By Roger C. Hurd
HURD, HORVATH & ROSS, P.A.
Palm Beach Gardens, FL
Living trusts are revocable arrangements that are established during the life of the trust creator, the grantor. They are also referred to as inter-vivos trusts. As discussed below, they are primarily intended to serve as devices to save probate costs and to simplify estate administration.
The typical funded living trust holds assets for the benefit of the grantor during that individual's life. During the grantor's life, the trust typically serves as his/her alter ego. Income flows through the trust to the grantor (and possibly others) as beneficiaries. The grantor may revoke, or alter, the trust document at any time.
At the grantor's death, however, the trust either becomes irrevocable, terminates, or assets flow into entities established in other documents. Any assets that are in the trust at death, or added to it, are distributed to successor beneficiaries, or held for them by the living trust.
Because living trusts are revocable, they provide no estate or income tax advantages to the grantor.
There are no estate tax savings because the grantor has the ability to revoke or alter the trust document. As such, the grantor is deemed to control assets in the trust and those assets will be taxable in his or her estate. These trusts may offer some estate savings if the document incorporates use of the unified tax credit and the marital deduction. The savings, however, come from the use of these estate planning devices and not via the trust itself.
Additionally, any taxable income must be reported by the grantor. There are no separate tax filings by the trust. In fact, during the grantor's life there is no need to receive a separate tax identification number for the trust. Where the grantor is a trustee, or co-trustee, the grantor's social security number is utilized. A separate tax identification number is only required when the grantor is not a trustee or following the grantor's death.
Because there are no tax savings offered by these arrangements, the primary advantages offered by living trusts are probate savings and simplified estate administration. In a typical estate, an executor must probate any assets owned by an individual before those assets can pass to the heirs named in the will. This can be a time consuming process. However, it is intended to protect the heirs and to provide for an orderly disposition of assets. Probate proceedings are also part of the public record and there will be substantial costs involved. Assets in a trust, however, are intended to automatically pass by terms established in the document. The trustee directs the assets to named individuals or holds the assets for their benefit. Because assets that pass via living trusts are not probated, these assets are not part of the public record. As such, living trusts speed the assets transfer process, provided privacy and protect heirs that might not otherwise be able to manage assets for themselves.
To take full advantage of a living trust, property must be retitled into the name of the trust. Typically, property would be titled as "The John Doe Living Trust, Dated 1/1/9X, For the Benefit of (FBP) John Doe" or "The Doe Family Trust, dated 1/1/9X, John Doe and May Doe, Trustors and/or Trustees." Failure to do this is a common error in establishing living trusts. Without making the effort to retitle property, assets will never be considered as owned by the trust and they will require probate. Tax deferred investments such as IRA's, pension plans, annuities, etc. are not transferred into the Trust. The Trust is named the beneficiary following the deaths of the grantor and his or her spouse. With regard to life insurance, the Trust is named the beneficiary.
Living trusts offer advantages to grantor/beneficiaries if they become incompetent or disabled subsequent to the trust's creation. In these situations a successor trustee can apply assets held in the trust for the benefit of the grantor/beneficiary. Although the grantor is typically the initial trustee in these cases, there should be a successor trustee named in the document in the event the grantor/trustee dies or becomes incompetent.
Although a grantor typically serves as initial trustee, it is not absolutely necessary that he or she do so. Some thought should be given as to whether a grantor should serve as trustee. In many cases, it may be advantageous to have someone other than the grantor simply for purposes of property management. Additionally, thought must be given to the selection of a trustee successor.
Even if a living trust is established it is necessary for an individual to also execute a will. This is called a pour-over will and intended to capture assets that have not been or are not capable of being retitled to the trust. A pour-over will typically has terms that will transfer these assets to the living trust, or other estate documents, at an individual's death.