Q&A on living trusts

posted 7/7/2014 in Trust

Living trusts are an exceptionally useful way to manage family finances today. Unfortunately, trusts are also a mystery to most people, as evidenced by the variety of questions fielded by our specialists. The more people know about trusts, how they work and what their benefits are, the happier we are. Accordingly, here are some of the questions we get most often, and the answers.

What is a living trust?

A living trust is a legal mechanism for property management, embodied in a trust agreement. The grantor creates the trust and transfers property to a trustee, who manages the
property, according to the terms of the trust, for trust beneficiaries. The grantor may also be a beneficiary. Trusteeship is governed by a well-established body of law that includes fiduciary duties owed by the trustee to the beneficiaries.

Fiduciary duties?
What does that mean?

Stated most simply, a trustee has a duty to put the interests of the trust beneficiaries ahead of his or her own. Self-dealing is not allowed.
For example, an irrevocable trust set up for Walt Disney’s grandchildren was recently in the news. One of the private trustees had used trust assets for real estate transactions from which he personally profited. In a lawsuit to remove him as trustee for violating his fiduciary duty, he initially defended his actions by arguing that the trust had profited as well; it was not harmed by his actions. That’s not the test, under the well-established law of fiduciary duty. The private trustee resigned before the case went to trial.

What are the advantages of a living trust?

Key living trust benefits include:

• financial protection in the event of incapacity—conservatorship may be avoided.
• probate avoidance—uninterrupted financial protection
for beneficiaries.
• professional asset management—provided a professional
trustee, such as us, serves as trustee.

Are there any disadvantages?

A living trust is more complicated to execute than is a will—assets must be retitled in order to be owned by the trust, for example. The cost to create an estate plan that
includes a living trust will be higher than the fee for drafting a routine will. There may be trustee’s fees to be paid.

For many families, the benefits of the living trust are well worth the costs.

What kind of investment return can I expect from a living trust?

The fact that portfolio assets are managed in a trust has no
direct impact upon the investment return of those assets.

We work with our trust clients to develop an investment plan that balances risks and rewards so as to meet the overall objectives of the trust. Some trusts are oriented
toward capital growth, some toward asset preservation, others toward a balance of various objectives.

Will a living trust reduce my income taxes?
How about estate taxes?

No, a living trust is not a tax-reduction strategy, for either income or estate taxes. Be suspicious of anyone who says otherwise. On the other hand, a living trust may be integrated
into an estate plan; it may become irrevocable at the owner’s death, with the assets held in further trust. In that situation, no estate taxes will be saved at the owner’s death,
but additional taxation of the family wealth may be avoided down the road. An estate planner can tell you more.

How does a living trust avoid probate? 

A living trust is an independent legal entity. As such, the trustees do not require court supervision to carry out their duties.

Why is avoiding probate a good idea?

Time and money are the two factors that concern most families. There are no court-related delays or administrative hassles with a living trust delivering financial protection to beneficiaries. Probate fees may apply to even modest estates, and they are separate from any “death taxes” (estate and/or inheritance taxes) that may be imposed. The paperwork and fee burdens vary widely around the country.

Can I still qualify for Medicaid if I have a living trust?

Having a living trust won’t affect your Medicaid qualification one way or the other. Living trust assets are a countable resource, treated the same as if you owned it outright.
If your wealth level is suitable for a living trust, the odds are you won’t be a candidate for Medicaid. An irrevocable trust established more than five years
before the Medicaid application is another matter. Irrevocable trusts are beyond the scope of this article— see an elder law attorney if you want to learn more about them.

When should I update my living trust?

As versatile as it is, a living trust isn’t a “file and forget”
strategy. You’ll want to revisit the trust terms when:

• marital status changes;
• a child is born or adopted into the family;
• a beneficiary dies;
• you move to another state; or
• your financial situation undergoes a significant change.

Who should be my trustee?

Trusteeship is our business, so we’re naturally biased in answering this question. We should be your trustee. We have the people, the professionalism, the systems and the experience needed to make your trust-based wealth management plan successful. Call on us soon to learn more!

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