Legal Service Developer Program
Revocable Living Trusts
by
Marsha A. Goetting, PhD, CFP, CFCS
Montana State University
Extension Service
Living trusts have been promoted as the ideal solution for Montanans who wish to secure a wide variety of financial planning objectives. Avoiding probate and taxes are the primary goals of some. Others are concerned about protecting assets for family members should they be confined to a nursing home for a long period of time. Another may feel the need for investment assistance because of his or her inexperience. Still others want a way to continue their business if they should become disabled. Are all these objectives possible? The answer is yes - but the most appropriate legal tool to accomplish each one may not be a living trust.
What is a Living Trust?
A revocable living trust is just what its name implies - one that
is created during an individual's life that can be changed and terminated
at any time. It is a legal arrangement by which an individual transfers
ownership of assets to a trustee who manages the assets for the beneficiaries
designated in the trust agreement. Beneficiaries named, in the trust
agreement, can be the individual who formed the trust, friends, family
members, a college, hospital, library, charity or other organization. Any
type of asset - cash, certificate of deposits, stocks, bonds, life insurance
or real estate - can be placed into a living trust.
The person providing assets for the trust is called the trustor or grantor. The grantor must actually change the title of ownership of each asset that will be placed in the trust from his or her name to ownership by the trust. The trustee manages the assets according to the directions in the trust agreement. The trustee can be the person creating the trust, several individuals, a corporate entity such as a bank or trust company, or any combination of these.
A trust agreement is a document containing instructions to the trustee stating, for example, who is to receive income from the trust and when and how it is to be distributed. When the trust terminates, the agreement designates the distribution of the assets to the beneficiaries who are named in it.
Considerations in Forming a Living Trust
Consider the following issues to determine whether a living trust
would fit into your specific financial planning goals.
Tax Consequences. A revocable living trust is sometimes “promoted” as a tax avoidance tool. However, a living trust does not provide the tax savings that are often attributed to it. Income earned in a revocable living trust is taxed to the person creating it (grantor) and must be reported on his or her personal state and federal income tax returns. No federal gift tax is payable upon the creation of a revocable living trust because the trust can be changed at any time by the person forming it.
State and federal law require the value of revocable living trust property to be included in the grantor's estate upon death. Since the grantor is viewed as having control of the assets, their value must be included for determining federal estate and Montana estate tax. Typically, the following rights are reserved by the grantor when he or she forms a living trust: to amend the trust, to change the beneficiaries, to change the trustee, to change the date of termination or to change the entire trust by revoking it and having the property returned.
If none of these rights or similar rights are retained by the grantor, then the trust becomes irrevocable and the value of the assets in it are subject to federal gift taxation at the time the trust is formed. At the death of the grantor, the value of assets in an irrevocable trust are not usually subject to the Federal estate tax.
Probate Costs vs. Living Trust Costs. Probate in Montana is not nearly as burdensome as it is in other states that have not adopted the Uniform Probate Code. In some states probate can be quite costly, as the attorney and personal representative must appear before the court for approval of almost every act involved in probating an estate. In Montana, formal approval by the court is not required for any action authorized in the Uniform Probate Code. The Montana Uniform Probate Code specifically exempts from probate the following: assets in living trusts, property owned as joint tenants with right of survivorship, payable-on-death deposits, and life insurance payable to a named beneficiary.
How much of your present estate is subject to probate? Typically only solely-owned property or a deceased's share in tenancy in common property is subject to probate. However, even for non-probate property there are reporting requirements for inventory taxes, and perhaps Montana and federal income taxes.
Even if your property is subject to probate, your heirs have the right to ask the attorney to handle the case on an hourly fee basis which may be less than the maximum statutory percentage. In Montana the maximum charge allowed for the attorney is one and one half times (1 1/2) the amount allowable to the personal representative. The percentage for the personal representative (which is a maximum fee) is three (3%) percent of the first $40,000 and two (2%) percent in excess of that amount.
For example, on a $200,000 estate, a personal representative could receive a maximum of $4,400 and the attorney $6,600. ($40,000 X .03 = $1,200; $160,000 X .02 = $3,200; $1,200 + 3,200 = $4,400; $4,400 X 1.5 = $6,600).
An hourly fee could result in less expense for the estate and/or heirs, especially if the individual accomplished estate planning before his/her death.
There is no guarantee that a living trust will save money over probate. For example, if you use a paid trustee such as a bank or trust company, management fees over the years could easily exceed the cost of probate. Trust fees are often based on a percentage of income or principal, with annual minimums ranging from $500 to about $2,500 depending upon the institution. Many institutional trustees won't accept trusts with under $50,000 in assets.
Protecting Assets For Heirs. With nursing home costs averaging $44,000 a year, many parents are concerned with preserving assets for their heirs. One source of assistance is Medicaid. But to be eligible an applicant must not have cash and other non-exempt assets exceeding $2,000 as an individual. Assets in a living trust would be considered as non-exempt assets. A home placed in a living trust is not exempt from creditors' claims. The one exception to the general rule is the family home; as long as one spouse is living at home, he or she can't be forced to sell the home to pay for the other's nursing home care. The state of Montana, however, can make a creditor's claim on the estate after the surviving spouse has died to recoup the nursing home costs. However, the Montana homestead allowance protects value in a home up to $100,000. The homestead allowance is exempt from and has priority over all claims against the estate.
Those who are concerned about nursing home costs should explore a long-term care insurance policy to see if it would better meet their financial planning goals than does a living trust.
Is an Inexperienced Investor A Concern? There are many instances where inexperienced investors may prefer placing assets in a living trust until they feel the confidence to take over management themselves. For example, a recent widow had very little investment experience and did not want to be responsible for investing the sizable amount of money she received upon the death of her husband. Although she is willing to learn more about investing, she needed the emotional security of having someone else manage her assets for her, so she established a revocable living trust.
Incompetency. Advancing age, serious illness, or accident may render a person incapable of either supervising his or her investments and business, or making necessary payments for his or her well being. A revocable living trust could be a management tool in this case. As an example, a retired bachelor with only distant relatives suffered a severe heart attack and was away from his business for several months. As a result of that experience he chose two living trusts - one naming a corporate -- trustee for his investments and the other naming a trusted partner for the business. Under this arrangement his investments are being continually supervised and, if he should become incapacitated, the corporate trustee can step in to take care of his living expenses. An alternative to a living trust may be a power of attorney.
SUMMARY
Before establishing a living trust, make a list of financial planning objectives you wish to achieve. Then discuss your needs with professionals such as an attorney, a trust officer, a certified public accountant and/or a certified financial planner. They may suggest an array of financial planning tools that could better help you achieve your goals than a living trust.
