Living Trusts

From what I have seen over years, there are still a lot of misconceptions and errors with how living trusts are used in real life and death.

While most of the publicity and consternation is over the Estate (aka Death or Inheritance) tax, the truth is that most people don't have estates large enough to be paying any of that tax. What should be more of a concern are probate fees. While estate taxes are payable on the net estate after deducting liabilities, charitable bequests and final funeral, medical, legal and tax preparation costs, probate fees are based on the gross estate values. It is possible that the probate fees are more than the net assets in the estate, requiring the heirs to pay in before the estate can be finalized. For example, an estate with assets of two million dollars and liabilities and other qualified deductions of two million would have a net estate of zero and thus no tax. The probate fees would be around $100,000 depending on the state or states in which the assets reside.

A growing number of people are using revocable living trusts in order to avoid probate. However, there is still a lot of confusion as to how they work. Many people confuse living trusts and living wills, when they are in fact two very different things. A living will is to document your wishes if you become incapacitated, such as a DNR (do not resuscitate) authorizing someone to "pull the plug" on you.

Another common misconception is that assets in a living trust are exempt from estate taxes. A living trust, because it is a revocable trust, has no effect on estate taxes or any other taxes available to individuals, such as the tax free residence sale. An irrevocable trust is a completely different entity that files tax returns and will affect estate taxes.

Another problem that often occurs is that people have set up a living trust, often with one of those cheap do it yourself kits, and then never got around to titling their assets in the name of the trust. I have seen several cases where the trust ended up doing absolutely no good for this very reason. While I still believe in setting up corporations by oneself, that is not the case for setting up a living trust. A good estate attorney will obviously take care of the asset titling at the time of the trust's establishment, and prepare a pour-over will to cover assets obtained later on that aren't in the trust's name. The executor of the estate needs to be careful about titled ownership of assets as s/he is compiling the inventory and determining which assets can be transferred immediately to the heirs and which ones must go through the long and expensive probate process.