A Living Trust Explained

A Living Trust is a revocable plan that contains your personalized special instructions for your own care and the care of your loved ones.  A Living Trust is used as a vehicle to save money, create stability for your family and avoid the time and expense of probate. The popularity of trusts has increased over the past ten years, and for good reason. Trusts are important tools designed to accomplish a number of different objectives, the most important of which includes transferring assets to heirs according to your desires, reducing taxes and eliminating probate proceedings, which are costly and time consuming.  In essence, a Living Trust is simply good estate planning.

Transferring Assets to Heirs

Trusts are like wills in that they designate what property goes to whom. Trusts, however, go beyond the scope of wills by setting up standards or guidelines on how and when that property is distributed. For example, many of my clients have minor children and want a way to provide for them that is both caring and responsible in the event of their untimely death. Some parents, therefore, set up a trust to include language that provides for income and principal to those children for education and medical purposes, but not for other purposes like buying a new roadster. Then, at a later, and hopefully more responsible age (i.e. 25 years), the trust might distribute the entire principal to the child.

Similarly, a trust might give property to a beneficiary for his or her life and then to someone else at death. For example, some of my clients have trusts that give a house to provide shelter for a spouse for his life and the fair market value of the house to the spouse's children at his death. This type of planning might be appropriate in second or third marriages with children from prior marriages. It is also a way to save tax dollars by keeping the property out of the gross estate.

Reducing Taxes

Estate taxes can consume up to 55% of the gross estate without proper planning vehicles such as the use of a trust or a family limited partnership (FLP). What many people don't realize, however, is that estate taxes will be assessed only on estates that have values greater than one million dollars ($1,000,000) in 2002. If your estate has a value between $1,000,000 and $2,000,000, estate taxes may be avoided with the proper planning. On estates with values greater than $2,000,000, estate taxes may still be eliminated but at the cost of losing some control over your assets. One of my recent clients had a relatively simple A-B-C trust that saved him over $250,000 in taxes on an estate with a value that fell between the $1,000,000 and $2,000,000 range. In other words, had he not used the A-B-C provision, his family would have had to write a check to the U.S. government for a quarter of a million dollars!

Probate Costs

Another reason you should consider creating a Living Trust for average size estates (more than $100,000) is to eliminate probate proceedings. Probate is not just expensive, but it's also a tiresome and complicated process. Probate is required for an estate that has been disposed pursuant to a Will and has a fair value of greater than $100,000. Below is a statutory fee structure used to compensate attorneys for administering the estate in probate proceedings.

SIZE OF ESTATE
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
$900,000
$1,000,000
$2,000,000

STATUTORY FEE
$4,000
$7,000
$9,000
$11,000
$13,000
$15,000
$17,000
$19,000
$21,000
$23,000
$33,000

These fees can and usually do go higher with court approval and don't include court costs or executor fees, which range anywhere from $2,000 to $5,000 on an average sized estate.

Trusts are not for all people. If appropriate, however, I believe in the value of a well conceived, well drafted, comprehensive trust that is dynamic and subject to periodic review. The cost of this kind of trust varies with the size and complexity of the estate but is far below the costs of probate proceedings and preventable taxes, to say nothing of the peace of mind it brings to you and your family.

I hope this has provided you with a concise summary of how a trust can help you and your family provide peace of mind and save you thousands of dollars.