What is a living trust and should I have one?

Many people in New Mexico have what they call “living trusts.” Although there are many seminars offered on living trusts, many people who have them do not need them. On the other hand, our office does prepare these trusts for our clients, but only in circumstances where the trust will solve a present problem or a future one. The use of these trusts should fit each client on a case by case basis.

Many New Mexicans who have “living trusts” don’t need them
The term “living trust” is a popular description for a revocable grantor trust. A trust is a legal arrangement whereby management of assets is put under the control of a Trustee for the benefit of the beneficiary of the trust. For example, in her Will, a parent can name a trust as the recipient of life insurance proceeds for the benefit of a minor child if the parent dies prematurely. In that case, the Trustee would have to be someone other than the parent, and the minor child would be the beneficiary. The parent is the grantor. How the funds should be spent for the child by the Trustee is spelled out in the terms of the trust, which are included in the parent’s Will. Because the trust would be created after the death of the parent, it would be an irrevocable trust.

Revocable Grantor Trust

We do not use the term “living trust” when discussing trusts with our clients. Rather we describe what is meant by “living trust” as a revocable grantor trust. The grantor is the person who creates the trust and puts assets into it. A couple can create a joint trust, which would then have two grantors. The trust is revocable by the grantor, meaning that it can be amended or even revoked at any time during lifetime. The Trustee of a revocable grantor trust is usually also the grantor. And the beneficiary of the trust is also the grantor. So a revocable grantor trust is really a custodial account created during lifetime for a variety of reasons.

One of the reasons that many people believe they need a “living trust” is to avoid probate. If a trust is created during lifetime, and assets are titled into the trust prior to death, then they will not pass through probate at the death of the grantor. This is because the assets are not titled in the name of the decedent, and the trust itself does not die. If avoiding probate in New Mexico is the only reason to create a revocable trust, the trust may not be needed. Probate in New Mexico is very inexpensive, does not involve tax of any sort, and is generally simple and short, about 6 months. An informal probate in New Mexico does not involve appearing in court. The time period in which creditors must make claims against a probate estate is only two months. Creating a revocable grantor trust for a client when it is not necessary can add unneeded complexity and expense to an estate plan. If there is no other reason to create a trust, the issues that a revocable grantor trust might have addressed can also be solved with a good Will and durable powers of attorney.

Revocable Grantor Trusts in New Mexico

However, there are good reasons to create a revocable grantor trust in New Mexico. If a client owns real estate in another state, or has an estate plan that would require privacy, or has significant assets that would require planning to minimize federal estate tax, or the nature of the assets would require a central form of management, a revocable grantor trust would be advisable. There are other reasons to create a revocable grantor trust which may be particular to any one client. It is important to note that revocable grantor trusts do not shelter assets in the trust from taxes owed by the grantor or the claims of the grantor’s creditors, nor do they protect assets from being counted for the purpose of eligibility for Medicaid.

Please let us know if you would like to discuss whether or not you should create a revocable grantor trust in your estate plan.