If you've ever thought about a living trust, it's probably because you hate the idea of going through probate. Living trusts have been heavily marketed on that basis over the past several years and, yes, living trusts certainly do avoid probate. But, there's a whole lot more to living trusts than just that. In fact, avoiding probate is not even oneof the top three reasons for a living trust. In my opinion, it's #4. To set the record straight, here are the top 6 reasons why you should have a living trust.
Reason #1: Protecting Property for Certain Beneficiaries. This is seldom mentioned as a reason for a living trust, but it's probably one of the most important reasons. When most of us think about estate planning, we think about giving our property to our husband or wife, our children, and other loved ones after we die. However, sometimes our intended beneficiaries just aren't able to handle an inheritance. Minor children are the usual suspects here. Many states don't even allow minor children to own property because they're just too young. Instead, the state appoints a guardian to hold the property until they reach majority age (usually age 18). Even then, parents cringe at the thought of an 18-year old getting any amount of money. The first thing they might do is quit school, buy an expensive car, and head to Cancun.But, minor children aren't the only ones who squander money. Most experts agree that no one under the age of 25 should be given an inheritance outright because they need time to finish school and start a career. Of course, there are many people over the age of 25 that shouldn't have money either. Some are spendthrifts at heart, others are in not-so-good marriages, still others are going through bankruptcy. Then there are those who are just too frail and incapacitated to manage property on their own. Giving any amount of property to any of these people is never a good idea.
That's when a trust becomes a vital part of your estate planning. A trust allows you to have your cake and eat it too. Let's take a look at a typical example and see how it works. Let's say that you have a 20-year old son who is a junior in college. If you and your wife both die, you want your son to get all your property, including the equity in your home, your life insurance, retirement plans, etc. If you reduce all your property to cash, it could easily amount to $500,000 or more. But, having your executor write a check to your son for $500,000 is probably not a good idea. Instead, it would be far better to create a trust for your son with someone else, say a friend, family relative, attorney, or your local bank, as trustee. The trustee would hold the money and invest it for your son's benefit until he reached a more mature age, say age 25. In the meantime, your trustee would use the money to pay for your son's schooling, his general living expenses, and any other expenses you might specify in the trust instrument - including a down payment on a home or a new business. When your son reaches the specified age, the trust would end and your son would be given a check for the full value of the trust at that time.
Revocable living trusts have been used to protect property for hundreds of years, and it is probably one of the most important reasons for a revocable living trust today. If you have any beneficiaries who are in this position, then a revocable living is a necessary component of your overall estate planning.
Reason #2: Reducing or Eliminating Estate Taxes. Many people say that a revocable living trust doesn't save estate taxes. Technically, they're right. There are no provisions in the federal tax laws that exempt revocable living trusts from estate taxes. However, living trusts are often used by individuals and families to take advantage of certain deductions and credits allowed under the tax laws. That sounds like double talk, but let me explain. For individuals dying this year, up to $1,500,000 is exempt from federal estate taxes. This exemption is referred to as a "unified credit." Besides the unified credit, no estate tax is levied on any property passing to a surviving spouse. This "marital deduction" is unlimited, so you could transfer any amount of money to your spouse without paying estate taxes.
Here's what typically happens when a husband and wife have simple wills. Let's assume that each of you has a $1,000,000 estate. Let's also assume that you die first and that your will leaves all your property to your wife. Your estate pays no estate taxes because of the marital deduction. Upon your wife's subsequent death, her property (then $2,000,000) is left to your children. Your wife's estate would then have to pay an estate tax of roughly $235.000, since your wife's unified credit covers only the first $1,500,000 of her property. The remainder is taxed at graduated rates reaching 47%.
You can eliminate this $235,000 estate tax very easily with a revocable living trust. Let's assume, for example, that you only give your wife $500,000 and that the other $500,000 is put into your revocable living trust. Your estate still doesn't pay an estate tax because the property given to your wife is exempt under the marital deduction and the property given to your trust is exempt under your unified credit. Now, however, your wife's estate is only worth $1,500,000 (her original $1,000,000 plus the $500,000 you gave her). Upon her death, no estate taxes will be paid by her estate because the entire $1,500,000 is covered by her unified credit. The $500,000 in your revocable living trust is not taxed in your wife's estate because she didn't own it, even though she was the preferred beneficiary and could receive distributions if she needed some money.
This very simple but highly effective technique - made possible by the use of a revocable living trust - would eliminate roughly $235,000 in federal estate taxes in the above example. For this reason, any married couple with a combined estate in excess of the unified credit (currently $1,500,000) should consider a revocable living trust to take advantage of this tax-saving technique.
Reason #3: Managing Property upon Incapacity. One of the major concerns that many of us have today is not about dying - it's about living too long! We see it all around us - we worry about our parents living in their own home. We worry about their bills being paid and whether someone will walk off with their money. In many cases, we are powerless to help them because all of their property is in their own name. Unfortunately, without doing some prior planning, the only option we have is to file an application with the probate court to have a guardian appointed for them. That's a gut wrenching experience because all their personal and financial affairs will have to be paraded before total strangers, and they will be forced to suffer the indignity and humiliation of being declared incompetent.
It doesn't have to be that way. Many people try to avoid that result by putting certain properties (particularly checking and savings accounts) in joint name with a son or daughter. That enables the son or daughter to pay their bills, but it doesn't provide a lot of help with other financial matters. It also creates more problems when the parent dies because those accounts pass automatically to the son or daughter and leaves the other children out in the cold.
You can find the rest of this article, including the final 3 reasons why you should have a living trust, by following this link: 6 Reasons
Copyright 2005. LivingTrustNetwork, LLC. All rights reserved. http://www.livingtrustnetwork.com
About the Author
Attorney Michael Pancheri is the founder and CEO of the Living Trust Network. You may contact him by email at info@livingtrustnetwork.com.