MYTHS AND FACTS OF LIVING TRUSTS
Most people considering estate planning
have heard of “living trusts.” They are often advertised in
newspapers and seminars as the only way to save taxes and avoid
probate. The advertising and hype can often be misleading. This
discussion seeks to explore some of the myths surrounding “living
trusts.”
In most instances “living trusts” are very useful, and as a general
rule, I recommend the use of a living trust. However, if a revocable
living trust is not properly funded, maintained, and administered
after death, the trust may be useless. Each individual’s case must
be carefully considered to determine the advisability of creating a
“living trust.”
DEFINITION: A “living trust” is a trust created by a married
couple or a single person during life. If the trust is created by a
married couple, it can be revoked or amended while both are alive
and competent. A single person who creates living trust can also
revoke or amend it. A “living trust” is properly known as an inter
vivos revocable trust, or simply as a “revocable trust.” In the
discussion of myths and facts which follows, the term “revocable
trust” will be used.
MYTH: Avoiding probate saves Federal estate taxes.
FACT: Avoiding probate does not save taxes. Probate is the
court supervision of the distribution of a deceased’s property. The
probate system and probate avoidance have to do with state law and
manner in which property passes at death to beneficiaries. Federal
estate taxes are determined by law as outlined in the Internal
Revenue Code. Saving estate taxes has nothing to do with probate
rather requires the intelligent use of certain techniques, whether
or not probate is avoided.
MYTH: It is always best to avoid probate.
FACT: In almost all cases it is advisable to avoid probate.
However, probate may be advisable if there is a good reason to
impose supervisory controls over the person responsible for
administering the estate. If the reason for using probate does not
apply, the use of a revocable trust is almost always better.
MYTH: If your estate is not in a revocable trust, it will be
necessary to probate your estate.
FACT: Probate can be avoided by other planning techniques
(but joint tenancy is seldom a good technique). In Florida, between
husband and wife, probate may be avoided at the first death by
jointly titling all assets. However, on the second death probate
will be necessary if the survivor did not place his or her assets
into a revocable trust or use some other technique.
MYTH: Holding property as joint tenants will avoid probate.
FACT: Although it is true that joint tenancy will avoid
probate, it is probably the worst way to transfer property at death.
It allows for no proper estate planning. It can cause the recipient
significant tax problems upon a subsequent sale of the property.
Additionally, at the time the joint tenancy is created, it can give
rise to a gift tax, and the “transferred” property may subsequently
be included in the donor’s estate at death if the donor retains
certain rights in the property. During life, property which is held
in joint tenancy may be subject to attachment by creditors and any
of the joint tenants can force a sale of the property. Finally, the
use of joint tenancy allows for no control as to whom will
eventually possess the property. Particularly, in second marriages
property could end up in the hands of strangers and not the intended
ultimate beneficiaries.
MYTH: If you have established a revocable trust, you don’t
have to worry about probate or taxes.
FACT: You always have to plan for taxes if you have a
potentially taxable estate, (presently in excess of one million
dollars) whether or not you use a revocable trust or a will. Also,
many revocable trusts simply do not work because: (1) they are not
properly drafted; (2) they are not properly funded; (3) they are not
properly maintained; (4) insurance and/or retirement funds have not
been properly integrated with the rest of the plan; or (5) they are
not properly administered after death. As a result, many living
trusts will prove absolutely useless as a result of one or more of
the five reasons listed above.
MYTH: A revocable trust will save more estate taxes than a
testamentary trust.
FACT: A testamentary trust (i.e., a trust set forth in a will
which comes into existence only at death, and thus is subject to
probate) can save the same amount of estate tax as a revocable
trust.
MYTH: You and your spouse can always be trustees.
FACT: You can serve as your own trustee of a revocable trust
during life (so long as you are competent), but after death there
could potentially be problems if a surviving spouse is a trustee of
all trusts unless his/her powers are limited and an ascertainable
standard is contained within your trust for tax purposes.
MYTH: Using a revocable trust is always less expensive than
an estate plan that will require a probate proceeding.
FACT: Not always. In most cases, the use of a revocable trust
will be less expensive than probate. If the statutory guidelines for
probate fees in Florida are followed the expense will be typically
4% to 5% of the probate estate reflecting attorneys fees, personal
representative fees and court related administration fees such as
filing fees, bond fees, publication fees, etc. In certain cases
however, especially small estates less than $75,000.00 summary
administration may be used in Florida and the cost of establishing a
revocable trust may be comparable.
MYTH: To avoid probate, all you have to do is to sign a trust
document.
FACT: Unless you transfer your property to the trust, simply
signing the document is a useless act. Furthermore, once the
trust is established and properly funded, it must be maintained.
After death, it must be properly administered.
MYTH: It is easy to use a revocable trust.
FACT: Revocable trusts are more labor intensive to create,
however, their benefits of probate and guardianship avoidance are
worth it. Very good records must be kept, and , as stated
above, a trust must be properly funded. It is also important
that, upon the death of a trustmaker, the surviving spouse or family
members immediately contact the state planning attorney, because
very important decisions have to be made regarding the
administration of the trust.
MYTH: If a revocable trust is used, there are no post
death administrative costs.FACT:
There are many things that must be done to administer, or wind up, a
revocable trust after death. Any delay may result in serious
administrative and tax problems. There will be limited
attorney fees in clearing titles which are pale in comparison to
probate fees. There will also be an accountant's fee to
prepare and file a 706 Estate Tax Return if the estate is in excess
of $1,000,000.00.
CONCLUSION: The use of revocable trusts are recommended for
most clients, particularly if properties are also owned outside the
State of Florida. A trust can avoid multiple probates as well
as eliminate the need for a guardianship to be established in cases
of mental or physical disability. Unfortunately, a revocable
trust, by itself, is no panacea. Any estate planning must be
done with careful thought and an examination of all alternatives.
It is very important to engage the services of a qualified estate
planning attorney to draft a trust that is unique to your needs and
captures the values you wish to impart to your loved ones.
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