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A Living Trust Preserves Wealth for Your Family
But Not Everyone Needs It
Planning Can Avoid Probate


Sometimes we avoid estate planning, because we hope to live forever. But you may want to hedge your bet against the actuarial tables with some financial strategies for estate planning. A Living Trust will help preserve your hard-earned money for your family.

However, the Federal Trade Commission has warned about some unscrupulous sales people who are selling Living Trusts with misinformation and misrepresentation. Before you sign up for something you donít really understand or donít need, learn about this estate planning device.

What is a Living Trust?

A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. A Living Trust is simply a trust you create while you are alive. You can be the trustee of your own Living Trust, keeping full control over all property held in trust. When you make a Living Trust, your surviving family members can transfer your property quickly and easily, without probate. More of the property you leave goes to the people you want to inherit it. Because you are the trustee of the Living Trust, you still control your assets. You can revoke or modify the Living Trust at any time during your life.

A Living Trust Saves Probate Fees

Almost anyone with an estate of $100,000 or more can benefit from having a Living Trust. The big advantage of a Living Trust is that property left through the trust will not be supervised by probate court before it reaches the people you want to inherit it.

Estates of $100,000 or more are often subject to probate in their state of residence. Probate is the process of paying your debts and taxes, appraising the property and distributing your property to the people who inherit it. The advantage of a Living Trust is that it eliminates the need for probate and probate attorney fees.

The average probate case often drags on for months before the inheritors get anything. And by that time, there's less for them to get, after the property has been reduced by lawyer and court fees. With a Living Trust, the courts maintain no control over the trust's assets, and do not tie up the assets in a lengthy and costly probate process. A Living Trust can save anywhere from 2%-5% of the estate value in court and attorney fees.

Property you transfer into a Living Trust doesn't go through probate. The successor trustee, the person you appoint to handle the trust after your death, simply transfers ownership to the beneficiaries you named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When all of the property has been transferred to the beneficiaries, the Living Trust ceases to exist.

Still, not everyone has to worry about probate, and some people don't need a Living Trust at all.

History of the Living Trust

The first Living Trusts were used in 16th century England. The King, who wanted to limit land ownership, oversaw the distribution of property when a landowner died. This process of supervising transfers was the very first form of probate. In order to avoid disclosure of their land holdings, people set up trusts with the Church to circumvent the King. Landowners would deed their property to their Church, in exchange for the promise that the Church would grant the land back to their heirs when the landowner died.

A Living Trust Remains Private

A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate, such as inventories of the deceased person's assets and debts. The terms of a Living Trust, however, need not be made public.

Does a Living Trust Protect Assets from Creditors?

No, a Living Trust does not protect your property from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name. It can be more difficult for creditors to know who inherits the property, however, because a trust document, unlike a will, is not a matter of public record, and is harder to track down.

Probate itself also can afford a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims for money. If creditors do not file their claims before the deadline, they relinquish their claims forever.

Does a Living Trust Save Estate Taxes?

YearFederal Estate tax exemption
2005 $1.5 million
2006-08 $2 million
2009 $3.5 million
2010 No estate tax. Current law is phasing out the estate tax
2011 $1 million unless Congress extends repeal


Presently estates valued under $2 million dollars are exempt from federal estate tax. A simple Living Trust will not reduce your estate taxes or state inheritance taxes. However, a married couple with assets in excess of $2 million dollars can save estate taxes with an AB Living Trust.

Saving Estate Taxes with an AB Living Trust

Fewer then 2% of individuals owe estate tax. The estate tax law presently exempts the first $2 million dollars of assets from the estate tax. A simple Living Trust does not reduce your estate taxes. However, a more complicated Living Trust, called an AB Living Trust, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets.

The AB Living Trust is designed primarily for married couples with children who have assets in excess of $2 million. An AB trust is also called "credit shelter trust," "exemption trust," "marital life estate trust" and "marital bypass trust." Its advantage is that it doubles the estate tax exemption. An AB trust also avoids probate.

So if you have assets in excess of $2 million, youíll want to look into it. Each spouse leaves property in trust to the other spouse for life, and then to the children. This type of trust can save up to hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple's beneficiaries.

As shown in the table, the amount of the estate tax exemption depends on the year of death. The federal estate tax is scheduled to expire in 2010. If it does expire, the AB trust will have no further usefulness. And for estates over $2 million, you may want to combine a Living Trust with other advanced estate planning techniques.

How to Set Up a Living Trust

With a good self-help book or software program, you can set up your own Living Trust. You yourself can write a valid Declaration of Trust, the document that creates a trust. In your trust document, you will name the trust beneficiaries and include instructions for the distribution of the trust assets. If you're going to hire a lawyer to draw up your Living Trust, the legal fees you pay might be as large as probate fees, which means that the Living Trust offers no net savings.

You are the Grantor, the person who sets up the trust. You will probably name yourself as the Trustee, the person who will manage the trust assets. You will name the Successor Trustee, who will probably be your beneficiary, the person who will distribute the trustís assets to the beneficiaries, according to your instructions. The trust becomes irrevocable upon the Grantorís death. The Successor Trustee will pay any debts, expenses and taxes. The trust assets will be distributed to the beneficiaries as you instructed and the trust comes to an end.

How to Fund the Living Trust

Once established, the Living Trust is funded when you transfer assets to trust ownership. Almost anything can be placed in a Living Trust: savings accounts, stocks, bonds, real estate, life insurance, and personal property. To "fund" the trust, you simply change the name or title on your assets to youself, the trustee. For example, you might easily change the name on a brokerage account to Joy Brown, Trustee. If you want to leave your house through the trust, you must sign a new deed, showing that you now own the house as trustee of your Living Trust. This paperwork can be tedious, but the hassles are fewer these days because Living Trusts have become so common.

What are the Tax Consequences of the Living Trust?

There are no income or gift taxes triggered when you set up the trust. Ordinarily, there is no need to file a separate tax return for your Living Trust. Of course, if property transferred to the trust earns income, you must report that income on your own return. When your beneficiaries inherit your assets from the Living Trust, they will still be able to take advantage of the ďstepped-up basis" of assets. The basis of the assets will be their value at the time of death, and the heirs can sell the assets with little or no taxable gain.

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