Using Living Trusts to Accomplish Your Estate Planning Goals – It
Isn’t Just About Avoiding Probate
By Ron Miller, Licensed Professional Fiduciary
You’re probably familiar with the basic idea of a trust. It’s
a legal instrument that establishes:
- who will control your assets
- what assets you want held in trust
- who your beneficiaries are
- what you want done with your assets during and after your lifetime
- how and when your beneficiaries will receive assets
- what information your will share with those beneficiaries.
A trust usually avoids the expense, long timeframe and publicity of the
court-supervised probate process. Those who gift assets to their family
and loved ones before death to avoid a probate will lose the tax advantage
of a stepped-up tax basis, and the recipient will take the donor’s
tax basis, potentially leading to higher capital gains tax. To achieve
the adjusted tax basis AND avoid a high-cost probate, a revocable living
trust is still the most secure, cost-effective and flexible manner to
transfer your estate to your family and loved ones.
What is a revocable living trust?
A revocable living trust is a type of trust that may be amended or revoked
during one’s lifetime. Since you control your assets, your revocable
trust is an extension of you and uses your individual tax identification
number to file and pay income taxes during your lifetime. It is common
for a trust to start as revocable, then become irrevocable upon the death
of its settlor (the owner of the assets who works with an attorney to
draft the trust document).
What is an irrevocable trust?
In contrast, an irrevocable trust is a type of trust that, once created,
cannot be amended or revoked at a later date. When you establish an irrevocable
trust, you essentially make a gift to that trust and no longer control
the use and disposition of the assets you put in that trust. An irrevocable
trust is a separate entity that files income taxes under its own tax identification
number. It is generally a tax-sensitive instrument. Many reasons exist
for one to create an irrevocable trust, the details of which are beyond
the scope of this article. An example to consider is a
charitable remainder trust which might be funded with appreciated stock or real estate. The donor
receives an immediate charitable tax deduction, avoids capital gains tax
and receives income for life.
What are the benefits of a revocable living trust?
The primary advantage of a revocable living trust is its flexibility. You
can change or even terminate the trust at any time during your lifetime.
If you’re fortunate to have good health, a simple family structure,
no family conflicts, evenly and easily divisible assets, no significant
creditor concerns and adult beneficiaries who are contributing members
of society with no familial, financial or personal challenges of their
own, a revocable living trust can also be simple to administer.
However, revocable living trusts really “earn their keep” when
one or more challenges exist. For example, revocable living trusts can
be adapted to deal with:
- Your (and your spouse’s) physical disability or mental incapacity
- Avoiding a conservatorship
- Birth of a new family member
- Remarriage after divorce or death of a spouse
- Blended families (marriage or remarriage when one or both spouses have
living ex-spouses, significant others and/or children from a prior relationship)
- Minor beneficiaries
- Young adults unprepared to manage your legacy
- Squabbling, uncooperative, combative or litigious beneficiaries
- Spendthrift beneficiaries who might otherwise burn through their inheritance
- Beneficiaries with drug, alcohol, gambling, shopping or other addictions
- Beneficiaries with mental illness
- Beneficiaries with special needs who may qualify for public benefits
- Grandchildren (when you want to avoid paying generation-skipping transfer tax)
- Changes in federal or state tax codes
- Complex or illiquid assets like real estate, a family business or royalty-generating assets
- Asset ownership title complexities
- Assets outside California and real property outside LA county
- Assets whose value exceeds the current estate tax exemption limits
- “Portability” of a deceased spouse’s unused estate tax
- Mortgages, promissory notes and other liabilities
- Creditor claims
- Charitable contributions
- And many more!
Who needs a revocable living trust?
Anyone who wants to protect their family and their assets and needs the
flexibility a revocable living trust offers.
How do I learn more about creating or modifying a revocable living trust?
Your best resource is your estate planning attorney. If you have not yet
established a relationship with an estate planning attorney, consider
contacting one of the members of the
Torrance Memorial Professional Advisory Council.
Ron Miller is a licensed professional fiduciary and co-managing principal of Select
Fiduciary Group LLC in Redondo Beach. Ron is a member of the Torrance
Memorial Professional Advisory Council. www.selectfiduciarygroup.com. (310) 465-8122.