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
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
Using a living trust offers some benefits to be considered:
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.
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.
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
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.
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.