Living Trusts: Are They For You?

By Diahann Lassus, CFP®, CPA

Feb 15, 2001 11:11 AM

Is a revocable living trust the right answer to your estate planning questions?

Maybe, but maybe not. The answer is much more complicated than we are led to believe by many of those who sell books, seminars, and software systems on living trusts. These individuals are trying to sell us a simple solution to a complex problem. So how do I decide whether or not a revocable living trust is right for me? First, let's think about what we are trying to accomplish.

What are my estate planning objectives?

For many of us, our objectives are pretty straight-forward. We want to make sure our family is taken care of financially when we are not around to take care of them. Or maybe we are concerned about estate taxes taking too high a percentage of our accumulated wealth? Or maybe we want to make sure that our family can't spend it all. There are many different objectives and we each may see them from a different perspective. The point here is an important one. We are all different and there is no simple solution to everyone's estate planning problem.

There are many ways to leave your assets to family members and I will just provide a few to put the living trust into a context for discussion. The first is you can leave your assets directly by naming individuals as beneficiaries of IRAs, insurance policies and even brokerage accounts today. These assets will pass directly to the individuals or organizations named regardless of what your will states. The second way to direct the distribution of your assets is by will. This means that assets not having a direct beneficiary named would normally be covered under your current will and would go to the designated beneficiary under your will. The third alternative that I will cover is establishing a trust during your lifetime so that assets pass directly to the named beneficiaries after your death. Now this certainly does not cover many technical aspects and I am not an attorney so I can't give you legal advice, but I hope you now have a basic framework for the next level of discussion concerning the living trust.

What is a revocable living trust?

A revocable living trust is a trust to which you transfer all or part of your assets during your lifetime. I read a wonderful description in an estate planning book where they refer to the trust as a box. So picture a box where you can place all your assets but still retain control of the box. You retain the right to the trust's income, to withdraw assets or add to the trust and the right to end the trust and take back all the assets. The major thing to remember here is that as the name implies, the revocable living trust can be revoked or killed at the whim of the grantor (the individual) who set it up.

Why would someone want to set up a living trust?

One of the primary reasons that people are encouraged to establish a living trust is to avoid probate. Probate is technically the process of proving a Will was in fact the Last Will and Testament of an individual who has passed away. Whether or not it makes sense to "try to avoid" probate depends on the process in your state. For many states, like New Jersey, the probate process is a very simple one and takes very little time. For these states, avoiding probate is not a good reason for establishing a living trust. And probate is not necessarily a bad thing. It does serve many useful purposes including serving as a forum to resolve disputes. If you live in New York or one of the states that requires all heirs to sign off before probate can be concluded, a living trust may make sense.

A living trust can allow a selected trustee to both manage the assets during your lifetime and distribute them after your death with the least number of complications. You may be too busy and want someone else to handle the assets, pay bills and basically administer your assets. This type of arrangement provides the opportunity to do that while still maintaining the basic control by being able to revoke the trust at any time (assuming this is written into the trust document by your attorney).

If you become mentally incompetent, the successor trustee named in your trust document can take control of the trust and avoid the cost of a conservatorship in many cases. A court appointed Conservator is often required in situations in which someone can no longer manage his or her financial affairs or personal care. A revocable trust can help avoid the expensive, complex, and frustrating court process if your family has to request that a court declare you legally incompetent. Note that you may need other legal documents such as a durable power of attorney to work through this process.

A revocable living trust allows you to retain almost total control of the assets during your lifetime and may provide the ability to control the timing and manner of distribution of assets. It also provides privacy. There will be very few people who would have access to the information about your assets, the beneficiaries you have named, etc.

A revocable living trust can provide effective and efficient transfer of assets. Because a trust can be named as recipient of almost any type of asset, you can consolidate your holdings into your trust for monitoring and administration. Upon your death, your estate can be structured so that other assets can "pour over" into this trust.

If you are having difficulty with dealing with wills and your estate plan, a revocable living trust might be a way to get past the psychological barrier of signing a will. It can be a starting point for getting your estate plan moving in the right direction to protect your family.

Now that we have covered some of the reasons for establishing a revocable living trust, let's look at some of the disadvantages.

A living trust may cost more because you have to manage and administer the trust during your lifetime. Your overall setup cost will be higher because you will need a will and a trust document. The trust does not replace the will. This trust document needs to be comprehensive and flexible enough to cover issues that arise during your lifetime. That means it will take more time in working with your attorney to make sure you include everything you might need.

Transferring assets to the trust involves costs and paperwork not required for less elaborate estate plans, such as a will. Retitling real estate or business interests may require the services of an attorney or other professional assistance and can required a significant amount of time.

Living Trusts will not save you income and estate taxes.

Many people are under a major misconception that a Living Trust will save taxes. This simply is not true. There are many ways to save income and estate taxes but this is not one of them.

 

Whether or not there is an advantage to "avoiding probate" depends to a great extent on the laws of the state in which you live. For many people, avoiding probate is not a good reason to go to the expense of establishing living trusts.

A revocable living trust is one of many available estate planning tools. It can be a very flexible and helpful tool when properly drafted by a knowledgeable and competent estate planning attorney. But it is not a one size fits all solution and can be potentially harmful when used without a clear plan. Regardless of what some sellers of books, seminars and software may tell you, revocable living trusts are not needed by everyone.

Define your objectives, meet with your financial advisor and your estate planning attorney and draft an estate plan that will help you sleep well knowing you and your family are protected.

Diahann W. Lassus, CFP®, CPA is Co-owner and President of Lassus Wherley & Associates, P.C., a Wealth Management Firm offering Fee-Only Financial Planning, Asset Management, Tax Services and Family Office Services. Lassus Wherley's headquarters is located in New Providence, New Jersey with a branch office in Naples, Florida. www.lassuswherley.com