Is a Living Trust Right For You?

Revocable living trusts have become very popular estate planning tools. A living trust can provide you with a lot of benefits and detriments. Whether one is right for you will depend on a number of factors.

A living trust is a trust, set up by you, during your lifetime. Upon commencement of the trust, you would transfer most, if not all, of your assets to the trust. You would choose the trustee of this trust. If you like, you may be your own trustee. This allows you to maintain full control over the property. You would be entitled to all the income from the trust, along with the right to withdraw principal, when needed. Since it is a revocable trust, you can cancel the trust or change the terms at any time during your life. Upon your death, the trust itself becomes irrevocable. The income and assets of the trust are disposed of in accordance with the terms of the trust documents (much like a will).

One of the biggest advantages of a living trust is that its assets are distributed to the beneficiaries without having to go through the court probate process. Probate is the state's legal method of transferring your assets to your heirs. The process generally involves an executor, an attorney, a judge and a courtroom, each of whom gets paid. The trust avoids the filing fees of the probate court. In addition, the trustee fees are usually lower with the living trust than with a non-family executor or personal representative handling the probate.

Avoiding probate, however, does not remove the requirement to file an estate tax return (depending on the size of the estate), along with the valuing and transferring of the assets. A formal accounting and settlement is usually done with all estates. If for some reason all of the assets were not transferred into the living trust, those assets would go through the probate process. Usually, a will can direct any extra property into the trust to avoid any such oversights.

A listing of some of the benefits, detriments and general information to take under consideration are:

Expedited distributions- Probating a will and gathering assets into the estate for distribution can take a long time. With a living trust, all the assets are already gathered together. So, the trustee can make immediate distributions and continue paying bills as usual.

Protecting minors- Living trusts can help avoid the need to appoint a guardian to represent the children's interests, which can cause delays and add to the costs of the administration of the estate.

Privacy protection- Since probate records are public, the size of your estate, names of beneficiaries, and the amounts each received, can be found by anyone. By contrast, the size and terms of a living trust are usually not of public record.

Multiple property- Those with real estate in more than one state can avoid the problems and expense of multiple probate proceedings by putting the out-of-state real estate in a living trust.

Carrying out your wishes- The living trust can ensure your wishes are carried out in the event you become mentally or physically incapacitated. The question of who chooses your care and to what extent treatment is offered or discontinued is removed from the court's jurisdiction.

Income taxes- If you create a living trust, you will be taxed on its income in much the same way as if you continued to own the property outright. So, for tax purposes, it generally is handled as if you owned all the assets personally.

Estate taxes- A very common misconception is living trusts can save estate taxes; but that's not necessarily the case. The trust assets will be subject to estate tax as if you owned them outright at the date of your death. As a result, the basic estate planning techniques apply to both trusts and wills, such as dividing up a married couple's assets to use both unified credit exemption amounts.

Costs- A living trust document generally costs more than a will. This cost, though, is usually offset by the reduced costs of administration required at death. The other negative to a trust is the experience of retitling your assets in the name of the trust.

There are several types of living trusts, and consideration should be given as to which type to set up and how best to implement your estate plan. There are different rules for both resident and nonresident aliens (non US citizens), so be careful.

Living trusts, in most cases, are a great estate-planning tool. However, each situation should be reviewed before establishing a living trust to assure you are making an informed choice.

C. David Pitzer, CPA, PC
118 Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711

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