14 Dec 2013
Introduction. Living trusts are sometimes promoted as a panacea for all estate, tax, and financial planning problems. But the living trust is only one of a number of options which may be used to achieve a person’s estate planning goals. The purpose of this article is to provide an overview of the advantages and disadvantages of a living trust and to suggest some appropriate uses of the living trust.
Livings trusts and estate planning involve complex issues with legal, tax, and accounting considerations. The simplified and general explanation contained in this handout is not meant to address an individual’s specific needs and goals for their estate plan. Prior to talking any action, consultation with a knowledgeable professional advisor is essential.
Overview. The trust is a written document which describes the rights and responsibilities of the trustor, trustee, and beneficiary during the trustor’s lifetime and after the trustor’s death. A person who creates a trust is called the trustor (sometimes called the grantor or settler). This individual transfers legal title to all of his or her assets to the trustee for the trust. A trustee is the fiduciary who is directed by the terms of the trust agreement to hold and manage the assets for the benefit of someone else, who is called the beneficiary. A living trust may be established by the trustor naming himself or herself as both the trustee and beneficiary. The trust agreement also provides for a successor trustee and includes provisions for the disposition of the trust assets, both during the lifetime of the trustor and upon the death of the trustor. During the trustor’s lifetime the trustor has complete control and use of the assets including the right to amend or revoke the trust. Upon the trustor’s death, the trust acts as a will substitute by describing who is entitled to receive the assets then remaining in the trust.
Advantages of the Living Trust.
Probate Avoidance. The living trust avoids probate for those assets owned by the trust. Assets become owned by the trust when legal title is transferred from the trustor to the trustee of the trust. Where assets are not transferred from the trustor to the trust, and are owned in the individual trustor’s name alone (i.e., not held jointly), such assets will usually need to be probated. Probate requires an executor or personal representative to be appointed by the court to conduct the affairs of the estate and distribute whatever assets remain in the estate after payment of debts according to the provisions of the will. The living trust, on the other hand, maintains its identity after the trustor’s death and the trust’s assets are managed and distributed according to the terms of the trust instrument, not the will. Because the assets in the living trust are no longer in the name of the trustor, they are not in the probate estate of the trustor, and therefore, need not go through the probate process.
Reducing Costs. A living trust avoids most of the legal and administrative costs of probating the estate, but not all costs. Legal fees and costs for probate vary, depending on the character and complexity of estate assets and administrative problems. A simple, uncomplicated estate typically costs $5,000 to $7,000 in legal and accounting fees. In addition, the personal representative is entitled to be paid compensation which is set as a percentage of the estate, usually about two percent. Because the personal representative fee is often paid to a family member, the real cost to the family may be minimized.
Avoiding Delay. A living trust avoids the delay involved in probating the estate. Probate typically takes a minimum of four to six months to complete, and longer if there are any unusual problems. However, distributions of the trustor’s assets, whether under the provision of a will through the probate process or under the provision of a trust instrument, will always involve some delay because of the necessity of ascertaining the extent of the trustor’s estate and assets, determining the claims and liabilities against those assets, providing for the payment of income and estate taxes, and authorizing the conducting the actual distribution of assets.
Maintaining Privacy. A living trust maintains the trustor’s privacy compared to the publicity of the probate process. Wills become public records when probated and are therefore subject to scrutiny as a public record, while living trusts remain private. Privacy is not a major concern for most clients; however, if the client is a public figure, a wealthy, or has some other privacy concerns, the privacy afforded by the living trust can be an advantage.
Asset Management in the Event of Incapacity. A significant advantage of the living trust is the ability to provide a mechanism for management of the trustor’s assets in the event of incapacity while still living. In the event of the trustor’s incapacity, a successor trustee automatically assumes the fiduciary duties previously held by the trustee. The living trust can provide specific direction to the successor trustee for the management of the trust assets. The living trust, when supplemented with a durable power of attorney for health care (called “Advance Directive” in Oregon), can provide an efficient means for not only the management of the trust assets, but also provide for the care and welfare of the incapacitated trustor. Without a living trust, an individual who becomes incapacitated may require the court to appoint a conservator or guardian to handle personal matters and assets unless a power of attorney can be used. A living trust, in combination with a durable power of attorney for health care, can eliminate such delays and make appropriate provision for the care of the individual and his or her assets.
Avoiding Probate in Other States. If the trustor owns real estate which is located in a state other than that of residency, two probates will be required (one in both states). Transferring foreign jurisdiction real estate to the living trust also avoids the foreign jurisdiction probate (known as ancillary probate).
Disadvantages of the Living Trust.
Costs. The legal costs and expenses of doing a living trust are usually significantly higher than merely having a will, but lower than estimated probate costs. There are no significant continuing legal expenses to maintain the trust after it has been established. Typical costs for doing a living trust range from $1,700 to $3,500, depending on complexity of the plan and assets involved.
Complexity. Creating and maintaining a living trust involves significant attention to detail in the creation (by transferring assets) and some continuing maintenance. Since the trust is a legal entity which is separate and distinct from the trustor, observance of those details is required to achieve the desired results.
Conclusion. The living trust, while not a cure-all for estate planning concerns, should be given consideration as an element of a comprehensive estate plan. In deciding whether or not to establish a trust, an individual’s specific personal, business, and tax circumstances must be reviewed. Therefore, the advice of a knowledgeable professional should always be sought before implementing a living trust.
QUESTIONS & ANSWERS
Q: What about taxes?
A: Living trusts are essentially income tax neutral while the trustor is living and provide no special estate tax savings that cannot otherwise be achieved through the use of a will. During the trustor’s lifetime, all income is taxed to the trustor; no separate income tax return is required as long as the trustor is also acting as a trustee.
Q: Does the trust provide protection from creditors?
A: No. Assets owned by the living trust are treated as the trustor’s own assets if there are creditor problems.
Q: Who can be the Trustee?
A: The trustor usually acts as his or her own trustee. A spouse or adult child may serve as a co-trustee or successor trustee. A bank is often a good choice as a successor trustee if there are difficult assets to manage.