Managing Money : Living Trust Is Often Better Than a Will
Starting to worry about how you will pass assets to your heirs? If so, be aware that a will is not the only way. Consider living trusts, which are gaining greater popularity these days--even among middle-income people--because they save the hassle and publicity of probate.
“Anybody who has a will, or should have a will, should consider a living trust” as an alternative or addition to a will, says Stephen P. Kunkel, tax partner for the accounting firm Pannell Kerr Forster.
A trust is a financial instrument into which you transfer property or money and appoint a trustee to administer it. The trustee--who can be yourself as well as a lawyer, accountant, financial adviser or institution such as a bank--manages and invests the trust assets and distributes its income to whomever you name as beneficiary or beneficiaries. The beneficiaries could include yourself, your spouse and children, a school, church or other institution.
A living trust (also called an inter vivos trust) has several advantages. First, it pays income while you are still alive. So if you still need the income, you can designate yourself as beneficiary, as most people do. After you die, the trust assets automatically pass to whomever you choose as heirs.
Second, a living trust could provide you a mechanism to obtain professional management for your portfolio if you are too ill or not interested in managing it yourself.
Third, and most important, a living trust allows your estate--and thus your heirs--to avoid the aggravating process of probate. Probate court is required to establish that a will is valid according to state law, among other things. But the legal and other costs of probate often can consume more than 5% of your estate’s assets, and delays in the process often run into months and even years.
“Probate is a real hassle,” Kunkel says, noting that many who have suffered through the process when receiving inheritances in turn avoid wills for their own assets, instead setting up living trusts.
Fourth, through a living trust, your assets are kept confidential so they can’t be examined by others. That is a great attraction to the wealthy.
“Some of my wealthier clients are very private people and keep their financial information extremely private. That is often the more driving reason to use these trusts,” says Dick Poladian, partner at the accounting firm Arthur Andersen & Co.
And partly because there is no public process, living trusts cannot be contested as easily as wills.
Another advantage: You can cancel or change terms of your living trust at any time. That is because living trusts generally are set up as revocable, meaning that you retain control over the assets and income.
“It leaves a tremendous amount of flexibility,” Kunkel says. If you get tired of the trust and want to terminate it, or want to change beneficiaries, or want to move assets in and out, you can do so, he says.
But there are some disadvantages.
First, you don’t save on estate or income taxes, Poladian says. Because you still retain control over the assets while you are alive, your heirs must still pay normal estate taxes when the assets revert to them.
By the same token, you also don’t avoid or reduce income taxes on income going to yourself. Again, because the trust is revocable, technically you still control the assets and the income. (If you designate someone else to receive the income while you are alive, you still will be taxed on the income, Poladian says.)
Second, you must formally transfer title on your assets to your trust, which can be a hassle for such things as homes and other real estate. If you fail to do so, your assets may have to go through probate.
In addition, anything you wish to do with your trust assets--such as refinancing your home placed in the trust--may have to be done through the trust, which can involve more paper work and hassle.
Also, setting up and administering a trust can be costly. You most likely will have to pay an attorney to handle the initial paper work setting up the trust. And if you name a trustee other than yourself, trustee fees can be quite high, depending on the type and size of assets.
Accordingly, adviser Kunkel recommends, the minimum value of assets you need to make a living trust worthwhile is about $200,000. That doesn’t include assets, such as your home, that might avoid probate anyway if they are jointly owned by you and your spouse.
Many middle-income people into their 40s or older probably have accumulated at least that much in assets, if they include the value of their pensions, he says.
Bill Sing welcomes readers’ comments but regrets that he cannot respond individually to most letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
