But do you know what a trust is? Do you know what purpose it serves?
And…should you have one?
To determine whether a living trust is appropriate for your estate plan, it is important to understand what it is and how it works.
What is it?
There are many types of trusts that accomplish various estate planning objectives, from reducing estate tax exposure to avoiding probate administration. A trust, in general, is a written document that provides for the management of property. A trust is an arrangement among three basic parties:
- the grantor who creates and funds the trust
- the trustee who manages the trust
- the beneficiaries who are or will be entitled to funds from the trust
A living trust (“living” because you create it now, while you are alive), is a written document that will typically explain how you want any money in the trust to be spent during your lifetime and how you want any money in the trust distributed after you die. The grantor of a living trust is typically also the trustee of the trust while she is alive and capable of managing the assets. The living trust should name a successor trustee to take over managing the trust once the original trustee is no longer able to handle the trust herself.
You can make changes
A living trust is revocable, meaning that the grantor can amend or revoke the trust at any time. Since the grantor retains the power to change or revoke the trust, the grantor still retains as much control over the assets in the trust as if she still owned them outright. A living trust is, in essence, your personal checkbook – you can do with the assets whatever you wish. Although the trust is the legal owner, the IRS treats you as the owner because you really have not parted with control – you can take the assets out of the trust for your personal use at any time and for any reason. You suffer no loss of control or of income.
In addition, because the IRS treats the grantor as the owner of any money in the trust, any income earned will be reported on the grantor’s personal 1040 Income Tax Return. No separate income tax return is necessary so long as the grantor is the trustee or co-trustee.
On the other hand, since a living trust is revocable and the grantor retains control over the assets, any assets in the living trust at the grantor’s death are includable in the grantor’s gross estate for estate tax purposes. This is an important point: a living trust does not of itself save any estate taxes. For this reason, there is no minimum net worth or wealth that is necessary to consider creating a living trust.
So Why Create a Living Trust?
There are three basic reasons why a living trust is a useful estate planning tool:
Any assets that you have transferred to the trust during your lifetime will avoid probate administration after you die. Generally, when a person dies owning any assets in his sole name, the probate court will oversee the proper distribution of those assets. Probate administration involves filing various forms, reporting on assets and expenditures, attending hearings, providing notice to interested parties, and allowing creditors a forum to bring claims. Assets properly transferred into a living trust will not require probate administration and will thus avoid the paperwork, hearings and other steps. The trustee or successor trustee will simply distribute the assets according to the terms of the living trust.
It is important to note that although assets in a living trust do not need to go through probate administration, those assets must still be reported on the Connecticut estate tax return, regardless if estate tax is actually due. If no estate tax is due, the Connecticut estate tax return is filed with the local probate court and the court assesses a fee based on the total amount reported on the return – including the value of the living trust. Using a living trust, therefore, does not avoid probate fees.
Keep things private
A living trust may be a useful tool in the privacy it affords. If you have a Will and go through probate administration, your Will becomes a public document that anyone can read. The terms of a living trust, however, are not public. You may have particular reasons for desiring privacy – from leaving unequal distributions to children or making donations to certain charities. In our practice, we have found that this privacy element is seldom the motivating factor for using a living trust.
Ensure proper management
Another benefit of the living trust is to ensure proper management of your assets in the event you are physically or mentally unable to manage the assets on your own. If you have transferred assets into a living trust and at some later point become incapacitated, the successor trustee you have appointed will be able to take over the management of your assets according to the terms you set up.
Should you become either physically or mentally disabled, then, if your assets are in a living trust, your successor trustee will continue to manage the trust and its assets in accordance with the terms that you established. There is no need to seek a conservator in the probate court and a probate court, in the exercise of its discretion, can now refuse to appoint a conservator if it feels other arrangements are in place, such as living trust, for the incapacitated person.
The Need to Fund the Trust
You should realize the above benefits only if you actually fund your living trust. Some people will create a terrific living trust and not fund it, either intentionally or by accident. If it is intentional, the person likely has a “pour over” Will so that in the event the person owns any assets in their name at the time of their death, their “pour-over” Will, which was prepared as a part of their estate plan, provides that those assets are to be added to the assets of the previously created, but unfunded, living trust, so that they will be distributed as provided in the trust. However, all such assets will be subject to probate at death before they are added to the trust.
A living trust may or may not be appropriate for you – as with many planning strategies, it depends on your particular circumstances. To learn more and to find out if you should include a living trust in your estate plan, don’t hesitate to give us a call.