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The Living Trust: The Illusion Continues
by Rick Amrhein, EsquireEditors Note: This article is an updated version of one published in the spring of 1992. The author's photograph is new and improved also. Americans are accustomed to the coming and going of various trends. In the 60's it was love beads; in the 70's disco dancing; Yuppies in the 80's; rap music in the 90's; and carbs in the 21st century. Lawyers also run into trends. One continuing trend that frustrates many attorneys is a "living trust" (not to be confused with a living will). Since this article ran over a decade ago, especially our older clients continue to be flooded with flyers on windshields, stuffed in Sunday papers and mailboxes, and countless radio commercials and seminars promoting living trusts. Some persons, such as my editor, believe such promotions have reached alarming proportions. A "living trust" is one that is created and takes effect during a person's lifetime. A living trust is not a new creature as some publications suggest. It has been around since the early days of the English legal system. Briefly, a trust is created when you transfer your assets and their control to a trustee. The trustee is given directions on how, when, and to whom, to pay out income and/or principal. A person who sets up a trust may also be the trustee and recipient of the income. The trust may specify the distributions after your death. There are differences between "revocable" and "irrevocable" trusts. The simplest form of a revocable trust is an "in trust for" account. You have full use of it until you die. Only then does it become irrevocable. ITF accounts are 100% taxable for death tax purposes. On the other hand, an irrevocable trust once established is set in stone. You cannot change beneficiaries, you cannot change trustees, you cannot change your mind. These may be useful for large life insurance policies, but little else unless you fully intended to complete a gift to someone else but with strings attached. If you continue to receive income or have control over the final distribution by your will, it will be taxable. Even if you set it up for a grandchild but retain control, it will be included in your estate for death tax purposes. If you name yourself trustee, the government's theory is it was not a completed gift. A living trust can serve useful purposes. A trust allows others to manage your assets when you do not want to be bothered or feel you can no longer do it. It allows a trial run to see how your children behave while you are alive and can still make changes. A living trust may or may not protect your assets from creditors, or may save some of your assets for your children should you need long term nursing care. Unfortunately, a lot of exaggerated claims are made of living trusts. You may have heard claims that by creating a living trust you can avoid inheritance and estate taxes. Claims are made that they avoid the probating or filing of the will and related costs and attorney's fees, and keeps your affairs private. Such claims often are misleading; reality may prove a different picture. The only sure-fire method to avoid death taxes is to give everything away before you die. If you retain control as a trustee, retain the right to revoke the trust, and/or are the beneficiary during your life, your estate or your heirs will face Pennsylvania in-heritance taxes (which are modest) and possibly federal estate taxes (which are not). But you say: "At least I can avoid the cost of filing a will in the courthouse and related attorney's fees". The total cost related to filing and recording a will, including public advertising of the will, in most estates is less than $1,000.00. Fees for a lawyer and the executor are controlled and carefully observed by the court, beginning at 6% on the first $100,000.00 and then reducing in percentage as the size of the estate increases. Many of the legal and accounting fees will be incurred by a trust at your death, also. Now, if your estate rises to the level of say $5 million dollars, it might be worth comparing the savings of avoiding probate since the Register of Wills bases its fees on the size of the estate, i.e., the bigger the probate estate, the more the filing fees. Reality is that the creation of a trust has its own costs. The trust agreement must be prepared and all trust assets must be transferred to the trustee. The costs and fees involved may be, conservatively, two thousand dollars or more depending on the assets involved. Banks may charge ongoing administration costs. If you decide to end the trust, you then have the cost of putting all assets back in your own name. The only way a living trust will avoid the need for a will (and probate) is if everything is transferred to your trust. You must transfer your home, your cat, your thimble and your baseball card collections. If anything is overlooked an estate will be needed anyway. Notably, a car may be difficult to title in the name of a trust. Finally, you say: "But I don't like people knowing my business. Isn't a probate estate public?" Except for a legal notice that you may see in the paper, no one except those people directly involved know the details of an estate. Most financial information in estates is not filed until nine months or so after a person's death. It is unlikely your curious neighbors will check the courthouse records nine months after your flowers have wilted. Is a living trust right for you? Your decision requires a careful balancing of benefits against disadvantages. Our estate planners are prepared to help you and your accountant or other financial planner analyze your special needs and goals, and to help you make the right decision... for you now. |
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