Take two cars to the track. One is a fully-fledged drag racer, built specifically for a certain stretch of road, with a custom transmission, near-perfect aerodynamics, as little weight as possible, and just enough fuel needed to cross the finish line. Pit it against a stock Honda Civic. Which will win?
Specificity is the key to a good estate plan, which is why creating an estate plan is something best left in the hands of professionals, those educated in the laws of their state, and the needs of their clients. When setting up a living trust – which can be a surprisingly complex document – it is wise to have a strong grasp of the law, and of a person’s estate. While you are likely to know a lot about what you own and where it is, it is not an easy task to draft up an effective revocable living trust, especially if your goal is to save yourself as much money and time as possible.
Consider your goals, and your resources. If you’re like most people and thinking about drafting your own living trust, you are likely doing so in an effort to save money by not approaching a legal professional. However, an incompetently drafted estate planning tool can end up costing you more time and money. To understand the risks behind drafting your own living trust, it is important to understand what a living trust can and cannot do – and why specificity is so important.
What Is a Living Trust?
A living trust is an estate planning tool commonly used to avoid probate. In estate planning, the key is to help individuals secure a future for their property and assets after their death – giving them the ability to determine where what they own will go, and who will control how much of their fortunes and belongings.
Most commonly, Americans either opt for a will or no estate plan at all. In both cases, a person’s estate will pass through a special local probate court, where a predetermined minimum amount of time must pass before the contents of the estate can be fully and properly distributed. Most small estates can bypass this through an expedited probate process.
However, if a person’s estate exceeds the total value of about $150,000 as per the state of California, or if there is real property in the estate, then it would be prudent to consider other options to skip probate. Aside from being time-consuming, probate also usually involves hiring legal counsel and an individual being appointed to be the administrator of the estate who, under the court’s supervision, compiles and distributes each asset in the estate. Your estate also becomes public record, removing a certain level of privacy.
A trust can help you ensure that assets bypass probate, by securing them under the name of the trust, rather than under your own name. A revocable living trust allows you to continue exercising full control over your assets while avoiding probate.
There are other types of trusts. An irrevocable living trust takes away a certain amount of control over assets in exchange for some protection of the assets from potential creditors. A testamentary trust only goes in effect after you have passed away, keeping assets under your name until you die.
The exact type of trust ideal for you and your situation depends entirely on the circumstances and specifics of your life and your estate, which is why making an effective suggestion is difficult. Consult a legal professional if you are unsure what type of trust you need, or if you are unsure whether you need a trust to begin with.
How to Build a Living Trust
While it is strongly recommended that you go to a professional to build a living trust, there is no harm in understanding how it works – and how it is typically formulated. If the goal is to build a revocable living trust for avoiding probate, there are a few steps that go into drafting a trust document. The gist of it is:
- The document must list all items to be placed within the trust.
- The document must list beneficiaries and conditions.
- You must choose a successor trustee to manage the trust after you have passed away.
- If you are leaving property to minor children, you must denote adults who would manage the property or assets in their name.
- You must get the document signed and officially notarized.
- You must amend all titles and other ownership papers relevant to the trust to name yourself as trustee, and place property under the trusts name.
- Ensure that all documents are safely stored.
A trust basically comprises of the trustee, successor trustee, beneficiaries, contents, and instructions. While living trusts are one form of trust, there are many others.
Dangers of Drafting Your Own Living Trust
The biggest problem with building a living trust on your own is that most people cannot do it from scratch, without substantial legal training. So instead, they buy or download a cheap or free template, to then convert into their own legal document.
These templates might sometimes be marketed as basic guides to creating a legal trust, but they are not to be mistaken for complete legal documents. In fact, all templates usually explicitly state through a disclaimer that the wisest course of action is to seek the services of a legal professional. This is because templates are built to be as generalized as possible, covering the basics without taking note of specifics – down to the most important detail, the state in which you reside.
Say, for example, that the template assumes you are in Nevada while you are in Florida. Nevada is a community property state, like California. In a divorce, this means usually that the community property acquired during the marriage is split equally. In a separate property state, assets bought together are still marital assets, but in a divorce, the division of these assets is usually decided equitably, rather than equally. It’s a minor distinction but can provide difficulties down the road if not considered carefully – especially in the form of mountains of paperwork.
This is just one of several nuances and changes between the different states. One solution might be to find a template specifically for your state – but even then, that template does not guarantee that it covers everything you need it to cover in your specific case.
Using a generic template or a computer program to build your own living trust might be cheaper than consulting a legal professional, but it can turn something relatively simple – avoiding probate and ensuring a smooth inheritance process for your family – into a nightmare.