A Common Sense Approach to Living Trusts

Much has been said in recent years about living trusts.  This article is intended to identify key advantages of living trusts and to clear up some misconceptions concerning them.  Basically, a living trust is established and exists during your lifetime and, like a will, can be the cornerstone of your estate plan at death.  The trust agreement describes how the property is to be used during your lifetime and directs the disposition of the trust property at your death.

The person who creates the trust and contributes property to it is commonly called the “trustor,” “grantor,” or “donor.”  The person who controls the property for the benefit of the trustor (or others) is called the “trustee.”  You can change or revoke your living trust at any time before you die, and you can act as your own trustee.  As a result, you can have complete control over your property during your lifetime, much as you do if you do not have a trust.
People have many different reasons for wanting to use a living trust in their estate planning.  These reasons are discussed below.

To avoid probate

If you transfer assets to a living trust during your lifetime, those assets will be administered and distributed to your beneficiaries as part of the trust and need not be probated at your death.  In some states, the probate process is costly and time consuming, and the use of trusts is fairly standard.  Even if probate in your home state is not terribly expensive, you may own a vacation property or other real property in another state.  In that situation, a living trust can be beneficial.  If your trust owns real property located in a state other than your home state, probate in that other state can be avoided.  Many clients prefer to transfer all their assets to the trust, thus avoiding probate in any state.

Completely avoiding probate is accomplished only if you transfer all of your assets to your trust during your life or if your assets are transferred at death through some other arrangement or mechanism such as a joint tenancy, “payable-on-death” designation or other beneficiary designation.  The advantage of using a living trust is the additional flexibility you have during your lifetime. It is often much easier to amend a trust if circumstances warrant a change than to retitle assets or revise myriad beneficiary designations to reflect those changed circumstances.

To keep assets confidential at death

The documents filed in a probate proceeding are public and the application or petition for probate contains an estimate of the value of the decedent’s assets.  Generally, the disclosures made in a probate proceeding are non-specific in nature and rarely are they reviewed by the public.  However, a living trust is not generally required to file any inventory or accounting with the court, which makes it an attractive option for people who have privacy concerns.

To assist in the event of incapacity

The trustee (or successor trustee) of a living trust can assist with your financial matters in the event of your incapacity.  The trustee invests the assets of the trust, pays bills and can assist with filing tax returns on behalf of the trustor.  The use of a living trust is often less expensive and almost always less burdensome than a court controlled guardianship or conservatorship.

To minimize taxes?

The assets included in a living trust are subject to estate taxes in the same fashion as assets owned outright by an individual.  The unlimited marital deduction and the current $2,000,000 federal transfer tax exemption ($1,000,000 for Minnesota) are available to a decedent’s estate regardless of whether a living trust has been established.  The living trust does not, by itself, afford any estate tax advantages over a will.  However, the planning behind a living trust (or a will) does offer a potential for estate tax savings at death.  So even if you do not ultimately use a living trust, we encourage you to make sure your estate plan takes advantage of these tax savings techniques.

For income tax purposes, a living trust is normally ignored.  The trustor simply reports the income of the trust on his or her individual income tax return as though the trust didn’t exist.  As with estate taxes, the living trust offers no advantages for income tax planning purposes.

In summary

A living trust may be advisable for an individual who owns real estate in more than one state or anticipates the need for assistance with asset management or help with personal financial matters.  A living trust may not be necessary if estate planning objectives can be met efficiently and economically with a well drafted will.