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Revocable living trusts have become popular estate planning tools for avoiding the costs of probate, maintaining privacy, all while providing a means of controlling one’s assets both during life and after death. This article will discuss the advantages and disadvantages of setting up a living trust.

A living trust is a trust that you set up during your lifetime. You will transfer most or all of your assets to this trust. You will have the right to receive the income and withdraw principal from the trust. You will have the ability to revoke or cancel the trust at any time during your life. At death, the trust becomes irrevocable (meaning that it cannot be modified) and its income and assets are disposed of under terms specified by you in the trust documents. You have the same flexibility to dispose of your assets by means of a trust as you do with a will.

Why would you do this? The most commonly cited advantage of living trusts is that, upon the trust owner’s death, trust assets are distributed without going through probate. Probate is a very costly court-supervised process of distributing a deceased persons assets to the rightful inheritors. By avoiding probate, people generally expect to reduce their overall expenditures. These savings often may be smaller than expected, however.

First, it is difficult to avoid probate costs altogether, unless all of your assets have been retitled to the trust, including your personal property. Transferring title of mortgaged real estate or personal possessions may be impractical or undesirable. Funding a trust requires a lot of diligence, but the purpose for setting up the trust will be undermined if all assets have not been retitled.

Second, the upfront costs of setting up a trust can be high. People pay thousands of dollars to attorneys to draw a detailed living trust for them.

Third, if trust assets must be retained and administered before they can be distributed, trustee fees may approximate those of an executor since the period of administering the trust may be drawn out. Even with a trust, a period of administration may be necessary to file income and estate tax returns, collect assets, pay debts, and distribute assets.

Tax Consequences

Perhaps the greatest misconception concerning living trusts is that they reduce federal estate taxes. This is not the case. Transferring your assets to a living trust does not remove them from your gross estate, so the assets remain subject to estate tax.  In fact, a living trust is tax neutral in terms of both estate and income taxes. A living trust can provide the same estate tax planning flexibility as a will. As for income taxes, the owner of a living trust is taxed on its income as if the assets were owned outright. A separate tax return generally is not required.

Advantages of a Living Trust

Although the anticipated savings of a living trust must be carefully evaluated, living trusts do offer several advantages other than reducing the cost of passing your assets to your beneficiaries.

Incapacity. A living trust is an excellent means for planning for incapacity. The trust can instruct the trustee to manage your assets and provide for your financial support. A durable power of attorney can also authorize your agent to transfer additional property to the trust. Thus, a living trust and durable power of attorney can avoid the need for a court-appointed conservator.

Speedier distributions. Upon your death, the trustee of a living trust can begin to make distributions to surviving beneficiaries without the delays and procedures that the probate process requires. Delays are also avoided with joint accounts, insurance proceeds, and other assets that pass directly to the beneficiary without going through probate.

Out-of-state property. A living trust can be very beneficial if you own real property in more than one state because separate probate proceedings are required in every state in which you own property. Transferring such property to a living trust avoids the need for multiple probate proceedings.

Avoidance of disputes. A living trust offers an advantage over a will if you anticipate discord among your beneficiaries. Unlike a will, family members do not have to be notified of the existence of the trust. A living trust also may withstand legal attacks better than a will.

Although a living trust may provide advantages, it is important for you to have a realistic expectation of what a living trust can accomplish. This will allow you to make an informed decision as to whether such a living trust is appropriate for your situation. If you have any questions please feel free to call your L&B professional at 858-558-9200.

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