally, that bit about updating the valuations is crucial. Your beneficiaries benefit from a “stepped up” basis in trust assets — but it is critical that the new basis be calculated while assets are still in the trust’s name. Otherwise, beneficiaries will get an erroneous report if and when they do sell assets after your death, and their taxes will be harder to prepare. If they don’t get the data updated, they might well pay higher taxes. So it behooves them to wait until the records are updated.

Your trust will not make it harder to manage your assets

That’s right. Simply put, there is nothing more difficult about managing your assets in your trust.

For ownership and tax purposes, your revocable living trust is an ignored entity. You can sell assets, give them away, fritter them away, or pretty much anything you could do if they remained in your name. Though, of course, we don’t recommend that.

You will get a new account number at your bank or brokerage. And you might need to update your autopayments and direct deposit instructions. But that’s a relatively small price to pay in order to gain the benefits of your trust.

Your financial agent won’t be able to manage your accounts

This is one of the myths about trusts that is also a myth about powers of attorney. The agent you name on your financial power of attorney won’t be able to manage your trust assets. That means that the bank won’t put your daughter’s name on the trust account — unless she’s the trustee (or a co-trustee).

Your trust is a separate entity from you, so your power of attorney doesn’t affect it. If you want your daughter to be able to manage your accounts, you should consider making her a co-trustee. In fact, we often recommend exactly that approach — it allows her to take over asset management gradually, as your ability (and, perhaps, interest) wanes. But your power of attorney won’t help here.

Other myths about trusts

A few other ideas that are just, well, wrong:

• Your trust is a final document. Well, no. You get to update it during your life. We recently prepared a “Seventh Restatement” of a client’s trust — that is, he had completely revised his trust six times after he originally signed it.
• Your trust will complicate the beneficiary’s life. Actually, it will simplify the passing of your assets. You can complicate the terms if you want, but there’s nothing inherently complicating about living trusts.
• You will need to name a bank, or a professional trustee, to manage your estate. No. You can name a child, a sibling, even a parent as trustee. They will have a lot of authority and little oversight, so you need to be sure you’re comfortable with doing that. But pretty much anyone can be your trustee.