There are a lot of misconceptions people have regarding living trusts. Sometimes, even experienced (and well-known) financial planners can hold and speak some of these misconceptions. By looking closely at what the law allows you to do with a living trust (or any estate planning tool), you can get a better understanding of how these tools really can work for you and whether or not including them in your plan makes sense for you. Despite what some may say, a properly drafted living trust can allow you to maintain exactly as much control over your assets after you've funded them into your trust as you had before.
Dave Ramsey is, according to Wikipedia, “an American businessman, author, radio host, television personality, and motivational speaker,” and he is a highly successful one at that. His radio show is heard across 500 stations and his financial advice courses have been attended by countless people. His advice has helped many people overcome financial problems, especially when it comes to overcoming the potentially crushing burden of excessive debt.
Just like all of us, however, Ramsey is not infallible. When it comes to the issue of estate planning and the use of revocable living trusts, his statements reveal some misconceptions that are common among some professionals and lay people alike. By looking at some of his misconceptions, you can get a better picture of the estate planning options that exist and whether or not they could potentially benefit you.
In his book The Legacy Journey, Ramsey writes that “living trusts require you to move your assets from under your own control to a trust before your death. As a result, even basic financial decisions – like adjusting investments, managing bank accounts, giving to charities, and buying or selling real estate – have to go through a trustee because the trust legally owns everything.” While Ramsey's statements are not outright falsehoods, they seem to demonstrate a fundamental misunderstanding of how living trusts work.
His description of how living trusts work is technically accurate in a certain sense, but it is also potentially very misleading. It is true that, if you create, execute and fund a living trust, you as an individual have relinquished control of those assets. That is exactly how trusts help you avoid probate… by moving those assets from legal ownership by you as an individual (which is how your assets are exposed to probate) to legal ownership by your trust (and avoid probate). But here's the thing: setting up such an arrangement does not mean that you have to give up actual control of your assets.
The law allows you to customize your trust in a great many ways, with lots of options regarding when and to whom you distribute your wealth, as well as who is in charge of your trust. You can, and many people do, set up a living trust where you are the trustee from the time you set up the trust until the day you die or become mentally incapacitated. When Ramsey says that establishing and funding a living trust means moving control of your assets from you to a trustee, he's technically correct, but here's the thing: that trustee who takes over control of your assets — it's you if you've named yourself as the trustee of your trust. In other words, all you do when set up a living trust like this is move the control of your assets from you as an individual to you as a trustee of your trust. You have no less control that you did before, and you can choose to maintain that level of control right until you die or become mentally incapacitated.
Ramsey also described living trusts in his book as “an up sell in the estate planning world” that is, in his words, “expensive” and “unnecessary.” While he is correct that, in most cases, an estate plan with a living trusts costs more than one without a trust, a living trust is certainly not in the same class as, say, a fancy sunroof on your new car.
As most people familiar with estate planning know. your living trust can help you avoid probate. In some states, the simple fact that your estate avoids probate can, by itself, pay for the cost of your living trust many times over. As an example, consider California. Some California estate planning lawyers have estimated that the average probate administration process costs the heirs roughly 5% of the value of the gross estate. So, if you have a $500,000 gross estate, then probate could cost you around $25,000. (And that's just on average!)
Additionally, there are other collateral benefits of how living trusts work that Ramsey overlooks. One of these is privacy. Certainly, some people may not care about all of the details of their estate becoming public record as part of their probate court case file, but a lot of people might look upon avoiding this outcome as an important goal as it relates to protecting their privacy and the privacy of their loved ones. Living trusts can do that in most locations. In most states, a probate case file, which has to be opened to probate a will, is public record; on the other hand, no such court case file is required to be opened to settle your trust and distribute its assets.
Furthermore, you can also potentially enjoy greater control over the distribution of your wealth by using a trust. With a will, the entirety of an heir's distribution is given to him or her as soon as the probate process is complete. If you'd like to give your loved ones their distributions in portions spread out over a longer period of time, a trust can help with that, while a plan that relies upon a will cannot.