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Benefits of a Living Trust

Whenever a person dies, his or her estate must be “settled.” Settlement, or “administration,” is the process of collecting, inventorying and appraising the estate assets, resolving the claims of creditors, and making distributions to the beneficiaries. If the decedent had no estate plan or only had a Will, then the settlement process would occur through a court proceeding called “probate,” which is a tedious and costly process. If the decedent had a Revocable Living Trust, probate could be avoided altogether; however, the trust estate would still need to be settled through a Trust Administration. A living trust is a document that provides for the management of your estate while you are alive and then for the disposition of your estate following your death.

There are five benefits to a living trust as follows:

  1. Probate Avoidance; In a probate, legal fees and Executor commissions are based upon a percentage of the gross value of the estate. See Probate Statutory Fee Schedule. Although a living trust estate must be settled, it does not have to be settled through the probate court. While the settlement of a living trust is neither cost-free nor instantaneous, the legal fees and trustee fees are usually substantially less than the statutory probate fees. The difference represents a savings to the trust, which benefits the beneficiaries.

  2. Conservatorship Avoidance; Without a comprehensive estate plan, if you were to become incapacitated to the point where you could not manage your own financial affairs, a conservatorship proceeding may be required. In a conservatorship proceeding, the probate court appoints a person (called the “conservator”) to collect your income, pay your bills, make investments for you, and otherwise manage your financial affairs. The conservator must provide annual accountings to the probate in which the conservator makes a full disclosure of his or her actions during the year. This is required even if your spouse is the conservator. It is usually necessary for the conservator to hire legal counsel to represent him or her in the court proceedings. The conservatorship proceeding will continue until you either regain your capacity or pass away. Consequently, this process can become a substantial and ongoing expense, depleting the estate to cover the costs. Furthermore, and as a public proceeding, all of your financial affairs, along with the fact of your incapacity, become a public record.

    A living trust avoids the need for a conservatorship proceeding. If you were to become incapacitated, your spouse or other person named as the successor trustee would then take over the management of the trust estate.

  3. Guardianship Avoidance; If you were to die without a trust while your children were minors, a guardianship proceeding could be necessary. A guardianship proceeding is a court proceeding that is similar to a conservatorship in that the minor is deemed legally incapable of managing his or her own financial affairs. Thus, the court appoints a suitable adult, called the “guardian,” to manage the estate that passes from you to your minor child under the supervision of the court. Like a conservatorship, the guardianship proceeding will go on year after year until the minor reaches the age of majority. When the minor reaches the age of majority, the guardianship proceeding must end and the assets of the estate distributed outright to the child. The child may not be financially mature enough to properly manage the estate at such a young age, thereby increasing the risk that he or she will squander it.

    A living trust avoids the need for a guardianship proceeding. If your child is a minor at the time of your death, the successor trustee will manage the minor’s estate in trust and without court supervision. Furthermore, the trust does not have to liquidate when the minor reaches the age of majority. This gives you the ability to defer the ultimate distribution to your child until he or she reaches sufficient age and maturity to properly manage the estate when it is received, thereby decreasing the risk that it will be squandered.

  4. Estate Tax Reduction; The living trust of a single person is tax-neutral; it neither benefits nor penalizes him or her. However, the living trust provides the opportunity for a married couple to reduce or eliminate the federal estate tax. For tax purposes, each individual (whether or not married) can give away $3.5 million worth of assets or money at death. If a married couple have an estate in excess of $7.0 million and one spouse dies leaving his or her share of the estate directly to his or her spouse, then there is no tax due on the estate. However, when the surviving spouse eventually dies, everything over $3.5 million is subject to estate tax.

    On the other hand, the living trust can provide that upon one death, the estate is to be divided into two separate trusts. These separate trusts are often referred to as “Trust A and “Trust B,” the “Marital Trust” and the “Bypass Trust,” or the “Survivor’s Trust” and “Credit Shelter Trust.” Basically, the trust provides that the first $3.5 million of the deceased spouse’s share of the estate goes to Trust B, and the balance, if any, along with the survivor’s share of the estate, goes to Trust A There is no estate tax on the first death. Trust B is an irrevocable trust, but the surviving spouse is the beneficiary, entitled to receive the income and principal for his or her health, education, support or maintenance. The surviving spouse may be the trustee as well, thereby preserving day to day management and control over both Trust A and Trust B.

    When the surviving spouse dies, Trust B is excluded from his or her estate for tax purposes. Therefore, if Trust A is $3.5 million or less, there will be no estate tax on the survivor’s death. If Trust A is over $3.5 million, the estate tax (46%) will apply to the value of the estate in excess of $3.5 million.

    In this manner, the first $7.0 million of the married couple’s estate passes to the trust beneficiaries free of estate tax.

  5. Preservation of Privacy; A probate proceeding, like any other court proceeding, is a public forum. Therefore, all of the decedent’s affairs, including a detailed inventory of his or her assets, will become a public record. The administration of a living trust is a private affair. There is no public disclosure of the decedent’s affairs, assets or liabilities, thereby preserving the family’s privacy.

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