A revocable living trust is created during your lifetime and can be modified or revoked at any time. It has a trustee that will administer the funds and beneficiaries. In this type of trust, you can be both the trustee and the beneficiary if you so desire. You can also set up an irrevocable living trust, which means that you cannot alter or destroy it after it has been established.
This financial tool has both advantages and disadvantages, and whether you should use it will depend on your goals for the trust. Consider the following pros and cons before you decide whether setting up a living trust is right for your unique situation. It is important to speak with a New Jersey living trust attorney before you make any decisions. At The Matus Law Group, our attorneys have extensive experience in handling estate planning matters and can provide guidance tailored to your specific needs, including choosing a trustee. We can help you understand living trusts and guide you in making informed decisions. To schedule a consultation with one of our attorneys, contact us at (732) 785-4453.
Advantages of a Living Trust
Although living trusts are not used as often today as in the past, there are still some distinct advantages to establishing this type of trust.
- Avoiding probate court: One of the main reasons individuals establish a living trust is to simplify asset distribution after death. Assets properly transferred into a living trust do not go through probate, allowing for a faster and more efficient transfer to beneficiaries. In New Jersey, probate is generally not as complicated, but some individuals prefer to avoid it for convenience and privacy.
- Privacy concerns: A living trust helps keep financial matters private by avoiding the public probate process. Wills become part of the public record when probated, which means anyone can access details about asset distribution. Using a living trust ensures that these details remain confidential, offering a greater level of privacy for estate matters.
Disadvantages of a Living Trust
Some of the disadvantages of living trust really stem from misunderstanding the purpose and use of this estate planning instrument. A revocable living trust does not offer asset protection, as the grantor retains control over the assets. Creditors can still reach trust assets, and transferring assets to a revocable trust does not shield them from legal claims. Only an irrevocable trust may provide asset protection, but it requires giving up control of the assets permanently. Other disadvantages include:
- Limitations on asset transfers: Once you move your assets into a trust, you must follow the trust document’s instructions on assignments. While a trust provides flexibility, certain assets, such as retirement accounts like IRAs and 401(k)s, cannot be retitled into a trust but can be designated as trust beneficiaries. Additionally, jointly owned assets may require restructuring before being transferred.
- No tax avoidance. For the most part, you are unable to completely avoid paying taxes on living trusts. The trust remains part of the grantor’s taxable estate, and any income earned by trust assets is taxed to the grantor.
- Potential for legal disputes. While living trusts are less likely to be contested than wills, they are not immune from challenges. In New Jersey, will contests must be filed within four to six months, while disputes over a trust do not have a strict statutory deadline but must be pursued within a reasonable time.
Avoiding Common Mistakes When Funding a Living Trust
Funding a living trust is a critical step in the process of estate planning. It involves transferring ownership of assets from an individual’s name to the trust to allow for seamless management and distribution upon death or incapacitation. However, common mistakes in this process can undermine the benefits of having a living trust, leading to probate complications and unintended legal consequences.
Failing to Transfer All Assets into the Trust
One frequent error is failing to transfer all relevant assets into the trust. This oversight can lead to certain assets going through probate, negating one of the primary advantages of a living trust. It is important to review all assets, including real estate, bank accounts, and investments, and ensure they are properly retitled in the name of the trust.
In New Jersey, transferring real estate into a trust requires drafting and recording a new deed with the county clerk, naming the trust as the new owner. Failing to complete this step means the property may still be subject to probate. Similarly, bank and investment accounts must be retitled in the trust’s name, which requires coordination with financial institutions.
Not Updating the Trust as Circumstances Change
Another mistake is not updating the trust as life circumstances change. Acquiring new assets after the trust is established requires that these too must be titled in the name of the trust. Similarly, changes in beneficiary circumstances, such as marriages, births, or deaths, should prompt a review and possible adjustment to the trust’s provisions to reflect these changes. Any newly acquired assets must be transferred into the trust; otherwise, they will remain outside its protection and could require probate.
New Jersey does not impose special restrictions on amending a trust, but any modifications must be formally executed according to state law. Keeping the trust up to date ensures that assets are distributed according to current wishes and avoids potential legal disputes.
Incorrect Titling of Assets and Documentation Errors
Improperly titling assets or failing to complete necessary paperwork can cause significant legal issues. It’s vital to confirm that all documents correctly reflect the trust as the new owner of the assets. Simple errors in paperwork or misunderstanding legal requirements can lead to significant probate and legal complications.
In New Jersey, real estate, financial accounts, and business interests must be explicitly assigned to the trust through proper documentation. Since New Jersey does not allow transfer-on-death (TOD) deeds for real estate, ensuring proper titling within a trust is one of the most effective ways to prevent probate for real property.
Funding a living trust properly is essential to achieving its intended benefits, such as avoiding probate and streamlining asset distribution. Ensuring that all assets are correctly transferred, regularly updating the trust, and addressing documentation issues are key steps in effective trust management. Consulting a New Jersey living trust attorney ensures compliance with state-specific rules and avoids potential pitfalls in estate planning.
What are the Disadvantages of Putting Your House in a Trust?
Placing your house in a trust can be advantageous, but it also has its downsides. It’s important to be aware of these potential drawbacks to make an informed choice about whether a trust aligns with your estate planning needs.
- Expense: Setting up a trust is generally more costly than creating a will. Legal assistance is often necessary, and transferring property into the trust involves recording fees and other administrative costs.
- Ongoing Management: Trusts require continuous oversight. Transferring your house into the trust involves a time-consuming process of retitling the property. Additionally, other trust-related tasks, such as updating beneficiaries and managing trust assets, can add to your responsibilities.
- Involvement: Trusts often require more effort to establish and manage compared to wills. This is especially true for larger estates or complicated family situations, which may involve additional legal and administrative work.
- Additional Documentation: Moving your house into a trust demands extra paperwork, such as creating and signing a new deed to transfer the property’s title to the trust. This added documentation can be burdensome for some individuals.
Recognizing these drawbacks is essential when deciding whether to place your house in a trust. Each situation is unique, so consulting with a legal professional can help determine the most suitable option for your specific circumstances.
| Disadvantage | Details |
|---|---|
| Expense | Setting up a trust is costlier than a will, requiring legal fees and administrative costs. |
| Ongoing Management | Requires continuous oversight, including retitling the property and updating beneficiaries. |
| Involvement | More effort is needed to establish and manage a trust, especially for complex estates. |
| Additional Documentation | Requires extra paperwork, such as a new deed to transfer property title to the trust. |
Disadvantages of Revocable Living Trusts
Revocable living trusts offer valuable advantages as estate planning tools, but they also come with certain disadvantages. Here are the disadvantages associated with revocable living trusts:
- No creditor protection: Assets held within a revocable trust are typically vulnerable to creditors or legal judgments against you, such as those arising from a personal injury lawsuit. The fact that you retain ownership and control over the property during your lifetime enables you to modify or revoke the trust, but it also leaves the assets accessible for the satisfaction of debts. Creditors can petition the court to access the trust to settle outstanding debts, leaving you with limited protection against such actions.
- No tax benefits: Unlike an irrevocable trust, a revocable trust does not reduce estate taxes because the grantor maintains full control over the assets. While New Jersey does not have an estate tax, federal estate taxes may apply to large estates, and New Jersey’s inheritance tax still applies if assets pass to certain beneficiaries.
If you’re considering including a revocable living trust in your estate plan, understanding the potential advantages and disadvantages is crucial. At The Matus Law Group, our New Jersey estate planning attorneys can help ensure that your estate plan aligns with state laws, protects your assets, and minimizes tax burdens. Our team can provide personalized guidance tailored to your unique needs. Contact us today for a consultation on how to create a comprehensive and effective estate plan.
Deciding whether a living trust is the right option for you will take the skill and attention of an estate planning attorney. Contact The Matus Law Group at (732) 785-4453.
