It depends. One of the main purposes for the popularity of living trusts is the perception that if you sign a living trust document, your family will be spared the necessity of going through a probate proceeding to settle your estate. In order for the trust to avoid probate, great care must be taken that your assets are retitled into the name of the trust.
Do Living Trusts Save Estate Taxes?
It depends. A properly drawn living trust for a husband and wife does maximize the use of the lifetime exemption equivalent amount ($675,000 per person in 2001, increasing to $1,000,000 per person in 2006.) However, so do properly drawn wills which include provisions for a “testamentary trust” to be funded once the person dies. It is a false statement that a couple whose total assets are less than $600,000 saves estate taxes through the use of a living trust because there are no estate taxes with that size of an estate. If you are married and your estate is larger than $675,000, you will save estate taxes by the use of an exemption equivalent trust which can be either a living trust or a trust in you will document.
Do Living Trusts Shield Assets from Creditors?
No. A commonly held misconception about living trusts is that an individual can transfer assets into a trust and become eligible for Medicaid assistance upon entering a nursing home. Unless the trust is “irrevocable” and the person setting up the trust retains no right to any of the assets, and the transfer is made at least five years before assistance is required, the assets in the trust would still be required to be used for nursing home care before Medicaid would begin paying.
Why Should I Set Up a Living Trust?
If you are in need of assistance in managing your assets and you would like to appoint a person or a bank trust department to manage them, a trust is very effective. Your assets can be retitled into the trust and your trustee can pay all of your bills, invest your assets and deposit money into your checking account as frequently as you direct. A trustee has the obligation to account to you for all of the income received, the bills paid and a listing of the investments. Trustees also can arrange for care at home, income tax planning, medical insurance filings, and any other financial management a person might require.
Avoiding probate is another reason to set up a trust. However, most married couples whose total assets are less than $600,000 own all of the property jointly so that upon the first death, the survivor receives all of the property automatically by virtue of the joint designation. Therefore, the preparation of two trusts is a needless expense. Upon the death of one spouse, the survivor may well wish to consider setting up a trust.
A trust can provide continuity in the event you become disabled. Trusts contain instructions as to a successor trustee so that if you are unable to continue to act as your own trustee, there is little interruption in your financial transactions.
If I Have a Living Trust, Do I Still Need a Will?
Yes. There are some assets that should not or cannot be retitled in the name of your living trust such as motor vehicles, retirement accounts, final paychecks, and tax-deferred annuities. Therefore, you must have a will that directs that any assets not in your trust at the time of your death be distributed to the trust for ultimate distribution pursuant to the terms of the trust. This is called a “pour-over” will.
Summary
A living trust can be a very effective estate-planning tool if it is tailored to your specific needs. Be wary of hard-sell techniques and claims regarding estate tax savings and creditor protection that sound too good to be true. As with most other matters, it if sounds too good to be true, it probably is. This important planning deserves deliberation by you after careful consultation with your attorney and financial advisers.
