Frequently Asked Questions

Divorce Kit FAQ

Living Trust Frequently Asked Questions

Why should I make a living trust?

How does a living trust avoid probate?

Is it expensive to create a living trust?

Is it a hassle to hold property in a living trust?

Is a living trust document ever made public, like a will?

Does a living trust protect property from creditors?

If I make a living trust, do I still need a will?

Can a living trust reduce estate taxes?

Tax-Saving AB Trust.

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. You can be the trustee of your own living trust, keeping full control over all property held in trust.

A "living trust" (also called an "inter vivos" trust) is simply a trust you create while you're alive, rather than one that is created at your death.

Different kinds of living trusts can help you avoid probate, reduce estate taxes, or set up long-term property management. For more details, see How Living Trusts Avoid Probate.

Why should I make a living trust?

The big advantage to making a living trust is that property left through the trust doesn't have to go through through probate court. In a nutshell, probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.

The average probate drags on for months before the inheritors get anything. And by that time, there's less for them to get: In many cases, about 5% of the property has been eaten up by lawyer and court fees.

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

How does a living trust avoid probate?

Property you transfer into a living trust before your death 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.

Is it expensive to create a living trust?

A basic living trust isn't much more complicated than a will, and you probably won't need to hire a lawyer. With a good forms you can create a valid Declaration of Trust (the document that creates a trust) yourself. If you run into questions you may need to consult a lawyer, but you probably won't need to turn the whole job over to an expensive expert.

Is it a hassle to hold property in a living trust?

Making a living trust work for you does require some crucial paperwork. For example, 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.

Is a living trust document ever made public, like a will?

No. 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 -- inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.

Does a living trust protect property from creditors?

No. 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.

Generally, after your death, all property you owned -- including assets held in a living trust -- is subject to your lawful debts. For example, if your house is held in trust and passes to your children at your death, a creditor could demand that they pay the debt, up to the value of the house. Ownership of real estate is always a matter of public record, so creditors can always find out who inherited real estate. It can be more difficult for creditors to know who inherits other property, however (because a trust document, unlike a will, is not a matter of public record), and they may not bother tracking it down.

On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

If I make a living trust, do I still need a will?

Yes, you do -- and here's why:

A will is an essential back-up device for property that you don't transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not think to transfer ownership of it to your trust -- which means that it won't pass under the terms of the trust document. But in your will, you can include a clause that names someone to get all of the property that you haven't left to a specific beneficiary.

If you don't have a will, any property that isn't transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.

Can a living trust reduce estate taxes?

A simple probate-avoidance living trust has no effect on taxes. More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets.

One tax-saving living trust is designed primarily for married couples with children. It's commonly called an AB trust, though it goes by many other names, including "credit shelter trust," "exemption trust," "marital life estate trust," and "marital bypass trust." Each spouse leaves property, in trust, to the other 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 final inheritors. To learn more about tax-saving trusts, read Tax-Saving AB Trusts.

Tax-Saving AB Trusts

Couples can save a bundle on estate taxes with this kind of living trust, called an AB trust or marital bypass trust.

Most people don't need to think about federal estate tax because it only affects those with very large estates.

EXAMPLE

Most estates -- at least 99% -- don't. The federal government imposes estate tax at your death only if your property is worth more than a certain amount, which depends on the year of death. However, all property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Estate tax is also not assessed on any property you leave to a tax-exempt charity

Year of Death

2008

2009

2010

2011

Exempt Amount

2 Million

3.5 Million

No estate tax

1 million, unless Congress extends repeal

But if you (or you and your spouse) expect that your estate may owe taxes, creating an AB trust is a good way to both avoid probate and also save on federal estate tax.

How an AB Trust Works
Here's how it works: Instead of leaving property outright to the surviving spouse, each spouse leaves most or all of his or her property to an irrevocable trust that can be used for the benefit of the surviving spouse. Because the surviving spouse does not own the property outright, the property isn't subject to estate tax when the surviving spouse dies.

When setting up an AB trust, each spouse names final beneficiaries who will receive the trust's property when the surviving spouse dies. Spouses often name the same people -- their children -- as final beneficiaries, but it's not mandatory.

EXAMPLE

Christine and Terry have a combined estate of $3 million, all of which they own together. If each left his or her half, $1.5 million, to the surviving spouse outright, that spouse would be left with an estate of $3 million. If the surviving spouse dies in 2008, when the estate tax threshold is $2 million, $1 million would be subject to estate tax.

But if Christine and Terry each leave their half of the trust property in an AB trust, naming their five children as the trust's final beneficiaries, no estate tax will be due. Let's say Christine dies in 2008. Her $1.5 million goes into an irrevocable trust for Terry, and is subject to estate tax at that time. But because the amount in the irrevocable trust is less than the federal estate tax exemption, no tax is due. Similarly, when Terry dies later that year, his $1.5 million is also less than the exempt amount.

The Surviving Spouse's Rights

The surviving spouse has limited power over the assets in the irrevocable trust. The extent of this power depends on the terms of the trust, within certain limits set by the IRS. If a surviving spouse is given more power than IRS rules allow, the surviving spouse becomes the legal owner of the trust property -- exactly what you don't want.

At most, the surviving spouse may:

receive all interest or other income from the trust property
use the property -- for example, he or she can live in a house held in trust
spend the trust property in any amount for his or her health, education, support and maintenance, in his or her accustomed manner of living. (IRS Reg. 20.2041-1(c)(2).)

In other words, the surviving spouse has the right to use all of the trust principal for what really concerns most older couples: the surviving spouse's health care and other basic needs.

After the death of the surviving spouse, the irrevocable trust property is distributed to the final beneficiaries, chosen by the deceased spouse in the original trust document. The surviving spouse's property is also distributed to his or her beneficiaries.

Drawbacks of an AB Trust

Before creating an AB trust, couples should understand what they're getting into. Once one spouse dies, the trust cannot be changed.

Possible drawbacks include:

Restrictions on the surviving spouse's use of the property. As discussed above, the surviving spouse has only limited rights to use trust property in the irrevocable trust.
Expense of legal or accounting help. When one spouse dies, the survivor will need to hire a lawyer or accountant to determine how to best divide the couple's assets between the irrevocable trust and the surviving spouse's revocable living trust. How the property is divided can have important tax consequences.
Trust tax returns. The surviving spouse must get a taxpayer ID number for the irrevocable trust and file an annual trust income tax return. Like any tax return, this requires some work.
Recordkeeping. The surviving spouse must keep separate records for the irrevocable trust property.
Uncertainty about the tax laws. Because Congress is almost sure to tinker with estate tax laws again in the next few years, you may end up wanting to change or revoke a trust you create now.

Do You Need an AB Trust?

Given these disadvantages, it's obvious that not all married couples with a combined estate over the estate tax threshold should use an AB trust. It's generally not advisable, at least not without the advice of an experienced estate planning lawyer, for many couples under 60. People in this age group don't want assets to be tied up in a trust if one spouse dies unexpectedly.

Other couples who may not need an AB trust include:

Couples where one spouse is considerably younger than the other. There's generally no need to burden the second spouse with a trust designed to save estate taxes when he or she is likely to live for many years.
Couples with children from prior marriages. There may be concern about conflicts between the surviving spouse and the deceased spouse's children, who must essentially share ownership of property for many years.

Close Window