Introduction
This information helps you answer the question: “Should I have a revocable living trust?” Living trusts are not for everyone, but they are becoming more common. Individuals whose estate planning goals have stabilized or who hold assets in more than one state, especially, should consider a trust. Many have found living trusts a desirable approach to estate planning.
The Schmiedeskamp Estate Planning and Administration Group
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What's a Trust?
A trust is a legal relationship between a trustee and the trust beneficiaries. The trustee holds the trust assets for the benefit of the beneficiaries under the terms of the trust. Living trusts often initially have the same trust creator, trustee and trust beneficiary.
What is a Living Trust?
There are many types of trusts. A living trust is a trust created during one's lifetime. It is also called an inter vivos trust.
Is a Living Trust a Probate Asset?
A living trust is a type of non probate asset. What this means is that the assets in a living trust may be distributed without formal court supervised administration where the creator of the trust dies. The primary reason most people establish a living trust is because of this benefit – probate is avoided.
There are many ways to hold title to assets. Some assets are known as "probate assets." This means they pass as you provide in your will. Probate assets are titled in one’s individual name. Other assets are "non probate assets." These assets pass outside of a will. Joint tenancy, tenancy by the entirety, and beneficiary designations are common examples of non probate assets. Beneficiary designations on insurance policies or retirement plans are examples of non probate assets. Again, a trust is a type of a non probate asset.
A good way to compare wills versus trusts is to think of one’s estate plan as a basket. When a person dies with a will, an empty basket is given to the legal representative of the person’s estate or executor. The executor is then directed to fill that basket with all the person’s assets and after paying any debts distributes the basket as provided in the will. The process of filling the basket is what we call probate and requires that the executor be appointed by a court. Where a person has a living trust, the basket is filled during the person’s lifetime. Probate is not necessary to fill the basket because the titles have already been changed. At the person’s death, the filled basket is then given to a successor trustee who need not be appointed by a court but is designated in the trust. The successor trustee without court involvement then distributes the basket as set forth in the trust. What a trust does is fill the basket before death, thus avoiding the need for probate.
How is a Trust Established?
Living trusts are normally established by executing a trust agreement and transferring assets to the trust. The trust document is executed by the person creating the trust, usually referred to as the settlor, grantor or declarant of the trust. It is also signed by the trustee who may be the trust creator, another person or a corporate trustee such as a trust company or bank.
Why Are Living Trusts Created?
Living trusts are created to serve a number of personal and financial goals or objectives. Common among these goals are the following:
Are there Disadvantages to Living Trusts?
Although there are many advantages to living trusts, there are a number of disadvantages as well. Commonly cited disadvantages are:
Are There Assets Not Appropriate for Trusts?
Not all assets may be placed in a trust. Some investments, commonly limited liability partnerships or professional practices, may not be placed in a trust. Other examples of asset that are not transferred to a trust are annuities and retirement plans. Transferring such assets to a trust may accelerate income taxes. Although these assets may not be placed in the trust, a trust may be the beneficiary of these assets. Special care is required with regard to retirement plans if there is a desire to continue to defer tax on benefits. Trusts may be written to allow continued deferral of income taxes to some extent where retirement plans are involved.
Are There Other Types of Trusts?
This material aims at trusts that may be changed and aims mostly to avoid probate. There are other types of trusts that may be established. Some are designed to hold insurance, allow for annual gifting, provide for charitable giving, enable a person to qualify for public nursing home assistance, and for other purposes. These are specialized trusts for specific purposes. It is important to make certain your attorney knows just why you wish to have a trust.
Are There Other Types of Trusts?
This material aims at trusts that may be changed and aims mostly to avoid probate. There are other types of trusts that may be established. Some are designed to hold insurance, allow for annual gifting, provide for charitable giving, enable a person to qualify for public nursing home assistance, and for other purposes. These are specialized trusts for specific purposes. It is important to make certain your attorney knows just why you wish to have a trust.
May Living Trusts Be Revoked or Amended?
Most living trusts that are created are subject to being revoked or amended. They are referred to as revocable living trusts. For some specialized estate planning purposes, trusts may be created that are not subject to being revoked or amended, but where a living trust is used to designate how property will pass at death, they typically may be revoked or amended.
Can I Be the Trustee?
Wide discretion exists in selecting a trustee. The creator of a living trust will usually be the initial trustee of a revocable living trust. A successor trustee is named to serve in the event the initial trustee may no longer serve. Individuals are frequently selected. However, it is important to make certain that the individual is capable and trustworthy.
Professionals may be retained to serve as trustee, such as trust companies or banks with trust departments. This is particularly useful where the trust assets warrant professional management or family circumstances warrant. However, there is no legal requirement that you use a corporate trustee. Family members or others often may be quite capable of serving as a trustee. Where independence is required or special family situations exist, professional management may be helpful.
There are some trusts where limitations exist on who may serve as trustee. These usually involve tax planning used for gifting. However, again, for the customary revocable living trust, this is not an issue.
Is There a “Right” Time to Create of Living Trust?
There is no “right” time to create of living trust. However, it is usually best for the business dealings of the trust creator to be less fluid or active when a trust is established. The most frequent time to have a trust (unless there are other reasons for it) is when a person reaches retirement or retirement age. Folks also may wait too long to establish a trust. Where a person is much older, ill or nearing the end of life, taking the time and energy to establish and fund a trust is usually unwise. This doesn’t mean that a trust may not be done. Each person, though, must consider whether it is right for them.
Where a Trust is Created, Is There a Need for a Will?
A will is still executed whenever a living trust is used. This is known as a "pour over will." This name derives from the fact that when a person dies, that person's assets are poured over into the trust. The will may not necessarily be probated or administered in court, but serves as a backup should any assets not be transferred to the trust or if the trust is invalid for any reason. The pour over will simply provides that assets not included in the trust pass to the trust for disposition.
Does a Living Trust Guarantee No Probate?
Where there is a living trust, probate often will not be required. However, a living trust does not guarantee there will be no probate. Probate may be required for a variety of reasons. Probate may be required where some assets are not transferred to the trust, to bar claims, or to pursue or defend claims. Some professional trust officers also insist that an estate be opened in order to prepare and file federal and state estate tax returns.
Does a Living Trust Eliminate Estate Taxes?
A living trust does not, in and of itself, eliminate estate taxes. This is a common misunderstanding. Whether estate taxes are eliminated depends on the size of the estate and the way the trust (or a will) is written. For most living trusts, there is not necessarily any advantage or disadvantage to a living trust. It is neutral. However, both trusts and wills may be written to reduce taxes in some cases.
Does a Living Trust Prevent Me From Having Use of My Assets?
Under the terms of most living trusts, there is really little difference from holding assets in your own name. A revocable living trust does not prevent you from having use of your assets, removing assets from the trust, or borrowing against trust assets. They remain your assets … the trust is simply a way to hold those assets.
Is a Living Trust the Same as a Living Will?
A living trust and a living will are not the same. A living will refers to a declaration that a person does not want any extraordinary means used to delay the moment of death if the person’s condition is such that death is imminent and inevitable. It states one’s wish to not be kept alive where there is no hope of recovery. A living will does not have anything to do with the disposition of assets. That’s what a living trust does. The term living will is not descriptive of what it does and is confusing. Some states, such as Missouri, use the term advanced directive that describes what a living will actually does.
Does a Living Trust Affect Eligibility for Public Assistance?
Assets in living trusts remain your assets. Therefore, for Medicaid and other public assistance purposes, the assets are considered as belonging to you. Accordingly, the usual living trust does not protect assets from covering nursing home expenses or make one eligible for public assistance. For assets to be protected for public assistance purposes, a special trust may be used. In general, the trust must be established at least sixty (60) months before applying for public assistance. Even then, whatever interest (e.g., income) held in the trust is treated as your asset. What this means is that in order to work, the trust creator must give up any right to the principal of the trust. Most living trusts are not created to become eligible for public assistance. If public assistance eligibility is the priority, that should be separately discussed.
Is a Living Trust For Me?
The decision to establish or not establish a living trust is a personal decision. Most people who have established a living trust have a real interest and preference for this estate planning tool. These individuals are normally happy with that decision. However, others do not consider it worth the time, expense or effort and prefer the simplicity of a will. Neither decision is necessarily right or necessarily wrong. A living trust is certainly worth serious consideration for many.
Please note that this discussion provides general information. It is not intended to provide specific or personal legal advice.
This is not intended to be legal advice, but rather, to provide accurate information regarding estate, trust and wealth preservation. For more information regarding these matters, please contact any member of our estate, trust and wealth preservation group: James A. Rapp ( jrapp@srnm.com ), Ted Niemann ( tniemann@srnm.com ), Harold B. Oakley ( hoakley@srnm.com ), Michael A. Bickhaus ( mbickhaus@srnm.com ), Jeffrey L. Terry ( jterry@srnm.com ) or Joseph B. Ott ( jott@srnm.com ). Our telephone number is (217) 223-3030. Please visit our website: www.srnm.com. We invite and welcome all questions and comments. © 2013 Schmiedeskamp Robertson Neu & Mitchell LLP Vol. 2015-1