An Overview of Living Trusts

E. Other Advantages of a Living Trust

As you know, the main reason for setting up a revocable living trust is to save your family time and money by avoiding probate and perhaps estate taxes as well. But there are also other advantages. Here is a brief rundown of the other major benefits of a living trust.

Out-of-State Real Estate Doesn't Have to Be Probated in That State

The only thing worse than regular probate is out-of-state probate. Usually, an estate is probated in the probate court of the county where the decedent was living before he or she died. But if the decedent owned real estate in more than one state, it's usually necessary to have a whole separate probate proceeding in each one. That means the surviving relatives must find and hire a lawyer in each state, and pay for multiple probate proceedings.

With a living trust, out-of-state property can normally be transferred to the beneficiaries without probate in that state.

You Can Avoid the Need for a Conservatorship

A living trust can be useful if the person who created it (the grantor) becomes incapable, because of physical or mental illness, of taking care of his or her financial affairs. The person named in the living trust document to take over as trustee at the grantor's death (the successor trustee) can also take over management of the trust if the grantor becomes incapacitated. (See chapter 7.) When a couple sets up a trust, if one person becomes incapacitated, the other takes sole responsibility. If both members of the couple are incapacitated, their successor trustee takes over. The person who takes over has authority to manage all property in the trust, and to use it for the grantor or grantors' benefit.

EXAMPLE: Wei creates a revocable living trust, appointing herself as trustee. The trust document states that if she becomes incapacitated, her daughter Li-Shan will replace her as trustee and manage the trust property for Wei's benefit.

If there is no living trust and no other arrangements have been made for someone to take over property management if you become incapacitated, someone must get legal authority, from a court, to take over. Typically, the spouse or adult child of the person seeks this authority and is called a conservator or guardian. Conservatorship proceedings are intrusive and often expensive, and they get a court involved in your personal finances on a continuing basis.

Your successor trustee has no power to make health care decisions for you if you become incapacitated. If your preference is to die a natural death without the unauthorized use of life support systems, you'll want to prepare and sign health care directives. (This is discussed in chapter 15.)

Your Estate Plan Remains Confidential

When your will is filed with the probate court after you die, it becomes a matter of public record. A living trust, on the other hand, is a private document. Because the living trust document is never filed with a court or other government entity, what you leave, and to whom, generally remains private. There are just a couple of exceptions. First, records of real estate transfers are always public, so if your successor trustee transfers real estate to a beneficiary after your death, there will be a public record of it. Second, some states require the successor trustee to disclose information about your living trust to trust beneficiaries. These requirements are explained in chapter 14.

A handful of states require that you register your living trust with the local court, but there are no legal consequences or penalties if you don't. (Registration is explained in chapter 12.) Also, registration of a living trust normally requires that you just file a paper stating the existence of the trust and the main players -- you don't file the document itself, so the terms aren't part of the public record.

In most cases, the only way the terms of a living trust might become public is if -- and this is very unlikely -- after your death someone files a lawsuit to challenge the trust or collect a court judgment you owe them.

You Can Change Your Mind at Any Time

You have complete control over your revocable living trust and all the property you transfer to it. You can:

• sell, mortgage, or give away property in the trust
• put ownership of trust property back in your own name
• add property to the trust
• change the beneficiaries
• name a different successor trustee (the person who distributes trust property after your death), or
• revoke the trust completely.

If you and your spouse create the trust together, both spouses must consent to changes, although either of you can revoke the trust entirely. (See chapter 13.)

No Trust Record Keeping Is Required While You Are Alive

Even after you create a valid trust that will avoid probate after your death, you do not have to maintain separate trust records. This means you do not have to keep a separate trust bank account, maintain trust financial records, or spend any time on trust paperwork.

As long as you remain the trustee of your trust, the IRS does not require that a separate trust income tax return be filed. (IRS Reg. § 1.671-4.) You do not have to obtain a trust taxpayer ID number. You report all trust transactions on your regular income tax returns. In sum, for tax purposes, living trusts don't exist while you live.

You Can Name Someone to Manage Trust Property for Young Beneficiaries

If there's a possibility that any of your beneficiaries will inherit trust property while still young (not yet 35), you may want to arrange to have someone manage that property for them until they're older. If they might inherit before they're legally adults (age 18), you should definitely arrange for management. Minors are not allowed to legally control significant amounts of property, and if you haven't provided someone to do it, a court will have to appoint a property guardian.

When you create a living trust with this book, you can arrange for someone to manage property for a young beneficiary. In most states, you have two options:

• Have your successor trustee (or your spouse, if you created a shared living trust) manage the property in a child's trust until the child reaches an age you designate.
• In all but two states (South Carolina and Vermont), you can appoint an adult as a "custodian" to manage the property until the child reaches an age specified by your state's Uniform transfers to Minors act (18 in a few states, 21 in most, but up to 25 in a few).

Both methods are explained in chapter 9.

No Lawyer Is Necessary to Distribute Your Property

With a living trust, the person you named as your successor trustee has total control over how the property is transferred to the beneficiaries you named in the trust document. With a will, technically the person in charge of the property that passes under the terms of the will is the executor you named in the will, but the probate lawyer usually runs the show. This can include the personal show as well as the silly court show. I've heard of a lawyer calling a family in for a reading of the deceased's will immediately after the funeral service, which some family members found highly insensitive. There's much less chance of this type of crassness if only close personal relations are involved in the transfer of the property.

Next: F. Possible Drawbacks of a Living Trust

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