Living trusts may be useful estate planning devices. The use of a living trust in estate planning depends largely on the individual circumstances of the taxpayer. The counsel given by some living trust proponents that almost everyone can benefit from a living trust usually provides inadequate information concerning the entire living trust creation and maintenance process.
Brief History of Living Trust Marketing
One of the first to examine the benefits of living trusts was Norman Dacey in his book, How to Avoid Probate!, published in 1965.
Unfortunately, during the 1980's, a trend emerged that shifted the emphasis from the "how-to" books of earlier decades to what can only be described as a marketing blitz. Lawyers and financial planners have found many of the attributes of living trusts make these trusts attractive for mass marketing. Unfortunately, some marketing tactics, such as "special no-charge seminars," turn out to be nothing more than a high pressure sales pitch.
These ambitions entrepreneurs pale in comparison to what some attorneys have called "living trust factories." These outfits sometimes solicit customers door-to-door, and for approximately $1,000 sell a mass-marketed living trust documents that consists of little more than boilerplate language.
The preceding information is offered as a caveat to those considering a living trust as a vehicle for estate planning. But a warning is merely a warning, and should not discourage taxpayers from considering the potential benefits of a living trust. For certain persons, depending upon the assets in their estate, where they living, and personal preference, a living trust can be a very smart move.
Fundamentals of Living Trusts
A living trust is essentially the same as other trusts. There are three parties to the creation of any trust. First, the grantor is the person who creates the trust by having a trust agreement drawn-up that details the grantor's wishes for the management and disposition of the property contributed to the trust. After the trust agreement is written, property must be transferred from the grantor to the trustee. This process is known as funding the trust and only after the trust is funded does the trust come into existence.
The second party involved in the creation of a trust is the trustee. The trustee is the person who controls and manages the trust's property and is responsible for the assets' safekeeping.
The third and final party to a trust is the beneficiary.
The typical living trust, and the reason for its name, is a trust created while the grantor is still alive. It often names the grantor as trustee and sometimes even names the grantor as a co-beneficiary.
Avoiding the Will/Probate Process
The principal estate planning benefit, and by far the most frequently cited benefit of living trusts, is the ability of the living trust to pass assets from one generation to the next without having to go through the time, trouble and expense of probate. Probate is the legal proceeding in which the court approves the decedent's will and supervises the distribution of the estate's assets.
Considering the avoidance-of-probate issue is the most frequently cited reason to create a living trust, an examination of why people fear this proceeding seems appropriate.
The Time Factor. One frequently cited reason for avoiding probate is the time involved. The probate process may take anywhere from 7 to 16 months with one year often cited as the average time period for settling an estate that has gone to probate.The reason the probate process is so lengthy is partially due to the fact that the estate's assets must remain intact to service the claims of estate creditors. With a living trust, the transfer of assets can take place almost immediately upon the death of the grantor, or the assets can be retained in trust and distributed at any time desired by the grantor.
It should be noted, however, that the creditor-claim-making procedure of probate is actually a major advantage of the probate process. The decedent's creditors usually have only 6 months to inform the executor of their claims against the estate. On the other hand, decedent's property transferred by trust has no such time limit within which a creditor can press a claim. So, an heir, who receives a trust distribution may be sued for a decedent's debts many years after the estate is settled.
The Cost of a Living Trust Agreement. The living trust agreement itself can cost $500 to $3,500 or more depending upon the complexity of the estate. These price quotes are only for the trust agreement. To complete the trust process, assets to be included in the trust must be re-titled. This can be a time consuming and difficult process. If the trust property is not properly re-titled, the property will not be included in the living trust and will not escape probate.
Lack of Privacy. Another often cited reason for avoiding the will/probate process is the lack of privacy involved. When a will goes to probate, it becomes a public document.
A Better Protective Shield. A somewhat more obscure but still noteworthy advantage of living trusts compared to the will/probate process is the living trust's ability to withstand challenges from embittered heirs better than wills.
The Cost of Probate. Another frequently mentioned reason for avoiding probate is the cost. Attorney fees are usually a statutorily prescribed fixed percentage of the probate estate. This percentage fee applied to the probate estate can be as little as 2.5% or as much as 6%.
Some attorneys such as those in our firm, however, will agree to fees based on hourly rates instead of the fixed probate estate percentage.
Other Factors to Consider. Even though title is passed to the trust when the trust is funded, thus avoiding the probate estate, these assets may still be included in the assets of the taxpayer's taxable estate. Merely re-titling assets into a trust is not the same as the grantor truly giving up all control and enjoyment of the assets. In order for trust property to not be included in the grantor's taxable estate, the property must be a true gift to the trust.
Living trusts are required to file separate tax returns; therefore, additional time, effort, and money must be expended for an adequate accounting during the year and for a timely filing of the trust tax return at year-end.
Recommendations
The answer to the question of who should use a living trust as part of their estate planning appears to depend on many factors which must be evaluated based upon the facts of each particular case.
