Much has been said in recent years about living trusts with some advisers vigorously encouraging everyone to have one. This article is intended to clear up some misconceptions concerning living trusts and to identify when they are appropriate. Basically, a living trust (also referred to as a revocable trust) is established and exists during the trustor’s lifetime and, like a will, can be the cornerstone of an estate plan.
To Avoid Probate
In some states, the probate process is costly and time consuming, and therefore, worth avoiding. In these states the use of a living trust is fairly standard. Assets that have been transferred to a living trust during the lifetime of the trustor are administered as part of the trust and need not be probated as part of the estate after the trustor’s death. In order to avoid probate, all assets must be transferred to the trust. In Minnesota, probate administration has been substantially streamlined and the advantage of a living trust solely for simplification purposes is minimized. However, a Minnesotan who owns real estate in more than one state may be able to save the administrative costs of multiple probates through the use of a living trust.
Many states require a probate proceeding even when the decedent’s only asset in that state was an interest in real estate. These states require someone to be appointed by the court as an executor or personal representative and is given the authority to administer the estate of the decedent, including transferring title to real property located in the state. If real estate is held by a properly funded living trust, probate may be avoided in both Minnesota and the jurisdiction that is the situs of the real estate.
To Minimize Estate Taxes
The assets included in a living trust are subject to estate taxes in the same fashion as assets owned by a decedent individually. The unlimited marital deduction and the current $5,430,000 federal and $1,400,000 Minnesota state tax exemptions are available to a decedent’s estate regardless of whether or not a living trust has been established. The living trust does not afford any tax advantages over a will as the primary estate planning vehicle.
To Obtain Asset Management Assistance
A living trust may be an appropriate way to obtain asset management assistance during one’s lifetime in the event of incapacity. To obtain this assistance, a corporate fiduciary or an individual should be named successor or co-trustee. The use of a living trust for this purpose may be less expensive and less burdensome than a guardianship or conservatorship. In some situations, alternatives to the living trust, (such as a durable power of attorney or an agency account with a financial institution) may be appropriate for asset management.
The documents filed in a probate proceeding are public and the application for probate must contain an estimate of the value of the decedent’s assets. A living trust is not, however, required to be filed with a court, nor does the trustee need to file an inventory of the trust assets in most circumstances. The estate tax return, which contains a complete list of the decedent’s assets including their value, must be filed by the personal representative or the trustee and is confidential in either case. Generally, the disclosures made in a probate proceeding are nonspecific in nature and rarely are they reviewed by the public.
Additional Pros and Cons
Some of the additional advantages of a living trust include:
- Flexibility. Unlike an irrevocable trust, living trusts normally can be amended or revoked by the grantor as long as he or she has capacity, much like a will.
- Lost or destroyed originals. When administering an estate, an executor or personal representative often needs to produce the original will.
In Minnesota, if the original will was in the possession of the decedent and cannot be found, it is presumed revoked. Original living trusts are generally not required for their administration. There are few disadvantages and myths regarding revocable trusts that should be addressed. In addition to providing no tax advantage, assets of a revocable trust are available to creditors of the trustor. Also, revocable trusts are generally more expensive to set up and, in order to effectively avoid probate, the decedent’s assets need to be transferred to the revocable trust. While there could be some minimal savings in the administration of a trust over the administration of a decedent’s estate, much of the savings is spent when originally designing and implementing the estate plan.
A living trust may be advisable for an individual who owns real estate in several states or wishes to obtain asset management assistance. For someone without these concerns, however, a living trust may not be worth the additional cost and complexity if his or her estate planning objectives can be met efficiently and economically with a well drafted will.