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REVOCABLE TRUSTS

More and more Americans are putting their assets in revocable living trusts. In such a plan, the ownership of real estate, securities and other assets are placed in a trust while the owner is still alive. The trust document outlines instructions for managing the assets and distributing them after the individual's death. The people who create the trust can act as their own trustees, so there are no management fees or loss of control. They can change the trust at any time.

Advantages

The advantages of living trusts over wills are considerable. Under a will, an estate must be settled in probate court. Lawyers' fees and court costs often are substantial; there may be exasperating delays, and the proceedings are a matter of public record. In contrast, a living trust does not require a court proceeding; a successor trustee simply distributes assets according to the trust's instructions, with an accountant, notary public or lawyer certifying any transfer of titles. The process is much quicker, cheaper, and more private than settling a will. Trusts can be contested, but not as easily as contesting a will. When an estate goes to probate in Oklahoma, the court freezes its assets for a period of time, and asks anyone to come forward to contest the will if they please. Someone contesting a will doesn't even need to hire a lawyer.

But to contest a trust, a disgruntled heir needs to hire a lawyer and file a civil suit. The assets of a living trust aren't frozen, and the trustee can distribute them to the beneficiaries immediately. The disgruntled heir then would have to sue each beneficiary.

Lawyers' probate court fees average 4% to 7% of the gross value of an estate--$6,300 for a $100,000 estate and $42,300 for a $1 million estate. In addition, special fees are granted by a court for sales of assets during probate, preparation of estate tax returns and litigation costs. Many lawyers don't go out of their way to tell clients about living trusts. They would rather write wills for $200 or $300 and then make a large fee when the will is probated.

Most married couples hold title to their house as joint tenants. Upon the death of the first spouse, the house doesn't have to pass through probate. But when the second spouse dies, unless he or she has placed the home in joint tenancy with another person, the property will be probated. The same is true of bank accounts, stocks and other assets. A living trust is one way to avoid that problem.

A revocable trust can contain provisions to save on federal estate taxes. If a couple has a living trust that utilizes a unified credit trust provision, with separate trusts for the husband and wife, they can pass on up to twice the applicable credit amount, $3,000,000 in 2004, tax-free to their children. Under this method, each trust can use the $1,500,000 federal estate tax exemption, even if one spouse dies before the other; in that case the surviving spouse can draw on the other's trust, with certain restrictions; when the second dies, both trusts go to the children. Without this kind of tax planning, the children would pay over $555,000 in federal taxes on a $3,000,000 estate.

For a home refinancing, some lenders demand that the house title be taken out of a living trust. Some institutions that buy mortgages in the secondary market from thrifts and banks won't buy mortgages in the name of a trust, because they fear that some irrevocable trusts may have stipulations preventing a trustee from willing the property. However, it is simple to remove the property from the trust. Then, after the refinancing is completed, the home can be transferred back to the trust.

A growing number of older Americans are putting their assets into living trusts because they want to avoid being placed under a court-appointed guardian if they become unable to manage their affairs. If a home or stock is in joint tenancy, a wife can't sell it if her husband has a stroke and isn't competent. So she must get the court to appoint her as conservator and then must keep scrupulous records.

With a living trust, an individual may specify in advance who will manage his affairs if he ever became incompetent. A will can't be used for this kind of contingency. Privacy is another argument for a living trust. Anyone can go down to probate court and find out that Natalie Wood had a $6 million estate that included 29 fur coats. If a living trust is contested, the barrier of privacy may be breached; otherwise, no details about beneficiaries or the estate enter the public record.

Many other kinds of trusts are used for estate planning, but the revocable living trust is growing in popularity. An irrevocable living trust offers the same advantages of avoiding probate and perhaps saving on estate taxes, but causes problems because it can't be changed. A testamentary trust, created after death, must go through probate.

A revocable trust usually names a successor trustee to act in the event of the resignation or the incapacity of the grantor. A trustee or successor trustee may be a close friend or family member, or a professional trustee such as a trust company.

A revocable trust in and of itself does not provide any major tax planning opportunity. However, tax planning devices that are available to those who do not have a revocable trust may be employed within the context of the revocable trust.

As the name implies, a revocable trust may be revoked by the grantor at any time during the life of the grantor, and title to the assets transferred back to the grantor. After the death of the grantor, the trust becomes irrevocable.

During the life of the grantor, a typical revocable trust provides that all of the income is distributed to the grantor, along with as much of the principal as the grantor may wish to withdraw. After the death of the grantor, a revocable trust may provide for many different kinds of dispositions to beneficiaries. For example, a revocable trust may:

  • Provide that all of the trust assets are simply distributed upon the death of the grantor. This scheme of dispositions is essentially that which can be done with a simple will plan, but it provides the attributes of privacy, speed, and avoidance of probate expense as outlined above.
  • Establish a unified credit trust plan in order to take maximum advantage of the available federal estate tax exemption.
  • Implement a generation-skipping transfer plan that will minimize or avoid the application of the generation-skipping transfer tax.
  • Contain any number of specialized trust provisions that will provide for the distribution of income, a specified dollar amount, or the maintenance of one or more beneficiaries, or a series of beneficiaries.
  • Provide for different schemes of distributions to different beneficiaries, or a combination of schemes for one or more beneficiaries.

Disadvantages

There are relatively few disadvantages of revocable living trusts. But there are some, including the hassles of transferring the titles to homes and other property, bank accounts, securities, businesses and other investments into the name of the trust. Legal fees for setting up a trust range from $1,500 to $5,000 or more.

We will be glad to help you take advantage of a revocable trust that will assist you in attaining your goals and implementing your plan of disposition. Please give us a call if you have any questions, or would like to obtain any additional information.