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As we meet with clients and prospective clients, we find many questions about living trusts. Since much of the information available about these comes from firms or individuals promoting them, with this newsletter we want to offer basic, unbiased information about living trusts--their advantages and disadvantages--and address some of the frequently asked questions about them.  Should you have further questions, we invite your calls.

 

What is a living trust?  It is simply a trust set up while the person creating it, the grantor, is still alive. These are also called inter vivos trusts.

 

How is that different from a living will?   A living will is a document that details which life-prolonging measures you want taken in the event of your terminal illness.  Whereas a living trust tells how to manage property during the grantor's life and what to do with that property once he/she dies.

 

Why would someone set up a living trust?  A living trust can be an ideal vehicle for managing the grantor's assets during his/her life including any periods of physical or mental incapacity.  Once the trust is set up and has been funded with assets, it becomes the trustee's responsibility to manage the assets according to the terms of the trust, irrespective of what happens to the grantor.  This is something which cannot be accomplished with a will, which only is invoked at the death of the person creating it.

 

Will a living trust keep my assets from going through probate?  Yes. Since probate is just a process by which property is transferred from a deceased person to his/her heirs or beneficiaries, a living trust will keep the assets contained in it from going through probate. 

 

Will avoiding probate save me estate taxes? While it is true that a living trust can be used to transfer assets at the death of the grantor and that by so doing, those assets are kept out of probate, there is no parallel tax savings.  Estate taxes will be due independent of whether those assets transfer through probate or outside of it.

 

Will a living trust save me other taxes?  Probably not. With a typical living trust used to manage assets currently and dispose of them at the grantor's death, there is no change in the income taxes due on earnings or gains.

 

Can a living trust be changed or terminated?  Some can and some cannot. It depends on the reason for establishing the trust and the way it was drafted. A trust that can be terminated is also called a revocable trust and one which cannot be is termed irrevocable.

 

If I have a living trust, do I still need a will?  Absolutely.  Even if your living trust tells how your belongings are to be distributed at your death, it is wise to have a will to cover the disposition of any assets which you own but which are not titled in the name of the trust.

 

What are the benefits of a living trust?

·      The primary benefit that a living trust provides, which cannot be obtained with a will, is the management of assets even during a period where the grantor is physically or mentally incapacitated.

·      Assets transferred at the grantor's death through a living trust do not go through probate, as they would if they were transferred through his/her will. This provides greater privacy, as probate records are public. In Tennessee, the probate process is fairly streamlined and not particularly expensive, but in states where that is not the case, transferring assets by living trust can be easier and less costly than doing so by will.

 

What are the downsides of a living trust?

·      It is a separate legal entity which will have a cost to create and may have ongoing costs to maintain. 

·      It is essential that assets be carefully titled since only those titled in the name of the trust are governed by its provisions. Over time, it can be easy to forget to title a new car, or a new home, or a new brokerage account etc. in the name of the trust. The failure to do so, diminishes the benefits which the trust was created to take advantage of. 

·      Even with a living trust, you will still need a will.

 

Note:  There is a special type of irrevocable, living trust which can be used to transfer assets out of your estate. By actually removing assets from your estate, this type of trust does have the ability to reduce your estate taxes. Generally, when people refer to a living trust they mean a revocable living trust, rather than this irrevocable variety.

 

Please call us at 615-591-0044 if you have questions or would like to discuss the topics covered in this newsletter.  This information has been prepared by Independence Trust Company to highlight issues which may be of interest to the recipient. You should consult with your attorney or advisor before taking action based on this material as your individual situation may differ.

 

© 1999 Independence Trust Company

 

Independence Trust Company

P.O. Box 682188

Franklin, TN   37068-2188

www.independencetrust.com

615.591.0044

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