It's The Law
Living Trusts Can be Misunderstood
A friend of mine told me he just completed a living trust for estate planning purposes. He said I should consider one, but I do not want to give up control of my assets and I am afraid of income tax problems. Should I be concern?
A traditional trust is created by placing legal title to assets in one person for the benefit of another. Think of wealthy people who designate a bank as trustee to hold money for education of their grandchildren. Terms of the trust determine how the money can or will be used. If the trustee and beneficiary became the same person, the trust relationship ended and with it the trust.
Modern statutes allow creation of a trust in which the creator (known as the grantor) is both the trustee and the beneficiary. Most of these trusts include provisions making them revocable and amendable at any time by the creator. These trusts are referred to as revocable trusts, revocable living trusts or living trusts, with no differences created by the designation as one of the foregoing. The differences are established by the person creating the trust, which establishes rights, duties and obligations.
During life of the creator, the trust is really a legal fiction. The trust does not require a separate tax identification number or tax return. Assets are placed into the trust by re-titling in the trustee's name, as trustee of the trust. Since there is no separate tax identification number for the trust, income tax returns and 1099 forms continue with the social security number of the creator.
The biggest benefit of a revocable trust is avoiding probate at death of the creator. At that time, the person appointed as the successor trustee takes over, begins managing the trust assets and distributes them to the beneficiaries in accordance with the trust document. The trust takes the place of the creator's will.
Avoiding probate takes on more importance when a person owns real property in more than one state. Real property must be probated in the state where it is located, which means property owned in multiple states will require multiple probates. Another aspect of avoiding probate that is attractive to many is administration of a trust is generally a private matter. Probate is a public proceeding involving the court.
A living trust can also be used to plan for incapacity. A trust can include a provision that a successor trustee takes over if the creator is determined to lack capacity to manage financial matters. Florida Statutes do not allow creation of a power of attorney that is not effective until the principal is incapacitated. But, that can be done with a living trust.
In many cases, the person creating a trust does not get around to re-titling accounts in real estate. Assets not in the trust will go through probate. For that reason, we generally prepare what is known as a pourover will in addition to a living trust. The will basically states that anything the creator did not place in his or her trust prior to death is to be transferred to the trust through probate.
A living trust does not avoid estate taxes or reduce them. Drafting options to avoid or reduce estate taxes are available, but the same options are generally available for wills.
Many people think a revocable trust will protect assets against creditor claims. That is not true during the life of the creator or even after death. For creditor purposes, assets in the living trust are treated as assets of the creator.
While living trusts have significant benefits, they do suffer from potential defects that might be important depending on circumstances of the creator. A probate estate gets better income tax treatment in form of slightly larger personal exemption and can off set up to $25,000.00 of rental losses each year against taxable income (not available to a living trust).
Transfer of certain assets to the trust prior to death can be problematic. Some insurance carriers increase rates when assets are transferred to a living trust, often with the explanation that the asset is now commercial rather than personal. Some clubs do not allow membership by a trust and transfer restrictions on corporate stock may prohibit changing ownership from an individual to the trust.
Living trusts are excellent estate planning tools and in most cases are significantly better than a will. But, due to the uniqueness of each situation, final decision between living trust and will should be made only through consultation with an experienced attorney.
By: William G. Morris, Esquire.
William G. Morris is an attorney with offices at 247 North Collier Boulevard on Marco Island, Florida. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.
Questions for this column can be sent to: William G. Morris, e-mail: email@example.com or by fax, (239) 642-0722 or
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