In the last few years, there has been an explosion in the number of people using living trusts. While these trusts can be helpful, all too often they don't live up to their hype. Many entrepreneurs pushing living trusts are not attorneys and actually understand very little about the process involved in transferring a decedent's assets.
Living trusts are simply trusts that people set up for themselves. A testamentary trust is created (by a will) at the time an individual dies. Despite the sales pitches, living trusts are not new. They are hundreds of years old. The only recent development in living trusts is the tendency for individuals to name themselves as the initial trustee.
Experienced estate planning professionals do not recommend living trusts for every client, but reserve them for clients who will be helped by having living trusts. Promoters of living trusts, who often give free seminars to bring in new customers, are somewhat like the man who only has a hammer and looks at every problem as if it were a nail.
Here are a few of the myths about living trusts:
- A living trust will save taxes. This is a half-truth. Some living trusts will have a beneficial effect upon succession (estate and inheritance) taxes because they contain a specific type of trust. That is the credit shelter trust, which takes effect when the first spouse dies. This same provision may be incorporated into an estate plan in a will. There are no tax savings occasioned by having a trust that you begin during your lifetime as opposed to having a trust that begins with your death. It is the existence of the credit shelter trust, whether it is contained in a will or a living trust, that affects the tax savings.
- Using a trust avoids a will being contested. True, but only in a very limited way. If you transfer your property by trust rather than by will, there will be no will contest. However, there may be a trust contest. The two actions are all but indistinguishable, except that in most jurisdictions, there is a fairly short period of time during which a will contest must be brought, while an action to set aside a trust may not be so limited.
- Administration of an estate using a trust is simpler and less expensive than the administration of an estate through probate using a will. This is certainly not true as a blanket statement. When a person dies owning assets in his or her own name, whether individually or as a trustee, those assets must be transferred in one or more steps so that eventually they are in the hands of the intended beneficiaries. Such transfers are subject to approval by taxing authorities wanting to make sure inheritance tax is paid. The holder of the assets may be a bank (for a bank account) or a stockbroker or transfer agent (for securities). Those individuals would be liable if they permitted the assets to be taken by someone other than the person authorized to do so. Accordingly, these institutions insist on being satisfied that they are releasing assets at the direction of the proper person. This requires preparation of essentially the same documentation whether there is a trust or probate estate. There are no shortcuts or timesaving techniques that are used with a trust. The same steps must be followed.
The existence of an
inter vivos trust has no effect on estate or inheritance taxes; the IRS will spend just as long reviewing the return. This process takes at least six months and does not begin until the estate tax return is filed nine months after death. Since this is the most common reason for delays in the closing of a decedent's estate, it is difficult to see how having a trust hastens the overall completion of the administration.
An important related claim to the item above is that with a trust, distributions can be made immediately after an individual dies. Again, this is only part of the truth.
Typically, living trusts do not insulate assets from the claims of creditors and taxing authorities. If the trustee does make an early distribution and a creditor then makes a claim, the trustee is personally liable and is required to pay the creditor. So the advertisements are correct. You may make distribution immediately from a trust, it's just that no one of sound mind would do so until knowing the extend of all debts, expenses and taxes that will be due.
Most states now have simplified "unsupervised" probate procedures in which distributions can likewise be made when prudent, rather than waiting and getting court approval. It may be safer to make a distribution from a probate estate than from a trust because there are clear notice provisions and statutes of limitations for making claims against estates, while many states have no clear provision or limitation for making claims against assets held in trust.
Planning the disposition of an estate and limiting the total succession taxes is not a do-it-yourself project. This brief discussion of some of the myths surrounding the use of living trusts is meant to alert you to common misconceptions. Your best bet is to consult an experienced estate planning attorney who knows your particular state law and can advise whether a living trust is right for you. If you do not know an experienced estate planning specialist, ask the trust department at your local bank. They work with experts and should be able to help you.
