Estate Planning – The Living Trust Option
The Living Trust
Unlike a will, a living trust protects your family’s privacy. Once your will is admitted to probate, anyone can read it at the courthouse. But a trust document will remain secret even after the assets are distributed.
During the Grantor’s life, (the life of the person creating the trust) there are other benefits as well. A Grantor of a living trust can continue to exercise control over the property throughout his or her life. Alternatively, the Grantor can be relieved of management responsibility by his naming someone else to act as trustee.
No other tax return need be filed. The person creating the trust continues to be the person taxable on income earned by the trust in the same way as if it was “his” income. In fact, according to the instructions for Form 1041, Income Tax Return for Trusts, no special trust form need be filed. Instead, the Grantor reports trust income, deductions and credits directly on his or her Form 1040.
Since the Grantor can revoke the trust at any time, transfers to the trust cannot be viewed as completed gifts. Thus, there are no gift-tax consequences on the creation of a revocable trust.
If you do set up a living trust and transfer your property to it, you should still have a simple will. One reason: only in a will can you name a guardian for your minor children, another, you may leave assets out of your trust, either on purpose or by accident. Without a will, those assets will be distributed according to your state’s laws rather than your wishes. But if you have a will with a so-called pour-over provision, the assets will automatically shift to your trust and pass the way you intend.
To create a living trust, you first sign the document creating the trust, then you deed your house, other real estate and major assets such as stocks and bonds, from yourself to yourself as trustee. You are the initial trustee and the initial beneficiary of the living trust. As long as you are alive, you continue to manage these assets just as before. When you die, the alternate trustee takes over and distributes your property as you specified in the trust. Incidentally, deeding them into your living trust will not cause a property tax reassessment.
But a living trust has another very important feature. If you should become unable to make financial decisions, your alternate trustee, such as your adult offspring, takes over management of your assets in the living trust. This avoids having a conservator appointed.
To summarize, the major benefits of a living trust are avoidance of probate costs avoidance of delay in transferring your property to your beneficiaries, as well as providing for management of your assets, if you should become unable to do so.
Major Benefits of a Trust
- Gives you full control of your assets while you are alive and competent.
- Avoids probate costs by reducing size of probate estate.
- Permits assets to be distributed quickly upon your death.
- Keeps the details of your estate private.
- Arranges for a successor trustee to manage your assets should you become incapacitated.
- Is difficult to contest.
- Effectively doubles the standard estate deduction for married couples.
- Costs more in legal fees than drafting a will.
- Requires retitling all assets that the trust will hold, which can be tedious and expensive.
- May require you or your heirs to pay annual fees of 1% to 2% of assets if a professional trustee is used.
- May leave your trust assets vulnerable to creditors’ claims longer than a will does. (However this may be avoided by probating the pour over will which starts the clock running on all creditors.)