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Living Trusts:  Myths and Realities

Michael J. Lanza's avatar

Categories: Of Legal Interest Permalink

Living Trusts can be an effective estate planning tool, but not just to avoid probate.

As part of my practice I advise clients about estate planning.  Often times one of the first questions asked at the initial meeting with a client is if assets are placed in a Living Trust, can this avoid the costs, time and expense associated with probate.  While a Living Trust can be used as an estate planning tool in certain circumstances, it should not be used if the sole purpose of the Living Trust is to avoid probate.  The following article written by Connecticut Judge of Probate, Domenick N. Calabrese, does a good job discussing many of the myths associated with the benefits of a Living Trust.   

Trusts were once an estate planning tool used exclusively by the wealthy. Beginning in the 1960s, more and more middle-class Americans began using trusts in estate planning. Trusts are a means of ownership. In estate planning, trusts can be used for a variety of purposes, such as providing asset management for those who may lack the ability to properly manage assets themselves (usually children or young adults), avoiding probate administration, minimizing estate taxes, and sheltering assets from creditors.

The “living trust” is a type of trust that someone creates during his or her lifetime. Assets in a living trust are disposed of at the death of the person who creates the trust according to the terms of the living trust. Assets in a living trust are not subject to administration in a probate court, and the terms and assets of the living trust are not exposed to public disclosure as wills admitted to probate are.
While living trusts can be a legitimate estate planning tool, unscrupulous purveyors of living trusts have been known to misrepresent some of the reasons to use them in order to scare the unwary into purchasing their living trust package, often at a cost of thousands of dollars. Let’s take a look at these myths, and the realities of those claims.

Myth: Living trusts reduce probate fees.
Reality: In Connecticut, assets in a living trust are subject to probate fees at the death of the trust creator. Connecticut probate fees average one-third of one percent (0.33%). A decedent’s estate with a gross value of $300,000 would incur a probate fee of approximately $1,000.00.

Myth: Without a living trust, a person with modest assets could lose 50% or more of their estate to probate fees and taxes.
Reality: As stated above, probate fees are a fraction of one percent of a decedent’s assets. Attorney’s fees for probate administration of a decedent’s estate average between 1 and 5% of the gross estate, with most being in the lower end of that range. For decedents passing away in 2010, there is a $3.5 million exemption for the Connecticut estate tax and an unlimited exemption for federal estate taxes. In order to lose 50% of your estate to estate taxes and probate and attorney fees, the value of the estate would need to be multiple millions of dollars and there would need to be federal estate tax levied upon it.

Myth: Unlike a will, a living trust cannot be contested in court.
Reality: Living trusts may be challenged in court. While a will may be contested in court, there is a time limitation beyond which a will cannot be contested. There is no similar limitation for living trusts.

Myth: All assets may be placed in a living trust.
Reality: Certain assets, such as most stock options, community property and certain qualified pension and profit-sharing plans cannot be placed in a living trust.

Myth: A living trust can save money for anyone with assets above a certain level.
Reality: Tax savings realized by living trusts are most significant for those with substantial assets. Lower cost alternatives to living trusts may accomplish the same objectives as a living trust.
Living trusts can be a valuable estate planning tool, but each person’s situation is different. You should discuss your situation with an attorney with experience in estate planning for options that are right for you. Avoid those who propagate fear of the probate process to sell “one size fits all” living trust products.

This article is for informational purposes only. It is not intended to be, nor should it be relied upon, for legal advice.