Revocable living trusts offer alternative to wills

August 11, 1991|By Alyssa Gabbay | Alyssa Gabbay,Special to The Sun

Where there's a will, there's a way, the old saying goes. Indeed, a will performs a valuable function in permitting you to direct how your assets will be distributed after you die.

But wills are not the only option for estate planning. A popular -- but controversial -- vehicle these days is the revocable living trust.

Although it's not a complete substitute for a will, a living trust performs many of the will's functions. At the same time, it avoids much of the probate process -- an important benefit for many people.

In probate, a local court oversees the inventory, appraisal and accounting of a deceased person's property and then distributes it according to the will. Sometimes lengthy and expensive, probate usually involves hiring an attorney. It also makes the will and the inventory of assets a matter of public record.

When you set up a living trust, on the other hand, you transfer most of your property and assets to it while you're still alive (hence the word, "living"). Because assets are held in the trust rather than in your name, they won't have to be probated when you die. Instead, they pass directly and promptly to your beneficiaries.

Setting up the trust doesn't mean that the assets aren't yours or that you won't have access to them. Since you'll probably appoint yourself as the initial trustee, you'll retain control over them. Moreover, you can change the trust at any time.

Apart from the advantage of avoiding probate, the living trust offers other benefits. Should you become disabled and unable to manage your assets, a successor trustee whom you've named will be able to carry out these duties.

"If you have someone who might become incapacitated soon, a living trust makes the transition of assets to another party easy," said Frederick Steinmann, a Baltimore attorney who specializes in estates and trusts.

Establishing a living trust also simplifies matters for the person // who will be managing your assets once you're gone. If you just have a will, your "personal representative has to figure out where all of your assets are, get them retitled and generally put all of the pieces together," said Robert C. Young, a vice president in the trust division at First National Bank of Maryland. "The living trust hopefully gets you to consolidate all of your assets under the umbrella of the trust, and all the successor trustee has to do is come in and manage them." Some financial advisers also claim that a living trust is more difficult to challenge after death than a will.

Despite these advantages, some attorneys oppose the idea of living trusts. They say that the living trust is expensive and confusing and that it doesn't provide any tax savings. You are required to pay income tax on the assets in the trust while you're alive, and they are subject to estate taxes when you die.

"There are a lot of lawyers and financial advisers who sell [the living trust] as great, but I don't recommend it for the majority of circumstances," said Marilyn Fisher, a law partner with Kramon & Graham PA who specializes in estate planning. "Who wants to put all your assets in this trust, like your house? It's just a kind of gobbledygook. It becomes confusing."

She noted that probate in Maryland is less time-consuming than in such states as New York, where the courts are more backed up. Moreover, setting up the trust itself can be expensive if you hire an attorney.

Funding the trust is another problem. Often, people forget to put new assets into the trust when they obtain them, or otherwise neglect the trust, said Stanard T. Klinefelter, head of the estates, trusts, and personal planning group at Piper & Marbury.

"People will move from one bank to another without putting the account in the trust," said Mr. Klinefelter. "This is something that really works only if you pay attention to it."

Mr. Klinefelter noted that having a trust doesn't relieve you of making a will, which disposes of those assets outside the trust and permits you to deal with matters such as appointing a guardian for children. It's probably simpler for most people just to set up a will, he added.

How do you know if a living trust is right for you?

* Do your assets total more than $150,000? Unless you set up a trust by yourself, you'll have to pay a lawyer to do it, which can cost $1,000 or more. If you have few assets, it may not be worth the expense.

* Are you 65 or older? Since you must keep most of your assets in the living trust, it doesn't make much sense to set it up while you still have many years ahead of you.

* Does the thought of the probate process make you cringe? If you hate the idea of your records being made public, or if you're bothered by the cost of probate, the living trust may be a good solution for you. Remember, though, that those assets which aren't in your living trust may have to be probated. For example, you probably won't put your checking account in your trust.

You can also avoid paying an attorney to do probate if you can find a close friend or family member who is willing to undertake the process, noted Marilyn Fisher, an attorney.

* Do you have time and energy to invest in estate planning? Setting up a living trust is a somewhat complex, time-consuming process, requiring you to retitle most of your property in the name of the trust. Moreover, if the trust is to perform its primary function of avoiding probate, you must be vigilant in remembering to put any new assets acquired into the trust.

* Have you explored other probate-avoidance options? As Eugene Daly, author of "Thy Will Be Done" (Prometheus Books, 1990), notes, you can avoid probate by setting up a joint or "in trust for" bank account with a beneficiary. When you die, the account will be transferred to him or her without probate.

Alyssa Gabbay is a free-lance writer who often covers business issues for The Sun.

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