Privacy of a Living Trust

The privacy of a living trust is an important advantage over a simple will because it makes it more likely your desires will be carried out.

Let me explain.

People normally want to keep their financial affairs private. It’s only natural. And that’s an especially good thing when it comes to passing on your estate. The fewer people who know the details of your estate distribution plans, the better.

To understand why, we first have to understand how probate works. As discussed at Probate Court, one of the primary purposes of probate is to ensure that creditors of a deceased person have a relatively easy way to collect any debts they are owed from the deceased person's estate. This is one reason the probate process is very open and public.

In fact, usually, as part of probating an estate, the executor is required to pay to publish a public notice in the newspaper that the estate is being probated.

The contents of the will (including any testamentary trust) become a matter of public record and are available to be viewed by virtually anyone.

The will contains lots of information that will be valuable to a creditor. It will probably describe the:

  • assets in the estate

  • location of the assets

  • who is supposed to inherit the assets

  • value of the assets, etc.

All of this information makes it much easier for a creditor to make a claim and potentially collect from the assets of the estate.

Once a creditor becomes aware that a debtor’s estate is being probated, it is a simple matter for the creditor to file a claim against the estate. The probate court determines the validity of the claim. Any claims determined to be valid are paid out of the estate.

The other side of the coin is that, after the probate process ends, and assets are distributed, a creditor is generally cut off from making additional claims. You don't have that kind of formal creditor claim cut off date with a living trust. Still, creditors would still much prefer going after probate assets as opposed to assets in a living trust.

You should not only be concerned about your creditors. You also need to think about the potential creditors of your beneficiaries.

If a creditor of one of your beneficiaries knows an asset is going to your beneficiary, the creditor might possibly be able to attach a lien to the asset and prevent it from ever going to your beneficiary. Or, more likely, wait for the asset to be transferred to the beneficiary and then attach it.

Now, there is nothing wrong with legitimate creditors collecting legitimate debts. And you should instruct your executor (if you have a will) or your trustee (if you have a living trust) to pay your just debts.

But, personally, I’d rather the representative I select have as much control as possible over the process – rather than leaving it up to litigation in probate court.

By using a living trust to maximize privacy, you give your trustee an advantage in negotiating the best possible settlement with any creditors.

Another overlooked benefit that comes from the privacy of a living trust is that it makes it less likely that a disgruntled heir will contest the trust. The reason is that the unhappy relative doesn’t know exactly who got what. It is private.

So, if you --

  • want to disinherit a relative

  • think there may be family disagreement over the disposition of your estate

  • have concerns about alleged creditors (yours or your beneficiaries) trying to collect from your estate, or

  • think someone may challenge your will --

the privacy of a living trust offers a real advantage to you. It is simply less likely that anyone will be able to thwart your wishes from being carried out.

The privacy of a living trust advantage will be biggest if you fund the trust while living. If you don’t, then your assets will still have to go through the public probate process (see How to Avoid Probate). Your will could operate as a pour-over will and simply "pour" the assets into the trust. This would keep distribution from the trust private, but the assets poured into the trust would be a matter of public record.

As discussed at how can I see what a living trust says, there are some states (like California) that (for some good reasons) have recently passed laws providing that beneficiaries and certain heirs have a right to a copy of a living trust after death of the trust owner.

A living trust could also be challenged in court and during that litigation become part of the public record. So, a living trust certainly does not guarantee your asset distribution will remain private or not be challenged. However, a living trust is definitely more private than a traditional will.

It is possible for "interested parties" to petition a court and, in some circumstances, obtain a copy of a living trust.

Finally, when title to real estate is transferred to a living trust, the bank may require that the living trust be recorded, along with the deed, in the county clerk’s office. At that point, the living trust could be viewed by anyone looking at the deed – as it is a matter of public record. The issue of placing real estate in a living trust is discussed at Funding a Living Trust.

So, there is no iron-clad privacy guarantee. But, it is true, that the privacy of a living trust is a big advantage when compared to the publicity of the will/probate process.

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