In every legal jurisdiction in America there exists a special court, which concerns itself with the administration of estates. Its most common name is “probate court.” Essentially, a living trust performs the same function as a will, with the important difference that property left by a will must go through the probate court process. In probate, a deceased person’s will is proved valid in court, the person’s debts are paid and, usually after about a year, the remaining property is finally distributed to the beneficiaries. The most important reason to have a Living Trust is to avoid subjecting your heirs, surviving spouse, or life partner to the agony and unnecessary cost of probate, by passing your assets to them without court interference.
Advantages
• Efficient and effective way to transfer property, at your death, to the relatives, friends or charities you’ve chosen.
• Eliminates estate-devouring probate charges and attorney’s fees.
• Speeds up the distribution of funds to your heirs by months or even years.
• Assures that no one may contest or overturn your wishes regarding the disposition of your estate.
• Is entirely private, rather than public documents open to anyone.
• Is totally revocable, allowing you to revise, amend or revoke the trust for any reason (or for no reason) any time before your death, as long as you are legally competent.
• Ensures that you either pay no estate and inheritance taxes or at least minimize those onerous taxes.
• Provides a means for your assets to receive full “stepped-up valuation”- a most important tax benefit that provides the major means of avoiding unnecessary taxation of capital gains.
• Unmarried couples who choose to commingle or not commingle their assets can benefit from using a living trust. People have the right to leave their property by living trust to whomever they want.
• Living trusts are valid under the laws of every state.
• Out-of-state real estate does not have to be probated in that state.
• You can avoid the need for a conservatorship.
• Your Estate Plan remains confidential.
Disadvantages
• No single disadvantage has been discovered to a properly drawn and funded Living Trust.
- After you sign your living trust documents, you have a valid living trust. But the trust is of absolutely no value to you until the real and personal property listed in the trust document (on the property schedules) is actually transferred into the trust. Lawyers call this “funding” the trust. Transferring your property to your living trust is crucial, and takes some time and paperwork, but it’s not difficult. Failing to transfer property to the trust is the most serious mistake people can make when creating a living trust.
• No cutoff of Creditors’ Claims – does not protect your assets from a creditor while you’re alive and will not shield your assets from your creditors after your death either, even if the property has been turned over to your beneficiaries.
• Difficult human dynamics (before death) – forces you to deal with (that means make a decision) regarding possible family conflicts, dividing property unequally between children, disinheriting a child, providing care for minor children or handling complexities arising from second or subsequent marriages.
• Divorce – One individual usually retains the trust, and the other individual must revoke his or her interest in the trust (requires paperwork).
• Periodic Review – need to review at least every five years. Circumstances change and the trust must too!
Tax Implications
• For tax purposes, living trusts do not exist while you are alive.
• You do not have to keep a separate trust bank account, maintain trust financial records or spend anytime on trust paperwork.
• As long as you remain the trustee of your trust, the IRS does not require that you file a separate trust income tax return.
• You do not have to obtain a trust taxpayer ID number. All transactions are reported on your regular income tax returns.