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What is a Living Trust and Do I Need One?

What is a living trust?

A living trust, sometimes called a “revocable trust” or “revocable living trust,” is a trust created while you are alive and is operative while you are alive as well as after your death.  During your lifetime you retain the right to revoke the trust, change its terms, or regain possession of the trust property. Its counterpart is a testamentary trust, which is contained in a will, and only becomes operative after your death.

What are the advantages and disadvantages of a living trust?

There are a number of misconceptions and myths about what a living trust can and cannot do.  Let’s take a closer look to see what is true and what is not.

  1. Living trusts can lower my income taxes. – FALSE.  Because the grantor (the person who funds the trust) can change the terms of the trust or revoke the trust altogether, the grantor is the owner of the trust for federal income purposes. For federal income tax purposes all income is taxed to the grantor at the grantor’s tax rate. If someone tells you otherwise, don’t walk, run from them. – No savings here.
  2. Living trusts can lower my estate tax. – FALSE.  Because the grantor is treated as the owner of the trust, any assets in the trust as of the date of the grantor’s death will be included in the grantor’s gross estate for federal estate tax purposes. – No savings here either.
  3. Living trusts can protect my assets from my creditors. – FALSE. Because the grantor can revoke the trust or regain possession of the trust property, so can the grantor’s creditors.  This is one of the biggest misconceptions of living trusts.  Contrary to what you may see on the internet, or worse yet, from hear an unscrupulous promoter of living trusts, there are no “tricks” or “inside secrets” that will permit a living trust that you create and fund to protect your assets from your creditors.
  4. Living trusts can save probate fees. – TRUE IN MANY STATES. Many states such as North Carolina only assess probate fees on assets that pass through probate (assets whose disposition is control by a will or by intestacy statutes) based on the value of the asset. For example a state may assess probate fees at the rate of $4.00 for every $1,000.00 of probate property.  In some states probate fees are very high, making a revocable living trust an attractive and useful component of an estate plan.  In other states probate fees are much less, so probate avoidance is less of a compelling reason to have a living trust.
  5.  Living trusts can save estate administration expenses. – TRUE IN MOST STATES. The cost of gathering and administering probate assets, particularly real property located in a state other than the state of the deceased person’s residence, can be expensive.  If a person dies owning real property in a state other than the state of their residence, an estate proceeding known as an “ancillary administration” will have to take place in each state in which the deceased owned real property at the time of their death other than the deceased’s state of residence. Typically the cost of an ancillary administration is greater than the cost to prepare a living trust.
  6. Living trusts can avoid the need for a guardian. – TRUE.  A properly drafted and funded living trust, aided by a properly drafted durable power of attorney and healthcare power of attorney, can avoid the need for a guardianship if the grantor becomes incapacitated.  If the grantor (the person who creates the trust) becomes incapacitated a successor trustee (hopefully selected in advance by the grantor and named in the trust agreement) steps in and continues to handle the grantor’s financial and personal affairs, without the need for a guardian to be appointed.  When a guardians needs to be appointed there can be a dispute concerning who should be the guardian, which can lead to expensive and time consuming litigation.  Even if everyone agrees on who should be appointed as guardian, the guardian will be required to be bonded (the grantor’s property is used to pay the bond premium) and make annual reports to the court.  A guardian’s options in dealing with the grantor’s property are usually severely limited by state law.
  7.  Living trusts keep family matters in the family. – TRUE. As part of the probate process the executor files the deceased’s last will and testament if there is one.  Once filed, the will becomes a public record available for anyone to review.  Unless the deceased is a notable person people aside from those involved in the administration of the deceased’s estate have little interest in reading the will,…but it is possible because it is a public record.  On the other hand, trusts typically are not filed with the court so the distribution provisions, conditions, and restrictions remain private within the family.

As you can see there are benefits and drawbacks to having a living trust.  Whether a living trust makes sense for you depends on your specific estate planning goals. Consult your estate planning lawyer to see if one is right for you.

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