I wish there was more space to list all the benefits of a living trust. Here are a few:
1 – If you own real estate or other assets in more than one state, a living trust can avoid costly multistate probate proceedings in each state. Millions of homeowners own a primary residence in one state and a vacation or second home in another state. In addition, they might own real estate in other states. If they die with a will, but without a living trust, probate proceedings will be required in each state where real property was owned. However, if title to all the properties is held in the trustor’s living trust, that trust is valid in every state so probate proceedings would not be required in any state where living trust real estate is owned. There is no need to hire any probate attorney because the successor trustee can transfer the property titles held in the living trust.
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EXAMPLE: A few years ago, my Minnesota neighbor Borgie died at 83. She owned real estate in Florida, Minnesota, and North Dakota. Her son later told me, because she didn’t have a living trust, probate proceedings were required in all three states, including hiring a probate attorney in each state, to distribute her real estate to her heirs named in her will. That waste of time and money could have been avoided if she had a living trust.
2 – Living trusts maintain privacy. Unlike a decedent’s will, which must be filed with the local Probate Court after the will’s testator dies, a living trust does not require public court proceedings. To illustrate, when wealthy Bing Crosby died in 1978, virtually all his assets were in his living trust. The details of what he owned and who received it under the terms of his living trust never became public knowledge.
The states of Alaska, Colorado, Florida, Hawaii, Idaho, Maine, Michigan, Missouri, Nebraska, North Dakota and South Dakota require living trust “registration,” but there is no penalty for failure to do so.
3 – The successor trustee distributes the living trust assets to the heirs named in the living trust without judicial costs and delays. After the trustor dies, the successor trustee then (a) files the income tax returns for the decedent’s last tax year, (b) files a federal estate tax return if the net estate value exceeds the exemption amounts listed earlier (no tax return is required for an exempt estate), (c) pays the decedent’s debts, (d) sells assets, if necessary, to pay taxes and debts, and (e) distributes the estate assets to the designated heirs listed in the living trust. In other words, the living trust successor trustee acts much like a will executor but without the drawback of probate proceedings.
4 – Litigation is discouraged because there is no probate court proceeding. Since there is no public probate court proceeding and the terms of the living trust usually do not become public knowledge, nobody except the living trust beneficiaries has a right to learn the living trust contents and receive an accounting. There is no easy way for a disappointed relative to contest the terms of a living trust or how it is administered.
Will contests can freeze estate assets for many years. The primary argument is usually whether or the decedent was competent when signing a will or living trust. Living trusts minimize potential trouble:
EXAMPLE: The late Charles Kuralt, CBS-TV folksy personality famous for his “On the Road” travels, owned some beautiful Montana property when he died. His will left his estate to his surviving wife. But his Montana mistress claimed entitlement to the Montana property under a holographic will (a signed letter Kuralt wrote to her shortly before he died of lupus). If title to the Montana property were in a living trust, that holographic will would have no effect because a will doesn’t affect living trust assets. But the trial court ruled, in a very nasty case, the mistress was entitled to the Montana property under Kuralt’s holographic will.
5 – A living trust can be amended or revoked any time before the trustor dies when it becomes irrevocable. Just as a will can be changed or revoked before death, a revocable living trust can be changed or revoked at any time until the trustor dies or becomes incapacitated. The reason it is usually best to amend a living trust, rather than start fresh (as is sometimes advisable with a written will), is the assets have been transferred into the living trust and creating a new living trust means having to re-deed those assets.
Primary reasons for changing a living trust include (a) an heir dies or becomes disliked, (b) a successor trustee dies or becomes unable to serve, (c) new assets are added to the living trust, (d) assets in the living trust are sold or given away (such action doesn’t require a living trust amended but it is a good idea), and (e) circumstances change. When an asset named in the living trust is no longer in the living trust when the trustor dies, perhaps because it was sold, the person named to receive it takes nothing (unless named to receive other living trust assets).
6 – Living trusts don’t pay taxes or forfeit the trustor’s tax benefits. A living trust files no income tax returns. Nor does a living trust need an IRS taxpayer identification number. It is invisible to the IRS. The reason is a living trust is merely a title-holding method. Homeowners remain eligible to deduct itemized mortgage interest and property taxes they pay on living trust property.
Principal residences held in a living trust remain eligible for the Internal Revenue Code 121 $250,000 or $500,000 sale tax exemption if the seller owned and lived in the home at least two of the five years before its sale. Property held for investment or use in a trade or business remains eligible for Internal Revenue Code 1031 “like kind” tax-deferred exchanges, even if held in a living trust. Although not a tax issue, mortgage lenders cannot enforce due on sale clauses when title to a home is transferred into a living trust (see the Garn-St. Germain Depository Institutions Act, 12 U.S. Code 1464, 1701).
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