Chances are you have heard of revocable living trusts. After all, living trusts have become a very popular estate planning and wealth transfer tool. But living trusts are not necessarily for everyone, and likely you have questions about them.
Here are some frequently asked questions to help you know more about this useful tool, and perhaps help you decide whether one is right for your situation.
Question: How does a living trust work? Answer: With a revocable living trust, you transfer ownership of assets of your choice to a trust while you are alive. The trustee then administers the trust according to the terms. You can keep any or all of the income from the trust, act as the trustee, change the provisions at will, or even terminate the trust.
However, once you die, a successor trustee will take over and the trust then becomes irrevocable, meaning no further changes can be made. The trust can continue to exist or be terminated, with the assets distributed to heirs or to another trust or trusts.
Question: What are the advantages of setting up a living trust? Answer: There are several potential benefits to a living trust including the following:
-Trust assets will be distributed to your heirs without going through the probate process. This typically means heirs will receive their inheritances sooner, without probate costs. Further, probate is a matter of public record, so avoiding probate helps protect you and your family’s privacy.
-You can name a successor trustee to take over the trust's management if you become mentally or physically disabled. This is usually less expensive and less cumbersome than having the court appoint a conservator, and helps ensure that your wishes are followed in such an event.
-By placing assets in the trust that require immediate management, such as a business, your successor trustee can immediately take over management of those assets after your death or disability.
-Since the trust's provisions are not subject to court review, it is usually more difficult for heirs to contest a living trust's terms than to contest a will.
-Property is subject to probate in the state in which it is located. Thus, if you own property in more than one state, your estate may have to go through two or more probate proceedings. Placing the property in a living trust bypasses the multiple-state probate process, saving much time, hassle and money.
Question: What are the disadvantages of living trusts? Answer: Living trusts also have several potential disadvantages. These include:
-Depending on the assets you own, you may not need a living trust to avoid probate. Insurance proceeds, retirement accounts, and jointly owned property automatically passes to your beneficiaries without going through probate.
-Once you set up the trust, it must be funded by retitling assets in the trust's name. This can be time consuming and require a significant amount of paperwork.
-Creditors have a limited time after your death to make claims against an estate in probate. There is no comparable time limit for living trusts, so creditors can make claims any time.
Question: Do living trusts save estate taxes? Answer: Because you retain control of the assets during your life, a living trust does not reduce estate taxes in and of itself. You can, however, make provisions in your living trust to take advantage of your federal estate tax exemption and you can set up other trusts that help reduce estate taxes.
Question: Is a will necessary when a living trust is in place? Answer: In most cases, you still want what is known as a “pour-over will” that covers the disposition of any assets you left out into the trust. If you have minor children, you also need a will to name a guardian for them.
Question: Do all assets have to be placed in a living trust? Answer: You decide which assets should be placed in the trust. Assets with beneficiary designations, such as life insurance, individual retirement accounts, and retirement plans generally are not transferred to the living trust, although the trust can be named as beneficiary. Before taking action, however, you should check with your estate planning adviser about the income and estate tax ramifications.
One final thought – a living trust is only worth the paper it’s printed on if not implemented properly. I have seen far too many that were designed beautifully but were essentially worthless because they had not been properly funded and implemented. It is essential that you work with a knowledgeable planning professional to make sure the trust works as intended.
(Lane Keeter, CPA is Office Managing Partner of the Heber Springs Office of EGP, PLLC, CPAs & Consultants)