Living Trust

THE LIVING TRUST

The living trust or revocable living trust has become a popular estate planning vehicle which has been touted as saving probate costs, saving estate taxes, saving income taxes and as advice for the management of property in case of disability. Moreover, these trusts are being sold by mail order houses which boast of these benefits and offer them to individuals with self‑help instructions.

WHAT IS A LIVING TRUST?

A trust is a legal entity where legal title to property is held in the name of the trustee who must manage and apply the property only for the benefit of the beneficiaries and not for the benefit of the trustee. Trusts are as old as the common law tradition in England from which our law stems.

To exist, a trust must have a trust agreement which spells out the terms under which property is held by the trust and property delivered to the trustee for administration. There is an old saying that there is no trust without property. A trust will not fail, however, for the lack of someone to act as trustee; it continues during a period of vacancy.

Trusts may be created either during the lifetime of the creator ("grantor") or after the creator's death. In the former case, the trust is referred to as a living trust; in the latter case, it is called a testamentary trust and is created under a will.

Trusts may be changed by the creator; these are referred to as revocable trusts. If changes can be made only with court approval, they are irrevocable trusts. All testamentary trusts are irrevocable. Revocable living trusts become irrevocable upon the death of the creator.

LIVING TRUSTS AVOID PROBATE

Probate is the collection, administration and distribution of property in the sole name of the deceased. Examples of property which avoid probate are joint tenancy property, pay on death accounts at financial institutions, life insurance, IRA's, pension, profit‑sharing and other retirement programs. Living trusts also avoid probate because the trustee, not the creator, holds title to the property. 

LIVING TRUSTS AVOID THE EXPENSE OF PROBATE

Because living trusts avoid probate, there is no administration expense to pay and no delay caused by court involvement.

What are the costs of probate? In Colorado, attorney fees for administering decedent's estates are charged generally on an hourly basis. There is no percentage fee charged. Fees can range from$1,000 up depending on the number of disputes involving the estate, the nature and location of assets, and whether a state and federal estate tax will be levied against it. In New York, Pennsylvania and California, the charges are based on fixed percentages despite how little or how much work is done. My experience is that 80-90% of the tasks performed by a Trustee upon termination of the Trust are also done by a Personal Representative of a probate estate, that is, the assets that passed by a will or by the laws regarding inheritance without a will.

With the assistance of an attorney, the cost of the preparation of a living trust and properly funding it with assets can range from $500 to $5,000 depending upon the terms of the trusts and the amount of the assets subject to it.

LIVING TRUSTS PROVIDE PRIVACY

   An inventory and an accounting are usually required in probate estates regardless of whether the deceased person signed a will or not. The public may have access to the probate file unless for “good cause” a Court restricts access to the file to only the people involved with the Estate. By contrast the inventory and accounting may be shared only among the beneficiaries of the Trust, the trustee, etc. No stranger need have access to the financial affairs of the person who created by the deceased individual.

 LIVING TRUSTS DO NOT SAVE INCOME TAXES

Income from property held in a revocable living trust will be reported to the creator. There is no difference in tax treatment and no income tax savings. In fact, while the creator is also the trustee, the individual's social security number will continue to be used.

LIVING TRUSTS MAY NOT BE USED TO DEFEAT CREDITORS

Colorado law specifically states that no creditor may be defeated by transfers to a living trust. Additionally, Colorado’s current trust law does not provide for a way for a trustee to shorten the claim period for claims. In probate estates, the claims may be limited. Generally, with my probate cases, the claim period is usually over within six months of my first meeting with my client. Without the ability to speed up the filing of claims, claims may be filed for up to one year after death.

LIVING TRUSTS MAY SAVE ESTATE TAXES

For a husband and wife, living trusts may have provisions which take advantage of two death tax credits which will protect up to $4,000,000 from estate taxes. Wills, however, can also accomplish the same savings if property is properly held by a husband and wife. Few clients, however, have estates in excess of $2,000,000 that would justify such planning. Proper planning is needed in both cases; the assistance of an attorney is essential.

LIVING TRUSTS ARE EXCELLENT VEHICLES FOR MANAGING ASSETS

Since most people who create their own trusts are also the trustee, most living trusts provide for a successor trustee if the creator becomes disabled. If the trust is fully funded, the new trustee simply takes over administration of the trust. If the trust is not funded at the time the disability occurs, but used in a "standby" capacity, or if it is only partially funded, then assets should be added to it to avoid probate and to properly manage all assets.

   Living trusts are a superior device for managing real estate if the creator, settlor, is disabled. Since the real estate would have been conveyed to the Trust, title companies easily acknowledge the authority of a successor trustee regardless of how long ago the trust created. By contrast, a general durable power of attorney may not be acknowledged if it was signed within the last year.

    A durable power of attorney is essential to accomplishing the complete funding of a trust in this situation. Why a durable power? The power must be used during the disability of the creator ("principal") so that the agent's authority will not be questioned.

PITFALLS FOR LIVING TRUSTS

    I recently came across a "mail order" living trust while handling a decedent's estate. The creator thought she was disposing of the property that was in the trust and, yet, no property was ever transferred to it. Consequently, since the trust owned nothing, it could not dispose of any assets!

    The creator also failed to execute a will in coordination with the trust. The living trust should always be used in conjunction with a "pour over will". The will directs that all separate property of the deceased be delivered to the trust. In this way, additional assets are made part of one plan.

CONCLUSION

    Living trusts are extremely useful devices for clients who wish (1) to avoid probate and (2) to take responsible steps to plan for management of their assets during their disability. They are also capable of saving estate taxes for certain clients.