Much has been written about the use of a living trust as a means of reducing the cost of passing your assets to your heirs at death. For most people, the primary motivation for creating a living trust is to avoid the probate process. In general, any assets which are in a decedent’s individual name at death will be subject to the probate process. Assets which are not individually owned at death, such as bank accounts and real estate which many times are owned by two or more individuals as joint tenants with right of survivorship are not subject to the probate process.
Life insurance and retirement benefits which permit the owner to designate a beneficiary avoid probate as well. Living trusts can also be used as a vehicle to hold assets for the benefit of minor children until they reach a certain age, or even for their lifetimes. They can also hold assets for an individual with special needs. What follows is a discussion of several of the advantages to a living trust arrangement:
If assets are transferred to a living trust during an individual’s lifetime, those assets will be administered by the trustee free of probate court supervision during the individual’s lifetime. Upon the individual’s death, the assets pass to the individual’s beneficiaries free of probate court. As these assets do not go through the probate process, the nature and extent of the decedent’s assets do not become a matter of public record as they would if individually owned.
For most individuals, the most important consideration in using a living trust is to reduce the cost of passing assets to their survivors at death. Significant savings can result through the use of a living trust to avoid probate. This is because filing fees, attorney fees and appraisal costs are reduced. While the initial expense of creating and funding a living trust tend to be higher than the initial cost of creating and executing a will, this cost is usually more than offset by the savings realized in avoiding probate administration at death.
Distributions from a trust to an individual’s beneficiaries usually occur more quickly than do distributions under a will. This is generally because no court orders must be obtained prior to distributing assets under a trust.
Out of State Assets
Avoidance of probate becomes an even more important consideration when dealing with assets which are located in a state other than the state of the individual’s domicile at death. If out of state real estate is owned individually at death, a separate probate process will often be required in addition to the probate process in the individual’s state of domicile causing estate expenses to increase.
Because the individual creating the living trust retains control over the assets transferred to the trust during his or her lifetime, the living trust is ignored for income tax purposes. This means that during the individual’s lifetime the trust is not treated as a separate taxpaying entity and all of the income and expenses of the trust are reported directly on the individual’s income tax return. Upon the individual’s death, the living trust ordinarily becomes irrevocable which causes the trust to become a separate taxpaying entity at that time.