Do I Really Need a Living Trust?
Seminars sponsored by attorneys or financial planners often promote revocable living trusts. You may have wondered if you really need what these seminars are selling. The answer is probably yes, but it may be for entirely different reasons than what the seminars may be telling you.
For large estates, a living trust or a testamentary trust can reduce estate taxes
Revocable living trusts are sometimes sold as a way to avoid estate taxes when you die. This claim may be true—if your estate would be taxable in the first place. The estate tax is now in flux: absent new legislation, for 2006 through 2008, an estate with a taxable base of $2 million or less would be exempt from estate tax; in 2009, the exemption will be $3.5 million; in 2010, the estate tax will disappear for one year; and in 2011 the estate tax will return with a $1 million exemption.
But even if your estate’s tax base would exceed these amounts, the same tax savings could be achieved by a testamentary trust—one that is established in your will and funded after your death. For most people, therefore, the main reasons to establish a revocable living trust are usually non-tax reasons.
Living trusts are a key part of incapacity planning
A trust continues to administer its assets for your benefit even if you become mentally incompetent. Someone else appointed by you becomes the successor trustee. If you have given this successor trustee a durable power of attorney, he or she can also place all of your remaining assets in the trust. These steps can avoid highly unpleasant court proceedings to appoint a conservator to be responsible for your affairs.
Trusts generally avoid probate court
Upon death, assets in trust are not subject to probate, which is the court procedure for distributing assets according to a will; or, if there is no will, by the laws of intestate succession. The length and costs of probate can vary greatly by the nature of the estate’s assets, but avoiding probate generally saves money in any estate.
In California, only estates worth $100,000 or more are subject to probate. And various assets, such as an IRA or 401(k), can bypass probate with proper beneficiary designations.
Trust administration is generally private
A revocable living trust is not administered by the probate court upon your death and, therefore, the value and the nature of your assets and the identity of your beneficiaries do not become a public record. At your death, notice must be given to all of your heirs and to all beneficiaries of your living trust, advising them, among other things, of their right to obtain a copy of the living trust. Compared to an estate in probate court, however, a revocable trust generally affords much greater privacy.
Be aware of risks and complications of a trust
Before establishing a revocable living trust, you should know about certain risks and complications. First, because your trust is generally not under direct court supervision, a trustee may be able to mismanage your estate to a greater extent than is possible in probate court, which provides various safeguards. Selecting a trustee who is trustworthy is therefore very important.
Second, the trust must be “funded” by transferring property into the trust. This involves re-deeding property and transferring various accounts. These are not necessarily expensive tasks, but they are essential to make your trust effective.
Third, beware of trust promotions by unqualified individuals or companies, who sell inexpensive, one-size-fits-all trusts—often as a “loss leader” in order to try to sell unsuitable annuities or other high-commission financial products.
Overall
Overall, a revocable living trust, if prepared by a qualified attorney, is generally an excellent idea for anyone with an estate subject to estate tax or probate administration or anyone who wants to be prepared for the possibility of incapacity.