Passing on your assets can be matter of trust

Posted July 11, 2011, at 8:29 p.m.
Last modified July 13, 2011, at 9:17 a.m.

When thoughts turn to determining who gets what after one dies, most people tend to think of a will. But there are also advantages to establishing a “living trust” — though there has been plenty of false information put out about their supposed benefits.

When assets are transferred to a person or entity to be held for the benefit of someone else, the legal relationship created is called a trust.

The person creating the trust is the “maker.” The party holding the assets is the “trustee.” The party for whose benefit the assets are held is the “beneficiary.” Trusts can be created at death by will (testamentary trusts) or while living (inter vivos, or living trusts.) Living trusts even can be created by someone for his or her own benefit. He or she becomes maker, trustee and beneficiary all at the same time.

Living trusts are more popular in some parts of the country than others. Their popularity is often dictated by a particular state’s laws governing settlement of estates. States with complicated, expensive procedures encourage the use of living trusts. States like Maine, with relatively simple settlement procedures, may make a simple will less expensive and more appealing.

Such a trust can provide for as much, or as little, professional asset management as the trust maker desires. Many people retain total control over investment and distribution decisions. People who lack investment expertise, who travel frequently or who work in demanding professions may want someone else to manage their assets. Because the trust can be amended or revoked at any time, ultimate control remains with the trust maker. The trust can also direct the disposition and use of the trust assets after the maker’s death.

It can provide for continued management in the event of the maker’s disability or incapacity. Often such trusts will have provisions transferring management and distribution responsibility to someone other than the maker if the maker becomes unable to manage the assets by himself. The same thing can be provided in a durable power of attorney, which is certainly simpler and less expensive, but a living trust can describe quite specifically the circumstances under which control is transferred and how that control is subsequently exercised.

Probably the most common reason for establishing a living trust is avoidance of the probate process. Much of the literature and advice on this subject is misleading; some is blatantly false. The probate process is very difficult and expensive in some states while fairly simple in others. Maine has adopted what is known as the Uniform Probate Code. This statute provides for as much or as little court supervision as the estate requires. It provides for “informal probate,” a relatively easy procedure that is used for the vast majority of estates. A complicated estate, or an estate in controversy or litigation, can be formally administered, overseen by the probate judge.

One advantage of the living trust is privacy. When a will is offered for probate the terms of the will become a public record. Estate assets and liabilities are not necessarily public, but the terms of the will are. The terms of a living trust remain private between the trustee and the beneficiary.

Probate is basically a method to transfer assets from a decedent to his or her beneficiaries. So is a living trust. The difference is that probate takes place at death, while establishing and funding a living trust occurs in the present. Either way the assets need to be transferred. Some people choose a living trust so that “things will be taken care of right now,” and not left to a widow or children to attend to. That thinking is not totally accurate because there will still be final income tax returns, estate tax returns and so forth to be prepared and filed, but the actual transfer of assets will have been accomplished when the living trust was funded and the maker was alive.

Two popular misconceptions about living trusts are that they protect assets from creditors or somehow save estate taxes. Neither are true. You cannot transfer all your assets into a living trust which you control and then tell your creditors that you have no money with which to pay them. If assets in a trust are available to you, they are available to your creditors. No matter what anyone tells you, living trusts will not save estate taxes. Assets in such a trust are taxed just as if they were owned by the decedent individually. Certainly, trusts can be effective to save estate taxes by creating some combination of marital and so-called “bypass” trusts, but the same trusts can be created by provisions in a will as well as by use of a living trust.

There are advantages and disadvantages to living trusts; the choice depends on what is important to you.

Brent R. Slater is an attorney withGross, Minsky & Mogul in Bangor. He has practiced law for 38 years and focuses on business and estate planning.

Editor’s note: Submissions for business columns should be 650 – 850 words and should be unique to the Bangor Daily News and pertinent to the Maine business community. Columns, a head-and-shoulder photograph and a short bio can be sent to business@bangordailynews.com.

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