Living Trusts - Not Always a Good Idea
December 6, 2001
Open any major metropolitan newspaper and you can probably find an ad for "living trusts," sometimes including promises that a "living trust" can substitute for a Will, and that you can avoid probate and/or that you can reduce or eliminate estate taxes.
Let's first look at what a "living trust" is, which is a revocable trust set up by a person to take effect immediately (i.e., during the lifetime of the grantor, rather than at death), and (as normally sold) is funded with all of the client's property - home, other real estate, stocks and bonds, bank accounts, autos, etc. All account names and vehicle titles are changed, and deeds from the client personally to the client as trustee of the "living trust" are prepared and recorded. Generally, after a "seminar" or sales talk, a book of literature and forms is provided.
How does such an arrangement stack up against its promises? Not always well - let's take it point by point:
- "Living Trust" as Will Substitute. Yes, this arrangement can substitute as a Will, since if the client puts all his or her property into the trust, the trust will provide who gets what and there will be no property left outside the trust for a Will to operate on. A Will, however, generally costs much less, involves no immediate transfer of property ( a hassle), and can be changed economically without any "retransfer" of assets, which is an even greater hassle.
- "Living Will" to Avoid Probate. It will do that, of course, but at what cost? Financial accounts and vehicles still must be changed after a person dies, and title companies must still be persuaded to insure a transfer of title of real property to a third person buyer when the trust beneficiary sells it. The same work, and possibility more, is required of the survivors and an attorney than with probate, but without any of the benefits (cutoff of claims and finality of title for the beneficiaries) available through use of a probate proceeding.
- Living Will to Reduce or Eliminate Estate Taxes. This cannot work for a very simple reason: as long as the trust is revocable, the client is treated by the IRS as the owner of the assets of the trust for estate tax purposes. Nor will a living trust dispense with the requirement to file an estate tax return if otherwise required.
It is a fact of life that we tend to "mystify" what we don't understand. The concepts underlying the basic estate planning devices available are not complicated, but sellers of "living trusts" and other complicated Will substitutes may attempt to convince consumers that they have a magical way to avoid taxes, probate and lawyers' fees known only to their select initiates. There are legitimate ways of reducing estate taxes, but this is not one of them. Nor does the "living trust" necessarily reduce fees, but can increase them, sometimes substantially.
The above is furnished as general information relevant in the State of Washington only and may not be relied on as legal advice, specific to any situation or otherwise, by any person, whether or not a client of the firm.
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