LIVING TRUSTS-A TRUST FOR EVERYONE?

A Living Trust is a trust created while you are alive-thus the name. It is a very common type of trust and has gained in popularity tremendously over the past several years. Once thought to be a trust only for the wealthy, a Living Trust is now very affordable and should be considered by anyone with an estate over $100,000.

Interestingly, living trusts date back to 16th century England, when landowners used trusts to circumvent the King. In those days, the King would oversee distribution of property upon the death of landowners, imposing heavy taxes on everything possible, attempting to keep ownership of the land in the King's hands. To avoid the onerous taxes, the landowners established trusts with the Church, deeding the land to the Church, with the promise that the Church would grant the land back to their heirs upon their death. This became the first form of probate, followed by the first successful attempt to avoid probate!

Living trusts accomplish the same goals today. Probate costs can range from 3% to 15% of the estate's value in legal fees, depending on the state they live in. Estate taxes can range up to 50% of the estate value, and unified credits may not be fully utilized without some planning. A living trust can transfer property to beneficiaries without probate costs, and will also help to maximize a couple's unified credits.

A living trust establishes a private legal entity that is no longer tied to the death of the original grantor. Therefore, the trustee of the living trust distributes the assets of the trust to the beneficiaries without any involvement from the courts. Once the living trust is established, virtually any assets can be placed into the trust by simply changing the name or title of the assets to the name of your living trust. A single person, the Trustee, then controls the trust. However, the Trustee is instructed by the trust documents that are written to carry out the wishes of the grantor.

A living trust is usually a revocable trust. With a revocable trust, the grantor can change or eliminate any of the terms at any time before death as he or she chooses. Because the grantor has so much control over the trust's assets, the property held in a revocable trust is subject to estate tax when the grantor dies. An irrevocable trust, in contrast, cannot be altered in any way after being established, and if it is properly structured, its assets are not subject to estate tax when the grantor dies.

Even though a revocable living trust holds assets subject to estate taxes, it can be used as a tool to reduce estate taxes. In a typical will arrangement, everything passes from one spouse to the other. This is known as an "I love you" will and avoids estate taxes at the death of the first spouse because of the unlimited marital deduction. However, at the death of the surviving spouse all property owned by the surviving spouse is taxed after the applicable credit is applied. The problem is that it wastes the applicable credit of the first spouse to die.

A better plan involves the use of a revocable living trust that splits into two trusts on the first death: a qualified terminable interest property (QTIP) trust and a credit shelter trust. The credit shelter trust preserves the tax credit of the first spouse ($700,000 in 2002) to die while providing for the needs of the remaining spouse, while the QTIP trust preserves the unlimited marital deduction for the balance of the estate. Both can be created to pass the property on to the chosen heirs after the death of the surviving spouse, and still have the income from both trusts flow to the surviving spouse while he or she is living.

Who else can benefit from a living trust? Anyone with: 1) an estate over $100,000 that would be facing high probate costs, 2) a desire to leave a different inheritance to children from a previous marriage, 3) a desire to provide protection and care of disabled children, 4) assets in more than one state. Real estate assets especially will likely face probate in each state in which the property is located, increasing the time and fees involved, 5) the potential for heirs to contest a will. Living trusts are much more difficult to contest than wills, 6) a wish to care for the family in case of incapacitation of the grantor, and finally, 7) a desire to keep your estate private. Wills and the probate proceedings are public information. Anyone is able to access and read the information and track the entire process.

If you fit into any of these categories, it is likely that a revocable living trust would be beneficial to you and your heirs. Please call your local estate planning attorney for further guidance and development of an estate plan.