Living trusts have become a popular way of owning assets for some people.
They can help address a number of important issues, but they are not for
everyone.
What is a revocable living trust?
As the name implies, these trusts are established when the grantor is still
alive and since they are revocable, the grantor retains the power to revoke
or amend the trust as he or she wishes. A trust document establishes the
trust, names the trustee (usually the grantor), names a successor trustee
(someone to take control if the trustee becomes disabled), often a trusted
family member, and describes how assets are to be managed and ultimately
distributed from the trust.
After the trust is established, assets are transferred into the trust by
the grantor and the grantor continues to manage them. The taxable income from
those assets is reported by the grantor on their individual tax return. The
assets are owned by the trust but there is no change in the control or tax
treatment of the assets.
When the grantor dies, the assets in the trust are distributed under the
terms of the trust document in a way similar to how a will describes how
assets in an estate are distributed.
Why consider a living trust?
Using a living trust offers some benefits to be considered:
Avoids probate. When a person dies, his or her assets are
deemed to be passed into their estate. The distribution of the assets is then
controlled by the terms of a will. Usually, there will be a court hearing
about the estate and there can be costs associated with the
"probate" of the will. With a living trust, the assets are
transferred under the terms of the trust and do not enter the estate. If the
assets are complex or the deceased lived in a state with high probate costs,
the cost savings can be significant.
Preserves privacy. Wills and estates end up being public
matters while living trusts are not. For individuals that do not want their
private matters potentially becoming visible to others, a living trust may be
attractive.
Speed of asset distribution. The distribution of assets
of an estate under the terms of a will can take time, sometimes months or
more. A living trust usually allows the assets to be distributed in just a
few weeks.
What are the disadvantages?
Time and expenses. Establishing a living trust properly
can take some time and result in expenses. While there are examples of living
trust documents available in many places, doing it right usually means
getting expert legal advice and help. In addition, when assets are
transferred into the trust, they must be "re-titled." For a bank
account or brokerage account, that is probably pretty easy. For real estate,
it requires filling out forms, filing documents and potentially paying
transfer fees.
Tax filings. While the trust will not pay any income
taxes, there must be a tax return prepared each year. The tax return shows
the income of the trust and "distributes" that income to the
grantor for reporting on his or her individual tax return.
Complicated asset ownership. Sometimes the mere fact that
a trust owns an asset can make dealing with it more difficult. One area where
this is prevalent is with real estate mortgages. Some lenders are
inexperienced in dealing with living trust ownership.
Summary
Living trusts can be powerful estate planning tools. If you are
concerned about the costs and public nature of probate or wish to be less
active in managing your financial affairs, you may want to consider a living
trust. While a living trust may seem simple on the surface it can become
quite complex in some cases. Consulting a qualified estate-planning attorney
is a must.
