There can be some confusion around terms used in estate planning. Unless you are an estate planning attorney or paralegal who works in that field, like the team at Beck & Lenox Estate Planning and Elder Law, it’s not likely you know all the terminology used. A recent article from The Dallas Morning News helps with understanding estate plan terminology. The article is “Clearing up confusion: The difference between a living trust and an estate plan.”
Living trusts, sometimes called “revocable living trusts,” or more formally, “inter-vivos trusts” are documents prepared and implemented when a person is living. They commonly include a distribution plan for assets owned in the trust, in contrast to a last will and testament, which only comes into effect when the person has died.
In most cases, the person who has created the trust (the grantor) is also the person to benefit from the trust (the beneficiary) as well as the person who controls and manages the trusts (the trustee). A living trust also makes provisions for the trust to be controlled and managed by a successor trustee, in case the owner is incapacitated. This also prevents the need for guardianship proceedings to gain control of the trustee.
If the person has no family members to care for them in the event of incapacity, the successor trustee may be a bank or other financial institution.
Living trusts are good tools to use for disposition of assets, especially in blended family situations. Trusts are harder to challenge than wills, and unlike wills, they are private documents. When an estate goes through probate, the will becomes part of the public record. As a result, anyone can see its contents.
An estate plan refers to the larger plan, which may or may not contain a living trust. It also includes an analysis of all of your assets and directions for how each will pass to your beneficiaries. Estate planning also addresses tax planning: federal and state estate taxes and inheritance taxes.
An estate plan also plans for incapacity. Preparing financial and medical powers of attorney, HIPAA releases and advance directives allow designated representatives to take care of your business affairs, talk with doctors about your care and know what your wishes are, if end-of-life decisions need to be made.
To be clear, estate planning is the “process” which creates a course of action for the passage of assets and the preparation of documents to facilitate the plan. A living trust is part of an estate plan, but not the only piece of the estate plan.
Some people are confused by the use of the word “estate.” Your estate includes everything you own at the time of death. Assets owned outside of trusts are divided into probate estate and non-probate estate assets. The non-probate estate consists of assets with beneficiary designations, usually life insurance policies, investment accounts, jointly owned assets and any Transfer on Death or Payable on Death accounts.
The probate estate includes assets distributed under the terms of a will. If you don’t have a will, the court will appoint an administrator to distribute your assets according to the laws of your state. There’s no obligation for the court to name a family member as the administrator. Therefore, a complete stranger might be in charge of everything you’ve ever worked for. The better route: speak with an estate planning attorney to create an estate plan and learn if your situation warrants a living trust.
Reference: The Dallas Morning News (May 24, 2022) “Clearing up confusion: The difference between a living trust and an estate plan”