1

Defining a Living Trust

A living trust is an arrangement you make for management and distribution of your property. Since like a will, a living trust is "revocable," meaning that you can modify or eliminate it at any time, "living trusts" and "revocable living trusts" are usually synonymous. These trusts are established by a written agreement or declaration which appoints a "trustee" to administer the property, and which gives detailed instructions on how the property is to be managed and eventually distributed. If you want your trust to substitute for probate (court administration of property after death) or for guardianship (court administration after incapacity), you must give the trustee detailed instructions about how to handle these situations, and you should legally transfer substantially all of your property to the trustee. A living trust agreement or declaration is usually longer and more complicated than a will, and transfers of assets to the trustee can be time-consuming and expensive.

2

Creating a Living Trust

Any competent adult can establish a revocable living trust. Husbands and wives can establish a trust together and can provide that their marital and separate property assets be held in different accounts. In most states any competent adult can be the trustee, including the person setting up the trust. A bank or trust company is often a good choice. You can appoint more than one trustee, can delegate different duties to each trustee, and can retain the power to remove the trustee and appoint a new one. Appointing an alternate trustee is essential if you are the first trustee and the trust will carry on after you die or become incapacitated. The Trust document is an important record. Although some legal software programs can create trusts, a trust is more complicated than a will. Creating your own should only be attempted if you are familiar with the tax rules, beneficial interests, and trustee authorities you intend. You should not create a trust just to avoid taxes.

3

Funding the Trust

The grantor legally transfers assets to the trust. Deeds, stock transfers, new bank accounts, and other legal documents may be necessary to finalize the transfer. The assets are then owned by the trust, held by the trustee. Assets not formally transferred to the trust will probably not be considered part of the trust if probate or asset protection issues surface. You can have life insurance and certain pension accounts paid directly to it. If you also want a trust just to avoid guardianship, you can use a durable power of attorney to finish funding the trust if you become incapacitated. Funding the trust means that the trustee holds the property in trust for the benefit of the beneficiaries. This abstract titling can cause issues in title insurance for property or financing so be sure to fund the trust properly according to local rules.

4

Trusts and Probate

A client once told me her husband passed away but at least they avoided probate because they had a trust. "What's in the trust?" I asked. She replied, "In it?" A trust can help avoid probate because the trust continues to own the property when the grantor passes while the trust document shifts trustee duties from the grantor to another trustee and beneficial interests from the grantor to another beneficiary. The trustee must keep separate records for trust assets and might have to file separate income tax returns for the trust. If the trustee does not obey these rules, the trust may not avoid probate. If you die owning real estate outside your resident, a court proceeding might be required in each state where real estate is located. A revocable living trust owning this property can avoid these extra court proceedings and can substantially reduce probate fees.

5

Trusts and Guardianship

If you transfer all of your assets to a revocable living trust and give your trustee detailed instructions on how to handle your assets if you become disabled, there should be no need for a guardianship. Your written agreement or declaration can specifically authorize your trustee to rely on a letter from your physician as proof of your incapacity. A guardian can establish, or complete funding of, a revocable living trust if: (1) the trust would be a more efficient way to administer the property of the incapacitated person, and (2) use of the trust would be consistent with the person's overall estate plan. A special court order is needed to do this, however.

6

Trusts and Powers of Attorney

A durable power of attorney is a simple and inexpensive alternative to some elements of a trust. A POA appoints another person as your "attorney in fact," to handle your assets and, perhaps, to make medical-care decisions on your behalf if you become incapacitated. It is less detailed than a revocable living trust agreement and it is less expensive because it is so short and involves no transfers of assets before incapacity. One compromise approach to revocable living trust planning is not to transfer all assets to the trustee immediately, but to specifically authorize the attorney in fact to complete trust funding if you become incapacitated. This can make initial trust establishment much less time-consuming and expensive, and still avoid the possibility of guardianship. This approach might not avoid probate, however.

7

Costs of a Living Trust

The exact cost of a revocable living trust depends on how valuable and complicated your assets are, whether standard documents can be used, how many assets must be transferred to the trustee, and whether tax planning is needed. Before you direct an attorney to set up a trust for you, ask for estimates of how much it will cost, how much writing a will would cost, and how much probating your estate would cost. The fee arrangement should be in writing. If you do not plan to serve as trustee, you should consider any fees you might have to pay the trustee and whether those fees would replace fees you are already paying to manage your assets. A standard living trust package should include the trust document, the transfer of assets to the trust, a "pour-over" will to add any other assets to the trust, and a similar durable power of attorney; it also might include descriptive materials and related legal documents, such as a directive to physicians or "living will."

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Advantages of a Living Trust

Reasons people create living trusts include: * Avoidance of probate; specifically, avoidance of expensive multiple probate proceedings when you own real estate in several different states. * Avoidance of guardianship. * Reduction of delays in distribution of your property after you die, although delays caused by filing an estate tax return cannot be avoided. * Privacy, because your trust instrument would ordinarily not be filed in court. * Continuity of management of your property after your death or incapacity, especially if you do not serve as the trustee. * For married couples with substantial separate property, segregation of those assets from their community property assets.

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Disadvantages of a Living Trust

* Expense of planning -- It is more complicated than a will to draft, and asset transfers can take time and result in various additional costs. * Expense of administration -- If you appoint a bank or trust company as trustee, you will have fees to pay; if you do not, someone will still have to take the time to maintain the trust, and under State law that person would be entitled to a reasonable fee. One way or the other, setting up a living trust will mean significant professional fees in the future. * Inconvenience -- Once the trust is established, you must be sure that trust books are maintained and that all assets continue to be registered to the trustee; persons dealing with the trustee (such as banks and title insurance companies) may want to review the trust instrument to check on the trustee's powers and duties. * Unforeseen problems -- Living trusts can raise a variety of new problems regarding title insurance coverage, real estate in other countries or Sub S stock.