by Robert L. Bever

          Over the last decade, many people, especially seniors, have been encouraged and even pressured into creating a "Living Trust" and placing all of their assets into such an entity. Literature and seminars discussing the topic can be found almost weekly in any community. The promoters of living trusts list a number of "alleged" advantages and, of course, are then ready to prepare the living trust for a sizable fee.

          This article will attempt to first address or respond to each purported advantage; secondly discuss some additional drawbacks or problems with a living trust; and then conclude with some situations where a living trust is advisable.

A. ADVANTAGES?

          1. Taxes - Probably the most important misrepresentation which can be made involving a living trust is that it will "save you taxes" at your death. The vast majority of living trusts created are revocable trusts, which means that the settlor (ie: creator of the trust-you) can change or even eliminate the trust at any time. This is generally preferable so that if you later need property from the trust or change your mind as to who will receive the property at your death, you can accomplish it just like you can change a will.

          If a living trust is revocable, however, there is absolutely no tax savings whether the property is in the trust or if it is still owned outright. There are two types of taxes at death, ie: federal "estate tax" to the U.S. government, and Indiana "inheritance tax". Both of these will apply equally to property owned either personally or in a revocable living trust. There are exclusions and credits to avoid both taxes, such as no tax for bequests to spouses and the unified credit which currently allows an individual to bequest up to $650,000 at death free from the federal estate tax, but none of these are affected by a revocable living trust.

          (Point: There are trusts known as "unified credit trusts" which can be created to take effect at your death either through your will or through an irrevocable trust and which do save a great deal of tax for couples with property in excess of $650,000, but these are not the purpose of a standard revocable living trust and will be the topic of a subsequent article.)

          2. Immediate Access To Property - Advocates of living trusts will convince a person that a beneficiary in a will must wait over a year to receive any distribution from an estate and that a beneficiary in a trust has access to money immediately. While it is true final distributions from an estate can take a few months, there are a number of ways to get money to a surviving spouse or child immediately. In Indiana, there exists a family allowance of $15,000 which can be reached immediately; one can petition for a "partial distribution" in order to meet any every day needs (which I have never had rejected); and cash flow financing can be pre-arranged through life insurance or pension benefits which provide a specific beneficiary apart from going through a probate estate.

          3. Privacy - A third point made by speakers for living trusts stress the advantages of privacy within a living trust. Let me first say that the courts do not publish the amount of your estate or the names of your beneficiaries in the local newspaper; and I know few people who make a habit of reviewing the public records at the courthouse. However, if privacy is a concern, Indiana does allow unsupervised administration of a probate estate, with the consent of beneficiaries, which eliminates much of the information going through the public records. An estate is still opened and a personal representative is appointed to handle the final affairs, but a detailed listing of property and beneficiaries is not required. Consequently, much of the same privacy found in a living trust can still be accomplished with a Will.

          4. Avoiding "Probate" and Costs - Listening to speakers at a living trust seminar, one would think going through "probate" is worse than the death, itself. First of all, let's understand what "probate" actually includes. To "probate" a will is simply having your personal representative (a person you select in your will) making sure your final bills are paid and that the beneficiaries you name in your Will receive the property you designate in your Will.

          Often times, audiences are convinced that in a living trust nothing must be done following a death and no work or cost is required to carry out the terms of the trust. I wonder if living trust speakers believe that elves come into our homes at night to get the property from a living trust to the named beneficiaries within the trust?

          The point I am making is that the same type of work will be required whether the personal representative in your Will is getting property turned over to the Will beneficiaries or the trustee in the trust is getting property delivered to the beneficiaries in the trust. Other work is also identical, ie: bills from your estate must still be paid; claims against your estate can still be made; inheritance tax returns for Indiana must still be completed and filed; if sufficient property, a federal estate tax return must still be filed; and beneficiaries must still have property transferred to their names. And much of the work will need the same legal assistance used with a Will.

          This discussion brings us to the topic of "costs". We hear every day how "probate fees" will take away the vast majority of your estate if you do not use a living trust. Let's look specifically at what "costs" these could include:

          (a) Taxes - we have already discussed how there are no additional taxes with probate than with a living trust.

          (b) Probate Fees - Some states charge a separate probate fee based upon a percentage of an estate going through probate. Indiana has no such fee other than a nominal filing fee of $100 to open an estate.

          (c) Personal Representative Fee - The person you name in your will to serve as personal representative to handle your final affairs and deliver property to a beneficiary is allowed to claim a fee. However, if you name a family member (ie: spouse) who is also a beneficiary, they will often waive this fee since it would reduce the amount they are going to get through the Will anyway. Why pay income tax on this income if they can receive it free as a beneficiary? Secondly, whomever is serving as the trustee in your living trust (probably a named successor trustee if you served as your own trustee during your life), can also claim a fee to perform their job.

          (d) Attorney Fees - Finally, there are likely to be attorney fees incurred with a probate estate. I will not deny this fact for the legal services provided; however, as pointed out above, similar attorney fees will likely also be required following death with a living trust. Contrary to presumed belief, the necessary transfers do not occur automatically. Bank accounts, real estate, car titles and corporate stock, will all need to be transferred from the trust to the beneficiaries and the same tax returns will still be necessary. This will all incur a cost.

            In addition, even if the attorney fees in a probate proceeding are slightly more than the attorney fees at death in a living trust, one must compare the initial costs when you create a living trust. It almost becomes do I pay now or do I pay later! In general, it is dramatically less expensive to prepare a will than to prepare a living trust (and if done properly, as discussed below, to transfer all of your assets at the time into the trust). Consequently, in conclusion, the cost savings are generally not what one is led to believe.

B. DISADVANTAGES?

            In addition to the above responses to alleged advantages, some other items need to be kept in mind on a living trust.

           1. New Ownership - Probably the biggest misconception in conjunction with a living trust is that the only thing you must do is to sign a document entitled "Living Trust". While this might technically create your trust, it serves no purpose unless you follow up with actual transfers of your property into the trust. This includes Warranty Deeds on your home or other real estate; transfers of your bank accounts into a new account in the name of the trust; transfers of car titles; notification to all corporations to transfer your stocks into the name of the trust; and any other work necessary to eliminate individual ownership in any property.

          As you might suspect, this requires a great deal of work and cost if done correctly. Secondly, you must remember when you sell or buy new property that it must always be owned by the trust. In order to accomplish the initial goal of the trust, you cannot own anything individually again until your death. Otherwise, you will still need a will which results in probate and which will defeat the purpose of the trust, anyway.

          While some people may not mind the additional paperwork made necessary by owning everything in trust for the rest of their lives, I have found it very confusing for some seniors and simply not worth any minimal benefit of a living trust. As you should know, with the use of a Will only, you continue to own everything personally until your death at which time the terms of your will come into effect.

          2. Bank Loans - In the event you need to borrow money following the creation of a living trust and need to use your property as collateral, some banks make it quite difficult to borrow against your trust property. Because of the new ownership discussed above, banks can be reluctant to use trust property as collateral, or at least require a great deal more paperwork to accomplish a simple loan.

          3. Income Tax Returns- At this point, the holder of a living trust can still report all income on their own income tax return using their own social security number. Depending on the type of property in trust, however, and if you name someone else as trustee, a new tax identification number can be required which will require a separate tax return (additional cost?) in addition to your own tax return in every year for the remainder of your life.

          C. USES OF LIVING TRUSTS

          The purpose of this article is not to say that living trusts should never be used. In certain situations they are probably the best document. If one is not capable of handling their own financial affairs or property, either because of a disability or simply do not wish to be bothered with the work, a revocable living trust which names another trusted person as trustee to handle the funds or property will accomplish two important tasks. It gives that other person the authority to control the property, while at the same time setting forth the settlor's intention of what should happen to their property at death.

          For others, if you believe the advantages are still worthwhile in spite of any drawbacks described herein, a living trust can still be used and either myself or my colleagues are willing to prepare them for you. Just be sure that all of the necessary associated work, ie: getting your property into the trust, is also accomplished at the same time.

          I hope this article has been of some assistance and just consider all options, including the simple Will, while pursuing your estate planning needs.