Friday, December 02, 2022

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What is a Living Trust and Why Might I Want One?

One topic I often address is in my practice is deciding when to use a trust-based estate plan – generally referred to as a “revocable living trust” – and when to use a will-based estate plan.  A living trust is not for everyone and there can be drawbacks, but the following characteristics are often seen as the primary advantages:

Privacy / Avoiding Probate.  A properly funded revocable living trust allows you to avoid probate as a means of transferring your assets upon death.  Probate is a court-supervised proceeding within which a person’s estate is settled.  In short, a will is filed with the court, creditors are notified and paid, and remaining assets are transferred to beneficiaries.  Probate filings are public documents, cases generally remain open for at least 6-12 months, and attorneys’ fees and costs are incurred.  Anyone interested in your family’s affairs would be able to obtain copies of the will, the inventory of assets, and the like.  With an effective trust-based plan, the need for a court to supervise the management and distribution of estate assets is avoided and assets may be distributed to heirs more quickly.  Where real property is owned in another state, a trust-based plan will also avoid the necessity of a second, out-of-state probate proceeding.      

Disability Planning.  Most loved ones serving as co-trustee or successor trustee find it easier to manage your financial affairs through a trust than with a simple power-of-attorney.  Some counterparties view general powers of attorney with skepticism. More importantly, a general power of attorney is effective immediately and doesn’t come with any tailored instructions or reporting responsibilities.  

Tax Planning.  Though tax planning can also be done using a will-based plan, a living trust is often used to minimize the impact of death taxes by providing for a “bypass trust” or “credit shelter trust” to be funded at the death of the first spouse.  Its primary purpose is to fully utilize the estate tax exemption available to each spouse in order to shelter as much of a couple’s combined estate from death tax liability as possible.  Assets that pass directly to a surviving spouse are ordinarily not taxed on the first spouse’s death, but will be subject to tax upon the survivor’s death.  In that event, the first spouse’s estate tax exemption may be wasted.  In contrast, assets properly funded to a credit shelter trust will avoid death tax on the death of the survivor as well.  The trust can still be made available for the general support of the surviving spouse during the survivor’s lifetime, but because it does not give him or her unfettered control over the trust assets, the remainder does not have to be included in the spouse’s estate for death tax purposes.  Couples with assets, including the face amount of all life insurance policies, exceeding $1 million may need some type of tax planning in Oregon.