28 May 2020

Benefits And Pitfalls Of A Living Trust

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Some feel it is beneficial to have your home in a trust versus owning it in your own name. In the 1965 book by Norman Dacey titled "How to Avoid Probate" the recommendation was to create a living trust. Living trusts have become seminar topics, and certainly should be considered in estate and retirement planning. However, there are benefits and pitfalls to consider along with other alternatives before deciding to create a living trust.

Placing the legal title to property into a trust, which is held by one or more trustees, is done for the benefit of someone else. Depending on the kind of trust involved, the trustee is often responsible for the maintenance and upkeep of that property for the ultimate beneficiary of the property.

A revocable trust is created while you are living, thus the name “living trust.” Since this trust is revocable, the individual creating the trust (called the "grantor") has the right to change its terms or cancel (revoke) the trust at any time, for any reason, during his or her lifetime. Upon death, the trust becomes irrevocable, and the trust property is distributed by the trustee in accordance with the terms of the trust.

The primary reason that people establish a living trust is to avoid probate proceedings, which can be a time-consuming and costly process. Under state laws, the trustee - not the individual (the grantor) - owns the property. In general, only property owned by the deceased individually is probated. Property held jointly will automatically pass to the surviving owner, without having to go through probate making the process quicker and less costly for family members.

There are other advantages to a living trust. For example, if you own property in more than one state, on your death, probate proceedings may need to take place in each state where property is located. These are usually referred to as "ancillary probate." When property is held in a living trust, these ancillary proceedings may not be necessary.

Another advantage is privacy. Probate is a matter of public record, whereas living trusts are private. Some individuals may not want to disclose who their ultimate beneficiaries will be, and the living trust provides a modicum of privacy.

However, there are also pitfalls in the use of the living trust. Although for ownership purposes, the trust is the legal title owner of the property, but for tax purposes, the property in a trust remains the property of the grantor. Because of this, living trusts do not save estate taxes nor do they save income taxes.

For income tax purposes, the grantor of the trust still has to pay tax on income obtained from the property. For estate tax purposes, even though there has been a transfer of assets to a revocable (living) trust, those assets remain, and are included, in the taxable estate.

There are also increased costs as a result of the creation of such a living trust. Lawyers will charge a fee for creating the trust, often costing several thousands of dollars. This is usually significantly more than to prepare a last will and testament. Furthermore, you there are also administrative and recording costs. The paperwork that the trust has to handle may be as great a burden as having to go through the probate proceedings.

There is one additional negative which people often forget. Just because property has been transferred to a revocable trust does not mean that those assets are protected as against creditors. If someone gets a judgment against the grantor, for example in an automobile accident where the judgment is higher than the insurance coverage, the judgment creditor can attach all of the assets so as to satisfy the judgment, even those assets which have been transferred to a living trust.

More importantly, even if a living trust is set up, the grantor still must have a will. Most people own more than their house, and especially if there are children or other assets involved, it is imperative to have a will to make clear the intentions as to how any property not titled in the name of the trust will be disposed of upon death. With a will, even if there is a cumbersome probate proceeding, at least the intentions have been made known; without a will, the intestacy laws determine who receives the assets.

Living trusts are an option to be considered. However, a complete asset check should be completed to determine how serious the estate will be impacted by the probate proceedings. For example, other assets may already be probate proof, such as life insurance proceeds, IRAs or other retirement benefits.

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