Peacock Tales • Summer 2016
This article is an updated version of one first published in the Spring of 1992 and first updated in the summer of 2004. The author’s photograph has been “updated” also.
Americans are accustomed to the coming and going of various trends. In the 60s it was love beads, in the 70s disco dancing, Yuppies in the 80s, rap music in the 90s and social media in the 21st century. Lawyers also run into trends. One continuing trend that frustrates many attorneys is “living trusts” (not to be confused with a living will).
Since this article first ran over two decades ago our clients, especially our more mature ones, continue to be flooded with flyers on windshields, inserts in Sunday papers, mailboxes and email boxes and countless radio commercials and seminars promoting living trusts.
A “living trust” is one that is created and takes effect during a person’s lifetime. A living trust is not a new creature. 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 usually directs the distributions after your death.
There are differences between “revocable” and “irrevocable” trusts. The simplest form of revocable trust is an “in trust for” account. You have full use of it until you die. Only then does it become irrevocable. Revocable trusts are 100% taxable for death tax purposes.
On the other hand, an irrevocable trust, once established, is almost set in stone. You cannot change beneficiaries, trustees, or your mind, without the consent of all present and future beneficiaries. These may be useful for large life insurance policies, and for wealthy clients, including those with substantial oil and gas holdings, who intend to make a gift but with strings attached. If you continue to receive income from the trust or have control over the final distribution, that portion of the income stream or control you retain will be taxable at your death.
A trust allows others to manage your assets when you do not want to be bothered or feel you can no longer do so. It also 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 it may save some of your assets for your children should you need long-term nursing care. Living trusts may be recommended to clients who own real estate in more than one state.
You may have heard claims that with a living trust you can avoid inheritance and estate taxes. Assurances are made that they avoid the probating or filing of the will and related costs and attorney’s fees and they keep your affairs private. Such claims often are misleading, so much so that at least one attorney who was prolific in promoting and selling them was disbarred.
The only sure-fire method to avoid death taxes are to spend everything while you are alive, give everything away before you die, or give it all to charity after your death.
Many of the legal and accounting fees that will be incurred by an estate will also be incurred with a trust. The total cost related to filing and recording a 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. In Washington County, the Court has set the fees of an attorney handling an estate at 6%.
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. If you decide to end the trust, you 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, you own, 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. 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 newspaper, no one except those directly involved know the details of an estate. Most financial information in estates may not be 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? Our estate planners are prepared to help you, and your accountant or financial planner, analyze your specific needs and goals and help you make the right decision . . . for you.
Peacock Keller, LLP • 70 East Beau Street • Washington PA 15301 • 724-222-4520