A living trust will avoid probate for all of the assets that have been transferred to the trust. Probate is a costly, time-consuming process that many estates do not need. However, estates valued at less than $100,000 probably will not benefit from a living trust because "small estate" laws provide procedures that can be used to transfer the assets to the beneficiaries without going to court.
Reducing or Eliminating Federal Estate Taxes with a Living Trust
For married couples with more than $2 million ($3.5 million in 2009) in net worth, a living trust can reduce or eliminate federal estate taxes by setting up an Exemption Trust. Assets transferred to the Exemption Trust (up to $2 million in 2008 and $3.5 million in 2009) will avoid the estate tax, provided IRS regulations and laws are followed.
How is a Living Trust Set up?
A trust document is prepared that usually names the trustors (the persons who are setting up the trust) as the trustees of the trust. The trustees are responsible for managing the trust and its assets. The trust usually nominates other persons, banks, or trust companies as successor trustees. The successor trustee(s) will take over management of the trust after the death, resignation, or incompetency of the original trustee(s).
2. The trust also provides for distribution of the estates of the trustors after the deaths of both trustors. These provisions can be the same as those found in a will and might include trusts for younger beneficiaries, gifts to charities, etc.
What Has to Be Done After the Trust is Signed?
After the trust is signed, the trustors transfer their assets to the trust. If this is not done, additional legal work, possibly including a probate of these assets, will be required after the deaths of the trustors. Certain assets, such as IRAs and 401k accounts, cannot be transferred to the trust. However, they are not probate assets provided the beneficiaries listed are living.
Advantages of Living Trusts
1. Assets held by the trust will not need to be probated. Legal fees for probating an estate are usually much higher than the fees for administering a trust. Probates can also take a year or longer to complete, but a trust administration usually can be completed in a much shorter time.
2. If a trustor becomes mentally incompetent, the successor trustee can take control of the trust and avoid the cost of a conservatorship in most cases. Conservatorships are often used in situations in which someone can no longer manage his or her own financial affairs or personal care. A conservatorship is a court-supervised proceeding that can involve substantial legal fees.
3. Federal estate taxes can be reduced or avoided.
4. The trust is revocable during the lifetimes of the trustors. If an Exemption Trust is used, part of the trust will become irrevocable after the death of the first trustor.
Disadvantages of Living Trusts
1. A living trust costs more than an estate plan that includes only a will.
2. Transferring assets to the trust involves costs and paperwork not required for less elaborate estate plans.
3. Administration of an Exemption Trust can involve additional effort for the surviving spouse.
4. Refinancing real property that is owned through a trust may require transferring the property from the trust before the refinancing, and then putting it back into the trust. A few lenders do not require that property be taken out of the trust when it is refinanced.