Estate Planning and Administration

Should I Have a Revocable Living Trust 2015

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Introduction

This information helps you answer the question: “Should I have a revocable living trust?” Living trusts are not for everyone, but they are becoming more common. Individuals whose estate planning goals have stabilized or who hold assets in more than one state, especially, should consider a trust. Many have found living trusts a desirable approach to estate planning.


The Schmiedeskamp Estate Planning and Administration Group

This form has been provided for the convenience of clients and friends of the Schmiedeskamp Robertson Neu & Mitchell LLP Estate Planning and Administration Group. Our clients are families and individuals from all walks of life, along with individual and corporate executors, trustees, and fiduciaries, as well as public and private charities. The Group provides estate planning and administration services from the simple to the complex. Services relate to wills, trusts, beneficiary arrangements, and other estate planning techniques and approaches. We advise our clients regarding the effective and efficient transfer of wealth and succession planning. We work closely with our client's accountant, financial, insurance, and other advisors. For more information about the Estate Planning and Administration Group and all our lawyers, please visit www.srnm.com.


What's a Trust?

A trust is a legal relationship between a trustee and the trust beneficiaries. The trustee holds the trust assets for the benefit of the beneficiaries under the terms of the trust. Living trusts often initially have the same trust creator, trustee and trust beneficiary.


What is a Living Trust?

There are many types of trusts. A living trust is a trust created during one's lifetime. It is also called an inter vivos trust.


Is a Living Trust a Probate Asset?

A living trust is a type of non probate asset. What this means is that the assets in a living trust may be distributed without formal court supervised administration where the creator of the trust dies. The primary reason most people establish a living trust is because of this benefit – probate is avoided.

There are many ways to hold title to assets. Some assets are known as "probate assets." This means they pass as you provide in your will. Probate assets are titled in one’s individual name. Other assets are "non probate assets." These assets pass outside of a will. Joint tenancy, tenancy by the entirety, and beneficiary designations are common examples of non probate assets. Beneficiary designations on insurance policies or retirement plans are examples of non probate assets. Again, a trust is a type of a non probate asset.

A good way to compare wills versus trusts is to think of one’s estate plan as a basket. When a person dies with a will, an empty basket is given to the legal representative of the person’s estate or executor. The executor is then directed to fill that basket with all the person’s assets and after paying any debts distributes the basket as provided in the will. The process of filling the basket is what we call probate and requires that the executor be appointed by a court. Where a person has a living trust, the basket is filled during the person’s lifetime. Probate is not necessary to fill the basket because the titles have already been changed. At the person’s death, the filled basket is then given to a successor trustee who need not be appointed by a court but is designated in the trust. The successor trustee without court involvement then distributes the basket as set forth in the trust. What a trust does is fill the basket before death, thus avoiding the need for probate.


How is a Trust Established?

Living trusts are normally established by executing a trust agreement and transferring assets to the trust. The trust document is executed by the person creating the trust, usually referred to as the settlor, grantor or declarant of the trust. It is also signed by the trustee who may be the trust creator, another person or a corporate trustee such as a trust company or bank.


Why Are Living Trusts Created?

Living trusts are created to serve a number of personal and financial goals or objectives. Common among these goals are the following:

  • Avoiding Probate: A living trust provides a flexible and efficient method for distribution and transfer of ownership of one's assets at death. A living trust allows this to be done without court involvement. As such, a living trust avoids probate. While the probate laws of some states are less complicated, others are more demanding. In states that where the process is more involved, avoiding probate may be a key reason for a trust.
  • Avoiding Probate Costs: A living trust may avoid probate costs and related fees. It is important to recognize, however, that the savings are sometimes overstated, particularly in larger estates. The reason for this is that there are many costs involved in settling one's affairs, whether through probate or a living trust. These include filing tax returns, if and as required, and liquidating or distributing assets. Probate law and procedures have been simplified in some states reducing costs, but still a living trust may well reduce some costs.
  • Saving Time: Living trusts may save time because assets are held in trust at death. Therefore, distributions may be more promptly made. This benefit is limited in larger estates where estate tax returns must be filed and approved by taxing authorities or assets must be liquidated. Distribution will not be completed until tax issues and claims are resolved.
  • Privacy: A living trust protects the privacy of your estate from public scrutiny. Unlike a will which is filed in court, a trust agreement is not required to be publicly filed or recorded in most states. Wills once filed in court are public records that anyone can see. Wills of the rich and famous are even available on the Internet or published in books. Because a trust agreement is not subject to formal court administration, a living trust provides privacy of an estate plan and assets. There is some effort to make even formal administration more private. Also, some states require estate tax returns to be filed as a public record that discloses the gross value of one's estate. Even so, one of the most important benefits of a living trust is to provide privacy.
  • Incompetency: Living trusts provide a convenient means to administer one's property if a person becomes disabled and unable to manage his or her affairs. There are other methods to accomplish this purpose, such as the use of powers of attorney and custodial accounts. Nevertheless, with other advantages, a living trust can prove the most efficient way to handle things in the event of incompetency and helps insure that others will not try to deal directly with the trust creator.
  • Failing Competency or Health: Even where a person is not actually incompetent, a living trust with another individual as a co-trustee or another person as trustee may be helpful. It may help avoid an individual with failing competency or health from mistakenly or through trickery signing something that is not in their best interests. The co-trustee or trustee would have to be involved.
  • Management: Some individuals do not wish to continue day to day management responsibility for assets. Where a trustee other than the creator of the trust is involved, a living trust can serve this purpose.
  • Estate Planning: Living trusts, like wills and other estate planning tools, may serve various estate planning objectives including saving or even completely eliminating federal or state estate or death taxes. Trusts are often useful where special estate planning requirements exist, such as providing for an incompetent or disabled beneficiary.
  • Avoiding Will Contests: Where a person's heirs are likely to contest a will, a living trust may be helpful. It may be more difficult to challenge a trust than a will, although both are difficult to contest.
  • Defeating Spouse’s Elective Share: Trusts are sometimes used to defeat a spouse’s elective share. State law usually permits a spouse to elect to take against a will and receive a statutory share, such as one-third or one-half of a decedent’s estate. The law on this is unsettled. There is some authority that a will or trust does not preclude an elective share if the sole purpose of the trust is to defeat a spouse’s marital rights. Other cases hold that an elective share may not be made against trust assets.
  • Segregating Claims: For individuals engaged in businesses or professions, a living trust may avoid delays in distributing assets should lawsuits or claims be filed against the estate. Unless a separate suit is filed against the trust, which is seldom done because of insurance, the trust assets may be managed or even distributed without regard to an estate claim. It is important to keep in mind, however, that a living trust does not protect your assets against creditor claims during your lifetime. Certain trusts may limit claims on death.

Are there Disadvantages to Living Trusts?

Although there are many advantages to living trusts, there are a number of disadvantages as well. Commonly cited disadvantages are:

  • Costs: The cost of establishing a living trust, and related transfers, is greater and more time consuming than simply preparing a will. Indeed, where numerous assets are transferred and changes periodically made, little savings may result.
  • Taxes: For the typical living trust, there are no significant income tax changes or advantages. Because the trust is revocable, the creator of the trust continues to pay income taxes on all trust estate income and assets remain a part of the estate of the creator for estate tax purposes. If the trustee is someone other than the creator of the trust or a spouse, an additional income tax return may be required to be filed which increases costs.
  • Paperwork: The paperwork related to a trust is somewhat more involved than a will, both initially and when some amendments are made. Although few people find this a problem, others do, particularly where personal circumstances are rapidly changing.
  • Excluded Assets: The benefits of a living trust are diminished where some assets cannot or may not be included. Although such assets need not always be kept out of a living trust, some examples may include retirement plans, insurance, vehicles, and Subchapter S or closely held corporate stock. Increasingly, these assets may be placed in a trust or at least the beneficiary, but special planning is required.
  • Accountability: Because a court does not directly control a trust, there is somewhat less accountability for a trust than an estate. This problem is avoided by using a competent or even professional trustee, particularly as a successor trustee.
  • Claims: Where an estate is opened, claims are barred six (6) months after a person's death. Without probate, claims may be made for usually two (2) years after death although different states may have other limitations. For some, promptly barring claims may be important.
  • Creditor Protection: Use of a living trust may impact creditor protection. A couple, for example, may own their home as tenants by the entirety. This prevents creditors of only one spouse (rather than both spouses) from making any claim against the property. By placing the home in a living trust, this creditor protection may be lost in some states. It this protection is critical, a home may be kept out of the trust or other alternatives considered. Illinois law does permit a home held in trust to nevertheless be treated as being held as tenants by the entirety but special requirements must then be followed. If creditor protection is a key concern, additional trust provisions and limitations may be included.
  • Probate: Despite the desire to avoid probate, some trustees insist on probate where a federal estate tax return is to be filed. Although this should not be required, these trustees believe it is appropriate. This problem may be avoided by determining the position of the trustee in advance.

Are There Assets Not Appropriate for Trusts?

Not all assets may be placed in a trust. Some investments, commonly limited liability partnerships or professional practices, may not be placed in a trust. Other examples of asset that are not transferred to a trust are annuities and retirement plans. Transferring such assets to a trust may accelerate income taxes. Although these assets may not be placed in the trust, a trust may be the beneficiary of these assets. Special care is required with regard to retirement plans if there is a desire to continue to defer tax on benefits. Trusts may be written to allow continued deferral of income taxes to some extent where retirement plans are involved.


Are There Other Types of Trusts?

This material aims at trusts that may be changed and aims mostly to avoid probate. There are other types of trusts that may be established. Some are designed to hold insurance, allow for annual gifting, provide for charitable giving, enable a person to qualify for public nursing home assistance, and for other purposes. These are specialized trusts for specific purposes. It is important to make certain your attorney knows just why you wish to have a trust.


Are There Other Types of Trusts?

This material aims at trusts that may be changed and aims mostly to avoid probate. There are other types of trusts that may be established. Some are designed to hold insurance, allow for annual gifting, provide for charitable giving, enable a person to qualify for public nursing home assistance, and for other purposes. These are specialized trusts for specific purposes. It is important to make certain your attorney knows just why you wish to have a trust.


May Living Trusts Be Revoked or Amended?

Most living trusts that are created are subject to being revoked or amended. They are referred to as revocable living trusts. For some specialized estate planning purposes, trusts may be created that are not subject to being revoked or amended, but where a living trust is used to designate how property will pass at death, they typically may be revoked or amended.


Can I Be the Trustee?

Wide discretion exists in selecting a trustee. The creator of a living trust will usually be the initial trustee of a revocable living trust. A successor trustee is named to serve in the event the initial trustee may no longer serve. Individuals are frequently selected. However, it is important to make certain that the individual is capable and trustworthy.

Professionals may be retained to serve as trustee, such as trust companies or banks with trust departments. This is particularly useful where the trust assets warrant professional management or family circumstances warrant. However, there is no legal requirement that you use a corporate trustee. Family members or others often may be quite capable of serving as a trustee. Where independence is required or special family situations exist, professional management may be helpful.

There are some trusts where limitations exist on who may serve as trustee. These usually involve tax planning used for gifting. However, again, for the customary revocable living trust, this is not an issue.


Is There a “Right” Time to Create of Living Trust?

There is no “right” time to create of living trust. However, it is usually best for the business dealings of the trust creator to be less fluid or active when a trust is established. The most frequent time to have a trust (unless there are other reasons for it) is when a person reaches retirement or retirement age. Folks also may wait too long to establish a trust. Where a person is much older, ill or nearing the end of life, taking the time and energy to establish and fund a trust is usually unwise. This doesn’t mean that a trust may not be done. Each person, though, must consider whether it is right for them.


Where a Trust is Created, Is There a Need for a Will?

A will is still executed whenever a living trust is used. This is known as a "pour over will." This name derives from the fact that when a person dies, that person's assets are poured over into the trust. The will may not necessarily be probated or administered in court, but serves as a backup should any assets not be transferred to the trust or if the trust is invalid for any reason. The pour over will simply provides that assets not included in the trust pass to the trust for disposition.


Does a Living Trust Guarantee No Probate?

Where there is a living trust, probate often will not be required. However, a living trust does not guarantee there will be no probate. Probate may be required for a variety of reasons. Probate may be required where some assets are not transferred to the trust, to bar claims, or to pursue or defend claims. Some professional trust officers also insist that an estate be opened in order to prepare and file federal and state estate tax returns.


Does a Living Trust Eliminate Estate Taxes?

A living trust does not, in and of itself, eliminate estate taxes. This is a common misunderstanding. Whether estate taxes are eliminated depends on the size of the estate and the way the trust (or a will) is written. For most living trusts, there is not necessarily any advantage or disadvantage to a living trust. It is neutral. However, both trusts and wills may be written to reduce taxes in some cases.


Does a Living Trust Prevent Me From Having Use of My Assets?

Under the terms of most living trusts, there is really little difference from holding assets in your own name. A revocable living trust does not prevent you from having use of your assets, removing assets from the trust, or borrowing against trust assets. They remain your assets … the trust is simply a way to hold those assets.


Is a Living Trust the Same as a Living Will?

A living trust and a living will are not the same. A living will refers to a declaration that a person does not want any extraordinary means used to delay the moment of death if the person’s condition is such that death is imminent and inevitable. It states one’s wish to not be kept alive where there is no hope of recovery. A living will does not have anything to do with the disposition of assets. That’s what a living trust does. The term living will is not descriptive of what it does and is confusing. Some states, such as Missouri, use the term advanced directive that describes what a living will actually does.


Does a Living Trust Affect Eligibility for Public Assistance?

Assets in living trusts remain your assets. Therefore, for Medicaid and other public assistance purposes, the assets are considered as belonging to you. Accordingly, the usual living trust does not protect assets from covering nursing home expenses or make one eligible for public assistance. For assets to be protected for public assistance purposes, a special trust may be used. In general, the trust must be established at least sixty (60) months before applying for public assistance. Even then, whatever interest (e.g., income) held in the trust is treated as your asset. What this means is that in order to work, the trust creator must give up any right to the principal of the trust. Most living trusts are not created to become eligible for public assistance. If public assistance eligibility is the priority, that should be separately discussed.


Is a Living Trust For Me?

The decision to establish or not establish a living trust is a personal decision. Most people who have established a living trust have a real interest and preference for this estate planning tool. These individuals are normally happy with that decision. However, others do not consider it worth the time, expense or effort and prefer the simplicity of a will. Neither decision is necessarily right or necessarily wrong. A living trust is certainly worth serious consideration for many.


Please note that this discussion provides general information. It is not intended to provide specific or personal legal advice.


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This is not intended to be legal advice, but rather, to provide accurate information regarding education law matters. For more information regarding education law matters, please contact any member of our estate planning and administration group: Dennis W. Gorman (dgorman@srnm.com), James A. Rapp (jrapp@srnm.com), Harold B. Oakley (hoakley@srnm.com), Michael A. Bickhaus (mbickhaus@srnm.com), Natalie L. Oswald (noswald@srnm.com) or Joseph B. Ott (jott@srnm.com). Our telephone number is (217) 223-3030. Please visit our website: www.srnm.com. We invite and welcome all questions and comments. © 2013 Schmiedeskamp Robertson Neu & Mitchell LLP Vol. 2015-1







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