In my last column, I talked about some of the basics of estate planning: the importance of a will, health care and general powers of attorney and a living will. The last piece in the puzzle is a living trust.

A trust, by definition, involves three parties: a grantor, a trustee and one or more beneficiaries. Pursuant to a written agreement, the grantor gives assets to the trustee to hold and invest for the benefit of the beneficiary. The motives might involve tax planning or legal restrictions or distrust of the beneficiary's judgment. The effect is to separate the control of assets from the benefit of their existence, that is, the income stream from them.

A living trust stands this notion on its ear because the grantor, trustee and beneficiary are all the same person. The grantor puts all of his assets into the trust, charging himself as trustee to handle them for his own benefit. If that sounds like a great deal of fuss about nothing, well, you're right. Initially it is an empty circle, so much so that the trust is disregarded for federal income tax purposes; the grantor is treated as still owning the assets and responsible for taxes on the income. State law (in any state) recognizes the trust's property ownership, and that makes the trust valid.

What makes living trusts important is not what happens now, but what happens later. When you die, or become disabled, you can't continue as trustee. A successor trustee – someone you have previously chosen – then automatically takes over, and the trust becomes an active entity.

The Bogeyman of Probate

As I discussed last time, the state takes responsibility for making sure your assets are appropriately distributed after your death, since you will obviously be unable do so yourself. If you do not leave a will, the law has formulas to determine who gets the assets. If you have a will, its instructions will be followed, at least in theory. To ensure honesty, the process is an open one. Wills are filed with a court, and the executor must periodically account to the court for the handling of the assets. This causes three problems.

First, anyone can snoop and find out what somebody left to whom. Second, courts and lawyers are involved, so there are costs: legal fees, filing fees, executor's fees, administration fees and so on. And third, the process can be slow, sometimes agonizingly so. The first problem is universal in the USA. The other two, though, vary widely from state to state. Illinois has a relatively inexpensive and straightforward probate procedure. The systems in some other states, however, can be fairly described as Byzantine, Dickensian or a sick hybrid of the two. Pennsylvania's system, for example, is so odious that friends of mine who live near Philadelphia say that if either of them dies, the other will immediately drive the body to New Jersey before calling 911.

Assets held in a living trust are not part of your estate for probate purposes. What they are, their value and their disposition are not part of the public record. You still need a will, but a simple one called a "pour-over" will. These wills provide that whatever you owned at your death is to be transferred to the living trust. (Remember how frustrated celebrity watchers and tabloid television were when Jacqueline Onassis' will was filed, and that was all it said?) Usually, the only non-trust assets are personal effects, so the probate estate can be easily and inexpensively closed.

Occupying God's Waiting Room

Many people (myself among them) find the prospect of a prolonged, severe disability before death more daunting than death itself. One can, of course, ignore the possibility, but it is far better to plan for it. A health care power of attorney and a living will (discussed in my last column) should take care of the medical questions. Financially, though, disability can be a worse problem than death. If you have done nothing beforehand, your family or other caregiver must be appointed as guardian by the probate court, with all the same sorts of costs, delays, reports and inconveniences as handling an estate. You can execute a durable power of attorney, giving someone broad authority to handle your assets and finances if you cannot, but that approach has limits. For one, your appointee might be challenged at any transaction to demonstrate that you are, in fact, disabled, as he would otherwise lack authority. And if your appointee subsequently dies or becomes disabled himself, you have no means of providing a substitute. In contrast, the trustee of any trust has self-evident authority for any transaction permitted under the trust instrument. The very notion of a living trust involves having a successor trustee to the grantor, and they contain provisions for selection of further successors should that become necessary. Altogether, much better, much cleaner, and much easier on those around you.

Non-traditional and Problem Situations

Characters in mystery novels may challenge a will in court, or threaten to do so as a form of coercion. It happens in real life, too. If successful, your wishes for the disposition of the estate will be disregarded. A living trust provides almost absolute protection against such challenges. The terms of a trust cannot be contested, so all a claimant can do is argue that the trust is legally invalid or that the trustee exceeded his authority. Chance of success: negligible. And Uncle Louis is less likely to feel cheated if he doesn't actually know what you left cousin Agatha. While old hurts and dislikes can bubble up quickly after any death, a living trust is especially important if you are gay or lesbian, or have (a) an unmarried significant other, (b) an ex-spouse, (c) a child by anyone other than your present legal spouse, (d) any relatives whom you actively dislike or who dislike each other, (e) any relatives you can't locate, or (f) one sibling less well-off than the others.

Which is to say: just about everyone.

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also has been known to produce theatre.

Home

Money & Taxes Archives