LIVING TRUSTS MAY NOT SOLVE ALL PROBATE PROBLEMS
There has been much said recently about how seniors can avoid probate and reduce taxes simply by creating a living trust. However, despite all of the hype surrounding living trusts, these legal documents may not always be the preferred choice for many individuals.
A living trust, also known as an active trust or a trust inter vivos, is a trust which becomes effective during the lifetime of the person setting up the trust, also known as the grantor. What occurs with a living trust is that a person selects another to serve as a trustee and directs that the trustee hold and distribute certain assets in a manner set up by the grantor in the living trust documents.
Proponents of living trusts assert that there is an automatic tax break by virtue of the living trust. However, during the lifetime of the grantor, the grantor is still treated as if the assets of the trust are still owned. Thus, all income earned by the trust is taxed as income of the grantor. Even when the grantor dies, the trust assets may be taxed as part of the grantor’s estate under federal estate tax statutes. Federal income tax exemptions may be more for estates than for trusts. Also, there may be certain real estate tax benefits which are not available if a trust owns your property.
Living trust advocates also argue that you will avoid probate if you have a living trust. However, living trusts are not the only way to avoid probate, nor is avoiding probate always the preferred estate planning route. Moreover, any assets which have not been transferred in a living trust prior to the death of the grantor may still be required to go through the probate process.
Each person has a unique set of assets and the tax and probate consequences can vary depending upon your specific situation. Before determining that a living trust holds all of the answers to your concerns, it may be wise to speak with an attorney and/or a CPA or other tax planner to determine the best way to effectuate your wishes as to how your assets should be distributed before or after you die.
This article was authored by Steven Pradell, Esq. with offices in Anchorage, Alaska. He is also the owner of Pradell and Associates and Abracadabra Entertainment. This article is not intended to provide legal advice and should not be relied on for that purpose. Phone: (907) 279-4529. Email address: [email protected]. Reprinted with permission of Steven Pradell. Copyrighted by Steven Pradell.