TALES FROM THE CHESTNUT TREE

LIVING TRUSTS: True or False?

Neal A. Deutsch, CFP^®

Published in Rivertown Journal, January 2006

Living trusts are a powerful estate planning tool that, when used properly, can be greatly advantageous in attaining your estate planning goals, providing certain advantages that may not be available with other estate planning devices. Living trusts, all in all, are generally a pretty good idea: they are not, however, a cure-all. Disciples of the living trust abound today, touting the advantages of living trusts with the fervor of a television evangelist. Let's separate the facts about living trusts from some of the fiction that is widely discussed.

In order to determine if this estate planning strategy is applicable for you, it is necessary to understand the basic nature of a living trust. Technically, living trusts are not a legal entity: it is a marketing term for "revocable inter vivos" trusts, developed during your lifetime while you are alive and well. "Inter vivos" is Latin for "during life." If a trust is "revocable," the person who establishes the trust can change all or any part of the trust, so long as that person remains competent. Assets placed in the trusts will pass to the named beneficiaries outside of probate, generally speeding up the process and decreasing probate fees. Probate is the court proceeding by which a deceased person's assets are gathered and distributed to his or her beneficiaries.

True or false: Avoiding probate is usually desirable? In a strict sense, this is true. Probate can sometimes be an expensive and time-consuming process. Some states have adopted the modern Uniform Probate Code that substantially streamlines the process, reduces costs and time. However, by allowing assets to bypass probate, it affords speed and privacy to the process.

True or false: Living trusts save money during administration of the estate? By avoiding the probate court, living trusts may save on the associated attorney fees and court costs. However, there are still income and estate tax returns to file and legal, administrative and asset transfer work to do. This claim is mostly true, although it is somewhat exaggerated.

True or false: Living trusts save on estate taxes? False. Living trusts do not necessarily save federal estate taxes. Estate tax saving provisions can be incorporated into living trusts. However, those same provisions can be incorporated into a will. Therefore, living trusts do not offer any inherent tax saving advantages.

True or false: Living trusts are private? This is largely fact. By avoiding the probate process, you can keep the distribution of your assets private. Also, if the trust is funded (i.e. assets have been transferred into the trust before death) the size of the estate can be kept confidential. Note however, that some transfers, notably real estate, are always public.

True or false: A living trust can help in the event of incapacity? True, provided you have either placed assets in the trust before incapacity or a device exists to place your assets into the trust in the event of incapacity. Another device, the durable power of attorney, can be used in some cases as a less expensive alternative to the living trust when planning for incapacity.

The living trust may be an important tool that provides many advantages. Living trusts are not, and never have been, a panacea. As always, it is crucial to consult with an experienced estate planning attorney to evaluate all alternatives before adopting an estate planning strategy.

Neal A. Deutsch is a Certified Financial Planner^™, Registered Securities Principal and President of Chestnut Investment Group in Suffern, NY, helping people with financial planning since 1984. Please feel free to call Neal at 845.369.0016 or email him with your questions at neald@chestnutinvestment.com Feel free to visit his website at www.chestnutinvestment.com