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Living Trusts

The Living Trust (Revocable Trust) is by far the most popular type of estate planning trust. It is popular for its ability to avoid probate court involvement after death, its ability to help a couple avoid estate taxes as well as its flexibility. The person who has a Living Trust has complete power over the trust and the assets it contains. The trust can be changed, updated or completely revoked.

Our attorney drafts dozens of these trusts every year. Living Trusts are almost always preferable to wills for use in estate planning.

Some of the practical uses of the Living Trust are:

  • Distribute Assets At Death
  • Avoid Some Estate Tax (for couple)
  • Avoid Probate
  • Plan for Incapacity, Avoid Guardianship
  • Use Bank Trustee for Asset Control
  • Administer Property in Several States
  • Protect Families When Spouses Have Been Married More Than Once
  • Protect Assets From Creditors (when using a credit shelter trust)

Distribute Assets at Death
Just like a will, a Living Trust specifies who will receive your assets when you die. The distribution can be very complicated (creation of new trusts, naming many charities, use of funding formulas, etc.), or very simple (all to my wife). It is all up to the person who creates the trust.

Avoid Some Estate Taxes

Living Trusts can be set up to help a married couple utilize the maximum estate tax credit for each of them. For couples who have between $5 million and $10 million, this can eliminate the tax that would otherwise be paid.

The federal estate tax is 40%, a very high rate. In 2008, the tax is applied to all assets of a deceased person over $5.25 mill in 2013 (adjusted each year for inflation). Therefore, if an individual dies with $6.25 million, there will be a $400,000 tax to be paid. If an individual dies with $100 million, the tax will be about $40 million. Pretty steep.

However, if a married couple plans properly, they can use both tax credits and pass $10.5 million estate tax free. A Living Trust can help accomplish this.

Avoid Probate
The process to transfer assets out of a deceased person's name is called probate. If all of a person's assets are in a Living Trust, there is no need for a probate.

A Living Trust acts like a corporation in this case, and it "owns" the property. Because the Living Trust does not die, there is no need for a probate. When a person dies, the trustee takes the assets in the trust and distributes them according to the instructions in the trust document. No court involvement necessary.

Plan For Incapacity, Avoid Guardianship
Often when a person becomes old or sick, they lose the ability to manage their assets. This sometimes makes it necessary for a court to appoint a guardian over their assets. The guardian could be a family member, or even someone you have never met. The cost of the attorneys and the court cost expended to get the guardianship will normally be charged to the person who needed the guardian.

However, if you have a Living Trust and you become incapacitated, the successor trustee chosen by you will automatically take over the handling of your assets. This, combined with a Health Care Power of Attorney makes a guardianship unnecessary.

Use Bank Trustee for Asset Control
A bank trustee can save days of miserable paperwork and give peace of mind in later years. A bank trustee is a secure and trusted institution to handle your assets. Often when people get older, they want someone else to deal with their money and investments. Watching their stocks, balancing the checkbook and paying taxes are too much of a bother.

That is why many people have a bank trust department as their Living Trust successor trustee. When they retire and have a large nest egg, they resign their trusteeship and allow the bank to take over growing their assets while they tour the world or spend time with grandchildren. No worries about bills, taxes, investments, tax deadlines, etc. Leaving this task to a relative could overburden them and create the possibility that they could make a mistake for which you would not have a remedy.

In case of death, a bank trustee is also a good choice for trustee because there is little chance for "borrowing" from the trust. If a family member is chosen to be a trustee, even though they are competent and honest, family resentments and mistrust can appear after your death. A bank trust department can be a neutral professional party to instill confidence and trust, and keep peace while assets are distributed.

Also, bank trust departments are insured, so if mistakes happen, you are often covered.

Administer Property in Several States
One other very nice feature of Living Trusts is their ability to avoid probate in many states at once. If you own real estate in more than one state, you need a probate procedure in each state when you die. However, if the Living Trust owns the real property, then you can own property in all 50 states and there will be no probate!

Protect Families When Spouses Have Been Married More Than Once
Many people use Living Trusts to protect their children from a previous marriage. Sometimes when a person dies, their spouse will change their will, cutting out the deceased spouse's children. By creating the proper terms in a Living Trust, you can avoid that problem for your kids.

A Living Trust can be drafted so that 1/2 of the estate is transferred to a separate irrevocable trust when the first spouse dies. The separate trust will pay the surviving spouse income for life, but eventually goes to the first spouse's children upon the second spouse's death.

Protect Assets From Creditors
After the death of the first spouse, any assets transferred to a Credit Shelter Trust from the Living Trust are protected from creditors. This asset protection feature is not an inherent feature of Living Trusts, but when they are combined with a Credit Shelter trust, this benefit is included. As long as money is transferred to the irrevocable Credit Shelter Trust upon the first spouse's death, then the surviving spouse's creditors cannot touch those assets.