By Myka Landry
If you are in the midst of estate planning, you may be struggling with whether you should have a will or trust.
I am hoping my three-part series on this topic will educate you so that you can make an informed decision. In this second part of the series, I am taking a more in-depth look at trusts and whether they might be appropriate for your situation. It will also be helpful for you to read last month’s article, which talked about wills and trusts in general terms, and next month’s article, which will go into more details about wills and when they are sufficient to meet your needs.
This month, it’s all about trusts and some misconceptions that I have seen in my practice. So let’s begin.
First, it is important to note that there are many different types of trusts. Generally, when people are first deciding between a will and a trust, the type of trust they are talking about is a revocable living trust.
A revocable living trust is designed to hold your assets while you are alive and pass them on at your death. Since it holds assets while you are alive, it can also provide some incapacity planning during your life.
However, a revocable trust, in and of itself, does not provide any tax planning or asset protection during your life. This is a common misconception. Asset protection during your life cannot be accomplished with a revocable trust. However, tax planning upon your death can be included as part of a revocable trust.
A second misconception is that once you have a trust, nothing else needs to be done. This is far from the truth. For a trust to be effective, you have to re-title certain assets into your trust. The trust document only governs assets owned by the trust. Therefore, if you do not actually re-title property in the trust, the trust cannot provide incapacity planning during your life, nor can it avoid probate at your death.
A third misconception is that once property is put into a revocable trust, nothing more has to be done with it upon death. This is far from the truth. Many of the same things that need to be done administering a will also need to be done to administer a trust. For example, assets must be gathered, bills paid, creditors determined, tax returns filed, etc.
Despite the misconceptions, there are good reasons to have a revocable trust. In Colorado, the primary reason would be if you own real property in another state. If you own real property in another state and have a will, probate will be necessary both in this state, where it is not too difficult, as well as in the state where the other property is located. Not all states have the same probate process and it can be expensive and time consuming in many states. However, if you have a revocable trust, and the out-of-state property is titled in the trust, it will not be subject to probate in the other state.
Two other reasons to consider a revocable trust are your asset structure and family situation. If you have a large amount of assets, a trust might better meet your needs because many banks and financial institutions prefer to work with trusts. If you have a contentious family situation, a trust might be better because it may be more private and more difficult to challenge than a will.
The decision on whether to do a will or a trust is largely up to you. Trusts are generally more expensive to draft and set up than a will because there are more documents involved and you have to transfer assets. If you only own real estate in Colorado, it may not be worth the extra expense just to avoid probate. A qualified estate planning attorney can look at your entire situation and give you information that will help you make an informed decision.