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Pros and cons of living trusts.

Estate planning often involves the use of trusts, which come in two basic forms: revocable and irrevocable. As these names suggest, trusts may be permanent or not-so-permanent. If you create a revocable trust and transfer assets into it, you can change your mind and terminate the trust, reclaiming ownership of the assets that were in the trust.

An irrevocable trust can be established in your lifetime or after your death, as per your instructions. A revocable trust, on the other hand, can be established only while you're alive. Therefore, revocable trusts may be called "living trusts," and they have become increasingly popular.

Deflate probate

Living trusts have been promoted as a means to bypass probate at your death. In some circumstances, the probate process may be time-consuming and expensive.


Example 1: Annette Dawson dies with many assets held in her own name, including real estate, bank accounts, and securities. Those assets go to her three children, according to Annette's will. The executor of Annette's estate must prove to a local court that Annette has left a valid will, identify the assets that pass under her will, value those assets, pay any debts and taxes, and see that the remaining assets are properly distributed. (If Annette had died without a will, her assets would have gone through probate anyway and been distributed under state law.)

The entire proceedings can take a little or a great deal of time, depending on state law and the size of the decedent's estate. An estate going through probate typically will owe legal and court fees, which may be substantial.

Example 2: Beth Emerson, Annette's sister, has similar assets. However, Beth has created a living trust and transferred her assets into that trust. Beth dies in the same state as Annette.

Any items that Beth has not transferred to her living trust will have to go through probate. However, assets held in trust don't go through probate. The assets that Beth transferred to her living trust will avoid probate and can either stay in trust or pass to other parties at her death, according to the trust terms Beth had specified.

From one pocket to another

Creating a living trust can spare your heirs some time and money in the future. What's more, you can remain in control of your living trust. You can collect any investment income generated by your trust assets; you can sell them and replace them with other assets, if you like. In addition, you can revoke a revocable trust if you become unhappy with the arrangement. Then the assets will move from the trust back into your own name.

A revocable trust can provide another valuable benefit: you can use it as a form of incapacity protection.

Example 3: When Beth creates her living trust, she names her son Rick as successor trustee. If Beth loses the ability to manage the trust assets, Rick will replace her as trustee. Then Rick will manage those assets on Beth's behalf. Beth's family won't need to petition a court to appoint a guardian to manage the assets held in the trust.

Paying the price

If those are the advantages of a living trust, what are the drawbacks? You'll probably pay legal fees to create the trust, and you will have to retitle your assets to the trust. If you don't take the time to move assets into a living trust, the assets you leave out won't get the benefits of probate avoidance and incapacity protection.

Additionally, depending on your situation, you may not need a living trust to avoid or minimize probate at your death. Assets such as IRAs, other retirement plans, annuities, and life insurance proceeds pass directly to a named beneficiary without going through probate. The same is true for bank and investment accounts with a payable-on-death or transfer-on-death designation. If you hold property titled in joint tenancy with right of survivorship, your co-owner will inherit your share automatically, without probate.

Weigh the merits and drawbacks carefully before deciding if a revocable trust can offer value to you and your loved ones.

Did You Know?

It is estimated that the total amount of gold ever mined, worldwide, would fit into 60 tractor trailers. In comparison, 6,000 times as much iron is produced each year.

Source: American Museum of Natural History
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Publication:CPA Client Bulletin
Date:Jun 1, 2012
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