The Top 10 Questions about Establishing a Living Trust
By Randy Saul
Senior Vice President BKD Wealth Advisors L.L.C.
More and more people continue to be interested in living trusts. They have heard that a living trust can help avoid the public exposure and delays that probating an estate involves and are interested in learning more about the concept.
What exactly is a living trust? It is an agreement drafted by an attorney that establishes a revocable trust to hold some or all of your assets during your lifetime and provides continuing management of those assets in the event of your incapacity. Similar to a will the trust also provides terms for the disposition of the assets upon your death.
The main advantages of placing assets in a living trust are:
- A trustee of your choosing can manage the trust assets in the event
of your incapacity without the need for a conservator
- Assets will transfer to your designated beneficiaries without the
need for probate
- The terms of the trust and the nature of its assets are confidential, keeping the ownerճ affairs private
So with all this good news what are the ten most often asked questions?
- Will I lose control of my property?The answer is a resounding NO! The beauty of the living trust is
that you can continue to control the assets for as long as you want
and are able to do so.
- Once a living trust is established can it be changed?
Not only can it be changed it often should be. In most cases the terms of the trust should be changed or at the very least reviewed on a regular basis to account for changes in your family situation (deaths, divorces, etc.). In light of the events of September 11 everyone should review all estate plans to make sure they cover situations they once never considered. Similar to a will the terms of a living trust may be amended as long as you have the capacity to do so.
- What assets should I put into my living trust?
Since assets can be unique the answer is really up to each individual. However the main purpose of having a living trust is to make sure that your assets are properly managed and avoid probate. If an asset is not in your living trust or subject to some other form of transfer outside probate it will most likely be subjected to the probate process. In many cases owners place their investment assets in the trust.Personal property that does not have some type of ownership designation can also be placed in a living trust but you should consult your attorney to make sure the transfer is properly completed.
- Is a will needed in addition to a trust?
Most estate planners are in agreement that even with a living trust you still need a properly drafted will. As previously mentioned if an asset is not in your living trust when you die it will be in most cases subject to probate. You may even want to consider a pour over will that places the balance of your probate assets in your living trust and lets the terms of the trust control their disposition.
- Do I have to be a millionaire to need or be able to afford a
The answer here is absolutely not! Most people should review what they are really trying to accomplish with their assets's it the avoidance of probate or a conservatorship? Whatever the answer a trust can in most cases help. The cost although important is truly secondary when you consider what you are protecting lifetime of savings and investing. Still the cost usually runs somewhere between $1000 and $2000. In most cases the larger your estate and the more complex your assets the greater the costs and time needed to complete your plan.
- Is probate so bad as to make establishing a living trust really
worth the effort?
This answer is not as easy as the previous one. Many people have been scared to death by the stories of well-meaning relatives. In most cases probate is not as expensive as you may have heard but there is an average cost of somewhere between 2% and 5% of your estate and your personal representative will be working with the probate court. The two real concerns are the time and effort that is required by the personal representative to probate an estate Рbetween six months to a year Р and the fact that the estate will be a matter of public record. All of this is usually avoided with a living trust.
- Who should be a trustee of your trust?
Most people want to name themselves as their own trustee. Many financial advisors agree with this. After all most people are not willing to let someone else handle their investments as long as they feel they can and enjoy doing so. The tough question is deciding who should be the successor trustee. Most individuals automatically think of their surviving spouse or children. Still everyone should ask themselves who has the time and expertise needed to handle a lifetime's worth of assets? Corporate trustees can often offer an impartial professional answer. A corporate entity will outlive you and usually have local professionals who handle these matters on a daily basis. A good compromise between choosing a family member and choosing a corporate trustee is to have your family member serve as co-trustee with the corporate trustee of your choice. If there is not a trusted family member in the picture consider asking one of your trusted professionals such as your attorney or CPA to serve as co-trustee.
- Is a general durable power of attorney or a living will still
A grantor of a living trust also should consider establishing a general durable power of attorney to accomplish objectives that cannot be attained with a trust and to complement the objectives of the trust. A living will is something entirely different and should not be confused with the trust but is something that should be reviewed to make a complete estate plan.
- Does the living trust reduce income taxes or estate taxes?
In a word, no. During the owner's lifetime the trust has no effect on the owner's income tax. That is the owner will continue to be taxed on the income from the assets held in the trust. After the owner's death the assets in the trust will be subjected to the estate tax in much the same manner as a probate estate. Other types of trusts are used to avoid or lower estate taxes but their terms and impact on your control of the trust assets are significantly different than a typical living trust. Often times, proper estate planning will involve the use of both types of trusts.
- Are there any disadvantages to using a living trust?
There are certainly some differences that everyone should be aware of. For example there is more expense establishing and funding the trust than if you held the assets outside the trust. In most cases you can control the expense by working with your attorney and letting him or her know how much of the work you are willing to do in the funding of your trust. Also bear in mind that keeping up with your trust is an ongoing process Рit is up to you to make sure that newly acquired assets are placed in your trust when appropriate. Finally as mentioned above the trust must be reviewed on a periodic basis to make sure its terms are still consistent with your objectives.
To get started on your living trust consider meeting with an estate planning professional to find out more about your particular situation and discussing whether a living trust might be the best answer for your estate planning needs.