Trusts Are Not Just for the Rich – Part I

estate planning attorney raleigh ncPeople often think trusts are only for the very wealthy. In reality, trusts can be useful for people of all income levels.  In this two-part blog series, I discuss some of the applications we at the Wooten Law Firm make of trusts for our clients at all income levels.  In the first part of this two-part series, I will discuss the basic concepts and benefits of the most common trust we draft at the Wooten Law Firm, the Living or Revocable Trust. In the second part of the series, I will review some of the other types of trusts we draft for our clients at the Wooten Law Firm, including irrevocable life insurance trusts, charitable remainder trusts, and special needs trusts.  In addition to these types of trusts, there are other kinds of trusts that clients may need for their estate planning needs (but which are beyond the scope of these blog posts), including Grantor Retained Annuity Trusts, Intentionally Defective Grantor Trusts and Qualified Personal Residences Trusts.

A trust is a legal arrangement in which the owner of property (the “grantor”) transfers property to be held “in trust” by an individual known as the “trustee” for the benefit of a third party, referred to as a “beneficiary.”  While often the grantor, trustee and beneficiary are separate people, that need not always be the case. In some instances, the grantor, trustee and beneficiary can be the same person.

 Living Trusts (Also Known as Revocable or Inter Vivos Trusts)

A living trust is a trust that you create during your lifetime.  Typically you are the grantor, trustee and life-time beneficiary of the trust.  Because you retain complete dominion and control over the assets while you are still living, the trust is “invisible” for income tax purposes, meaning that you continue to report all trust income and losses on your IRS form 1040.  No separate tax return is needed as long as you remain living and competent.

While the living trust may be “invisible” for federal income tax purposes, for state law purposes, the trust is considered an entity separate and apart from the grantor (the person who created the trust).  Because the trust is treated as a separate entity for state law purposes, at the time of the grantor’s death, the assets in the trust are not subject to probate because the trust, not the now deceased grantor, is the owner of the property transferred to the trust during the grantor’s lifetime.  After the grantor’s death, the trust agreement that the grantor executed in connection with the formation of the trust will provide for the disposition of the trust assets after the grantor’s death.  Typically the trust agreement will make provisions for the grantor’s spouse if he or she is living at the time of the Grantor’s death and if not, then for the grantor’s children.  The trust can provide for the distribution of the trust assets outright and free of trust to the ultimate beneficiaries of the trust or provide that a successor trustee (often a bank or trusted family member) continue to hold the assets in trust for the ultimate beneficiaries until such time as the grantor feels that the ultimate beneficiaries are of a sufficient age and maturity to handle their inheritance.  For instance, a trust may provide “after my death, my trustee shall distribute the trust assets to my spouse, but if my spouse is not then living, then my trustee shall continue to hold the assets in trust for my children until my youngest child attains thirty years of age.”

The primary benefit of the living trust is probate avoidance.  Any distribution of your assets after your death that you may direct under your trust can be done under a traditional will.  But, by using a revocable trust rather than a will, you avoid all the hassle and expense of probate.  In addition, a trust gives you an additional level of privacy because unlike a will, a trust is not filed with the probate court for the rest of the world to see.  Another benefit of a living trust is that it can be used to avoid probate in another state (referred to as an “ancillary probate”).  If you own real estate in another state at the time of your death, you have to open an ancillary probate proceeding in that state in order to pass your real property in that state to your heirs.  If you deed the out-of-state real estate to your living trust before you die, the ancillary probate proceeding is avoided because the trust, not you, owns the real estate in the other state at the time of your death.  Yet another benefit of a living trust is that it provides some incapacity planning.  If you lose capacity, a successor trustee is named by you in the living trust agreement and that successor trustee takes over your assets and is under a fiduciary duty to make use of your assets for your benefit.

There are also a couple of common misconceptions about revocable trusts. First, while revocable trusts may avoid probate fees (sometimes inartfully referred to as “probate taxes”), they do not save any estate taxes.  Because you own and have control over the assets at the time of death, the value of the assets will be included in your taxable estate for federal estate tax purposes.

A second misconception about revocable trusts is that they avoid probate altogether.  This too is not necessarily correct.  While you will probably transfer most of your assets to the trust prior to your death, most people will keep a few things in their own name.  For instance a lot of people keep a small ”pocketbook” checking account from which they pay their regular living expenses.  People tend to find accounts not in the name of the trust a little easier to deal with.  Also, while we can transfer tangible personal property like your furniture and clothes, again, most people simply prefer to keep those items in their own name.  The same can be said for an individual’s car.  Often people prefer to keep their car titled in their own name rather than to go to the trouble of re-titling the car in the name of the trust.

Probate is not bad in and of itself.  Indeed, there are some positive aspects of probate like a short period of time following death during which creditors must make claims against your estate or the fact that someone is appointed with a duty to locate all your assets and pay all your debts. These are some of the positive aspects of probate.  What should be avoided is the time and expense of probating a large estate. By moving the majority of your assets to the trust during your life, you can reduce the size of your probate estate so that the probate process is much simpler and less expensive.

A third misconception is that you do not need a will if you have a revocable trust. As explained above, while you will transfer many of your assets to your trust during life, you will still probably own some things at the time of death.  You need a will to transfer those few remaining assets to the trustee of your revocable trust so that those assets can be distributed to the beneficiaries of your trust along with the other assets that you transferred to the trust while you were still living.

In the second installment of this two-part series, I will review some of the other types of trusts that we create for our clients.  Always remember, no matter what type of trust you are interested in, it is essential that you work with an estate planning attorney who is experienced in this area of law. To be effective, it is important that the trust be properly worded.  Only an experienced estate planning lawyer can ensure that the document drafted will achieve your intended estate planning objectives.  I hope that you have found this brief review of living trusts informative. If you would like me to prepare a living trust or other estate planning documents for you, I hope you will give me a call.