IS A LIVING TRUST REALLY NECESSARY?

By Robert B. Rosenstein

Everyday on the radio there is an ad for the preparation of a living trust and telling the listeners that they should create such a document. The issue that I would like to discuss in this article is the appropriateness of a living trust.

A living trust is a form of estate planning that provides a method of avoiding probate and also may help assist in avoidance of paying estate taxes. When an individual creates a living trust, what is occurring is that a new entity is being created. Once the new entity is created, all of the individual’s assets are transferred to the new entity and managed pursuant to the terms of the trust agreement that is created. This new legal entity is usually left under the control of the creator of the trust, known as the “trustor,” and the person or entity assigned to manage the assets is known as the “trustee.”

The trust document provides the terms and conditions as to how the assets (money and other property, including investments) are to be managed, and how the trustee is to distribute the assets. Usually, while the trustor is alive and also acting as the trustee, the funds are not restricted as to the distribution and may be withdrawn at will. The trust document also provides for an alternative trustee to be appointed to take over in the event of the incompetence or death of the original trustee. The trust agreement also provides for the distribution of the assets, or the creation of some other trusts, upon the death of the trustor.

Through this method, there usually is no probate required, as the entity is not affected by the death of the original trustor, and the new trustee continues on with the trust business. It is similar to the president of a company dying, the company does not stop operating, a new president is appointed and the business is able to continue.

A joint living trust can be set up by a husband and wife (who usually are co-trustors and co-trustees), to take advantage of the unified credit, to avoid paying estate taxes. What happens in simplistic terms is that upon the death of one of the co-trustors, two separate trusts are created. One trust to take advantage of the tax benefits, and the other for the surviving trustor, with funds that are unrestricted. Upon the death of the first co-trustor to die, the trust set up for the tax benefit is non modifiable, but the assets are usually set up to be used for the care of the surviving trustee (spouse). After the death of the second trustor, the trust is distributed as the co-trustors provided for in the trust document.

The major advantage of having a living trust is to avoid probate. If there is only a will and not a trust, a court proceeding known as probate is opened, for the purpose of gathering of all of the assets of the deceased, paying off obligations and distribution of the assets pursuant to the terms of the will. The will can provide for creation of trusts within it, and can also provide a method to take advantage of the unified credit, just the same as a living trust can.

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