Living Trusts

A trust lets an individual arrange for the management, safekeeping, or distribution of his or her assets, such as an investment portfolio or business interest. When a trust is revocable, an individual maintains control over the assets. He or she can withdraw assets from the trust, add to them, or alter the trust in any way. An irrevocable trust, however, may not be altered after it has been established.

A living trust is created during an individual's lifetime and can be structured to end when the individual dies, or to continue, per the individual's wishes. The individual who creates the trust is the grantor. The person or financial institution responsible for managing the assets and carrying out the trust's instructions is the trustee. The person (or people) designated to receive income or assets from the trust is the beneficiary. The grantor can serve as his or her own trustee or name a professional trustee to handle management responsibilities. To avoid probate, the legal process of settling an estate, assets must be retitled in the trustee's name.

There are many advantages to incorporating a living trust into an individual's estate plans. Revocable living trusts are income- and estate-tax neutral. Because the grantor maintains the ability to withdraw assets from the trust or change the trust's arrangement, the grantor is treated as if he or she still owns the trust assets and is taxed on all income and capital gains earned by the trust. Upon the grantor's death, the assets are included in the grantor's taxable estate.

The only way to keep assets from being taxed is to relinquish all ownership interests and discretionary control over the assets by putting them in an irrevocable trust. However, individuals are subject to gift tax when irrevocable trusts are created.

Assets distributed from a trust upon the grantor's death avoid probate. However, the cost and time delays of probate may not be significant, depending upon state law. Probate only allows creditors four months to six months to file their claims. But creditors have years to sue trust beneficiaries.

A number of states have adopted the Uniform Probate Code, which has greatly simplified the probate process. Whether assets avoid the probate process or not, probate-type work generally will be needed to value assets, to prepare Federal and state tax returns, settle creditors' claims, and to resolve disputes among beneficiaries.

On the other hand, avoiding probate can be advantageous for the following reasons:

• If an individual owns property outside of the state where he or she is residing at the time of death, holding property in trust can help it avoid being subject to probate proceedings in both states.
• Wills and probate proceedings are matters of public record. A trust can be an attractive alternative if privacy is important.
• A disgruntled heir could delay probate proceedings by contesting the will. It would be more difficult to contest the provisions of a trust.

Married couples who have their assets titled jointly often think they can bypass probate. It is true that, upon the death of one spouse, jointly held property passes to the surviving spouse without being subject to probate. However, upon the death of the surviving spouse, all remaining property passes through a will and is subject to probate.

A trust is an alternative (and sometimes preferred) way to provide for the preservation and distribution of assets after an individual's death. But a trust generally does not replace the need for a will. It is ordinarily not practical to transfer tangible property such as automobiles, furniture, and jewelry to a trust. Inevitably, some assets never are transferred to a trust, and a will is needed to spell out the beneficiaries of such property or, as is more common, to simply "pour over" these assets into the revocable trust at the grantor's death. The trustee then distributes these assets according to the terms of the trust document. Furthermore, a parent with minor children always should have a will that designates a guardian for the children.

The complexity and cost of a living trust depend upon what it is designed to accomplish. Individuals can expect to pay from several hundred dollars to several thousand dollars in up-front fees for a living trust, depending on its complexity. Although some do-it-your-self trust documents exist, most experts recommend obtaining legal assistance.

Grantors can name a professional trustee, such as an investment professional or a financial institution, to manage the assets in their trust. Most professional trustees charge a percentage of the assets under their management as an annual fee. Individuals can instruct the trustee to consult them before taking action, or they can grant full discretionary authority to the trustee. If a grantor acts as his or her own trustee, there is no management fee, but he or she might still require some administrative services to maintain the assets held in the trust. One of the main advantages to having a living trust is that if an individual becomes incapacitated, the assets in the trust would be managed automatically by the trustee named in the trust document. If an individual serves as his or her own trustee, he or she should name a successor trustee. Otherwise, the determination of who will handle an individual's legal affairs could be left to public, and potentially costly, guardianship proceedings.

One popular strategy is to create a "stand-by" trust as a contingency plan in conjunction with a durable power of attorney. This type of trust can remain unfunded until it is needed. In the event that an individual becomes incapacitated, the representative named in the durable power of attorney could transfer assets to the trust so that the individual receives the same benefits as if the assets were in the trust all along.