THE NY FOREST OWNER 35:3: 6: May/June 1997
LIVING TRUSTS: FACT AND FICTION
Do I need a living trust? This is a question that many of our clients ask themselves. In fact, a number of attorneys are actively marketing living trusts. If you believe that the answer to this question is simple, think again. There are a number of advantages and disadvantages to living trusts. They are a good planning tool for some people and not for others. Consider all of the issues before deciding.
What is a Living Trust?
A trust is an agreement. The agreement is between the person setting up the trust (commonly known as the “Grantor” or “Settlor”), and the person or institution that will manage the trust (commonly known as “Trustee”). When creating the trust, the Grantor transfers assets into the name of the Trustee. The trustee is obligated by the trust agreement to hold and distribute those assets pursuant to the terms of the agreement. The person(s) that receive the income from the assets are known as “income beneficiaries.” The person(s) that receive the principal assets are known by a number of terms but most commonly, “remainder beneficiaries.” The income and remainder beneficiaries may be the same individuals but do not have to be. The trustee is a fiduciary. Therefore, in addition to his/her obligations under the agreement, the trustee owes a fiduciary duty to all parties.
A living trust may be revocable or irrevocable. The distinction between revocable and irrevocable trusts cannot be understated. The trusts are different in the manner in which they are funded, taxed and amended. Generally, when you hear about living trusts in the media the reference is to revocable living trusts. Irrevocable living trusts are far more complex and therefore will not be addressed in this article.
Reasons to Create a Living Trust.
A. Avoid Probate.
The first reason given for creating a living trust is the avoidance of probate. Probate is a process by which the assets of a decedent are marshaled. Once marshaled, the duly appointed representative of the estate pays the decedent’s final expenses and then distributes the balance of assets to the appropriate beneficiaries. The probate process is supervised by the Surrogate Court in the county where the decedent resided. In New York, the probate process is usually rather simple. When a living trust is created, all assets are transferred to the trustee to hold in trust. When a person dies, the trust agreement does not terminate. Therefore, if all assets were transferred to the trustee, the individual would not have any probate assets to be administered. No probate filings would be required.
B. Privacy and Protection.
As discussed above, if a living trust is properly created and funded there would be no need for a probate filing. The probate records are public records. Anyone may review the Surrogate Court files. The files may contain a listing of assets, and names of relatives and beneficiaries. If a probate estate is not required the information is not available for review.
Upon the opening of a probate estate, any party that may have an interest in the proceeding is entitled to notice that the estate is being opened. In addition, any individual that would be entitled to receive a share of the estate in the event there was no Last Will and Testament, is entitled to file an objection to the probate of the Last Will and Testament. If a probate filing is not required there is not a notice requirement.
C. Financial Management.
Upon transfer of a Grantor’s assets to the trustee, the trustee is empowered to manage the funds. If the Grantor subsequently becomes disabled, the trustee may continue the management as if the Grantor were competent. Financial institutions should not be concerned by the subsequent incapacity. Further, if a trustee becomes incompetent, an alternate may be designated to fulfill the duties of that trustee.
Reasons Not to Create a Living Trust.
A. A trust must be properly created, funded and maintained.
The number one reason a living trust will not work for most people is that they fail to fund and maintain the trust. Creation of a trust may be likened to the creation of a separate entity, i.e. corporation, partnership. If incorrectly created, funded or maintained the trust will fail to achieve the Grantor’s goals.
B. A trust is more expensive to create than other estate planning tools, i.e. Wills.
The cost of a trust may be two or three times the cost of creating a comparable Last Will and Testament. Currently, the costs of trust creation run between $1,500-$5,000. Often, people do not require this type of expensive planning. A planning alternative may be utilized to achieve the same goals without the expense. It is also possible that the expense incurred to create the living trust will exceed the ultimate cost of probate.
C. Once the trust is created, the Grantor’s assets must be transferred to the trustee.
If any asset is retained in the Grantor’s name alone and not transferred to the trustee that asset will not be part of the trust and the advantages of the trust will not apply. Many client’s resist transferring their home to the trustee. There seems to be a comfort issue with the thought of relinquishing control of the homestead.
D. Finally, the trust must be maintained.
As we go through life, our financial situation changes. We buy new assets and sell other assets. Once the trust is created, to maximize its benefits, the trustee must buy and sell the assets. If assets are commingled, the trust will not achieve the desired goals. Further, the trust may be susceptible to challenge.
A Revocable Living Trust Does Not Save TAXES!
Let me repeat, a revocable living trust does not save income or estate taxes. Since the trust is revocable by the Grantor, the taxing authorities deem the Grantor to have an incident of ownership in the trust. Therefore, all income will be taxed on the Grantor’s individual tax returns and all assets will be included in the Grantor’s estate tax return. The words, “Save Taxes” is included in almost every advertisement for revocable living trusts. The savings are illusory.
A. Not all assets may be held in a Living Trust.
Business assets may not be the best assets to transfer to a living trust. Members of partnerships often have to obtain the permission of their partners to make the transfer. Buy/Sell Agreements must be amended to recognize the transfer. Assets of a professional corporation may not be held by a trustee. In addition, retirement plans often cannot be transferred and should not be transferred due to harsh in come tax treatment. Many financial institutions do not readily accept assets held by a trustee as collateral. Therefore, care must be taken prior to transferring an asset to a trust to ensure that the underlying loan is not accelerated and that the ability to collateralize the asset is not compromised.
B. A Living Trust will save me money.
In New York State, probate fees are relatively modest. The filing fee for an estate under $500,000 is $500. Executor’s commissions (fees) and trustee commissions are roughly comparable. Finally, the attorney’s fees for establishing, funding and maintaining the trust are often as high as the attorney’s fee for administering the estate. A true price comparison should be obtained prior to entering a trust agreement.
Living trusts have many purposes and are an estate planning tool that when properly used, funded and maintained may achieve a number of goals. The living trust is not, however, the only available estate planning tool. In many cases a living trust is not appropriate. Care must be taken to ensure that your individual purposes will be served prior to entering a trust agreement.
David Colligan, a member of NYFOA’s Niagara Frontier Chapter, is a practicing attorney with a Buffalo law firm (Colligan Law LLP; 600 Bank of America Building, 12 Fountain Plaza Suite 600 Buffalo, NY 14202) and regularly provides articles on legal matters of interest to forest owners.