A living trust (also known as a "revocable trust") permits you to keep control over your assets while you are alive and allows you to direct assets to your beneficiaries at your death.*
The chief benefit of a living trust is the avoidance of probate. Probate is the court supervised distribution of property after your death. Each state has its own laws that determine how and when property will be probated. Generally, property that passes to the decedent's beneficiaries by either will or by operation of law is subject to probate. However, property that passes to beneficiaries on its own terms (life insurance, retirement plans, IRAs, certain bank accounts, and property held in trust) will avoid probate.
Avoiding probate means:
- avoiding the court costs and legal fees associated with the supervised distribution of your property;
- maintaining privacy as to your assets; and
- avoiding possible delays in distributing assets to your heirs.
In addition to probate avoidance, a living trust allows you to retain control of your assets during lifetime, while providing for their disposition upon your death.
Of course, establishing a living trust may be only the first step in reaching your estate planning goals. The savings from avoiding probate may be modest, especially when compared to the legal costs incurred in structuring, funding and administering a trust. More sophisticated estate planning will be necessary if, for example, you (or you and your spouse) own more than your remaining estate tax exemption amount** in assets, where state estate taxes will impact your estate, or if you hope to provide for minor children. Nonetheless, a living trust's benefits should spur you to start thinking about planning your estate now, in order for you to maximize control of your property.
* A living trust does not provide any income tax savings during one's lifetime. For income tax purposes, a living trust is treated as if it does not exist. No annual trust tax return is required to be filed. Instead, all income and loss of the living trust is reported on the income tax return of the person who established the living trust.
** The federal estate tax exemption amount is $2,000,000 in 2006 increasing to $3,500,000 in 2009. The highest federal estate tax rate is 46% in 2006 and decreases to 45% in 2007-2009. The federal estate tax will be repealed on 1/1/10 until 12/31/10. Beginning 2011, the federal estate tax will be reinstated with a federal estate tax exemption amount of $1,000,000 and a maximum estate tax rate of 55%. Currently, bills are pending in Congress that, if passed, would permanently repeal or otherwise lessen the impact of the federal estate tax.
The concepts contained herein are not intended to serve as advice and may have legal, tax and accounting implications. Consult your Attorney and CPA for advice.
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