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Advantages and Disadvaantages of Living Trusts
Practical Probate: Advantages of Living Trusts
By Domenick N. Calabrese, Judge
Region 22 Probate District
Living trusts offer many advantages. One of them is providing for the management of assets when the person who created the trust is incapacitated. However, this is only true for assets that are moved into the trust first. Simply creating a trust without moving assets into the trust will not provide this benefit.
Let’s look at how this might work. Mary Jones creates a living trust, naming herself and her son William as co-trustees of the trust. William’s reliability must be beyond question; unreliable co-trustees could easily mismanage or even steal from the trust.
Mary then moves some or all of her assets, including her financial accounts, into the trust – a very important step. She also arranges for her regular income to be automatically deposited into the trust accounts.
A few months later, Mary suffers a stroke and becomes incapacitated. She can’t write or communicate, and has a very limited understanding of what’s going on. Because she moved her financial accounts into the trust, William (as co-trustee) is able to manage Mary’s finances through the trust. He may use the money in trust accounts to pay Mary’s bills. If Mary’s income automatically gets deposited into trust accounts, William will also be able to manage that income.
If Mary hadn’t established the trust and moved her financial accounts into it, institutions where Mary’s accounts are located might not work with William or other family members. Even if Mary appointed an attorney in fact through a durable power of attorney, it’s possible that the financial institutions might choose to ignore the power of attorney.
This could create a number of problems. No one would know the value of Mary’s assets; it would be difficult or impossible to manage Mary’s affairs. There would be no access to Mary’s assets to pay her bills. Mary’s bills, such as insurance, mortgage, taxes and utilities might not get paid, resulting in foreclosure, interest and penalties for unpaid taxes, termination of insurance coverage, utilities being shut off, or collection action against Mary. Family members would not know what Mary could and could not afford.
Without the trust in these circumstances, a family member might need to make an application to the probate court to appoint a conservator of the estate for Mary so that her bills could be paid and her assets managed. Involuntary conservatorship proceedings in the probate court can be time consuming and expensive. This adds to the stress that Mary’s family must deal with in addition to the significant challenges posed by Mary’s stroke and resulting legal incapacity.
Living trusts have additional advantages, as well as disadvantages that will be the subject of future articles.
Living trusts are not appropriate for everyone. This article examines just a few elements of living trusts. Only after consulting a qualified, ethical attorney who will take the time to understand your situation and objectives, and explain your options, is it possible to make an informed decision as to whether a living trust is appropriate for you.
Practical Probate: Advantages of Living Trusts Part 2
By Domenick N. Calabrese, Judge
Region 22 Probate District
In my last article, I examined the benefits a living trust provides for management of someone’s assets should they become incapacitated. Another advantage of living trusts is providing for the transfer of trust assets after the person who created the trust dies. This advantage only applies to assets that are moved into the trust before the person who created the trust passes away.
Using the example in my previous article of the fictitious Mary Jones who created a living trust and moved some of her assets into the trust, let’s see how this might work. After Mary passes away, the assets in her trust will be transferred according to the terms of the trust. Mary’s trust could provide that upon her death, trust assets pass to family, friends or charities of her choice. The trust could also provide for some or all trust assets remain in the trust for a period of time for the benefit of any person, persons or charities.
Probate proceedings to determine the owner of trust assets would not be necessary. The transfer of trust assets could take place more quickly than if those assets required the probate court to identify the legal owners. Another advantage of living trusts is trusts are usually not subject to public disclosure the way most documents filed in probate court are. For those who place a high value on privacy, this advantage may be significant. Trust assets may not be subject to the claims of Mary’s creditors in the probate court - a third trust advantage.
The probate court would determine the owners of nontrust assets – assets that Mary owned in her name only with no beneficiary, survivorship or payable on death designation. If she had a will that gets admitted to the probate court, Mary’s assets would be transferred to the beneficiaries she named in her will after her creditors and costs of administering her estate are paid. If Mary had no will when she died the probate court would apply Connecticut law to determine the legal owners of Mary’s assets.
Living trusts have additional advantages, as well as disadvantages that will be the subject of future articles.
Living trusts are not appropriate for everyone. This article examines just a few elements of living trusts. Only after consulting a qualified, ethical attorney who will take the time to understand your situation and objectives, and explain your options, is it possible to make an informed decision as to whether a living trust is appropriate for you.
Practical Probate: Advantages of Living Trusts Part 3
By Domenick N. Calabrese, Judge
Region 22 Probate District
I recently had a discussion with a married couple with two children, ages 4 and 2. They were interested in providing for their children if something were to happen to both parents.
One way to accomplish this would be with a living trust. The parents could create a living trust, place assets into the trust, and name a trustee in addition to or in place of the parents. If both parents were to pass away while their children were still young, the trust could provide money to pay for the children’s education, medical care, housing, clothing, or anything else for the children’s benefit.
Once the children attained a certain age – it could be any age – 18, 25, 30, or some other age – anything left in the trust would then be turned over to children in their adulthood.
The trustee – the person responsible for managing the trust – would use the trust money to pay for whatever of the children’s expenses the trust was designed to cover. The trustee would be bound by the terms of the trust to be sure the trust assets were properly invested, and the trustee would be liable if he or she wasted trust assets.
Providing for the management of assets for minor children is important – if it’s not done with a trust or custodial account, a guardianship estate might need to be established in the probate court. In addition to “youth” – those under the age of 18 – there are other reasons why managing assets for the benefit of an adult may be needed. For example, it can be very challenging for a young adult to responsibly manage a significant asset. Likewise, adults in their 30s or older may lack the sophistication or maturity to responsibly manage a significant asset. Perhaps providing support for someone with serious creditor issues, or someone who is easily taken advantage of by the unscrupulous is a goal. A parent or grandparent with adult children or grandchildren in difficult marriages may want to ensure that a potential “ex” spouse doesn’t end up with some or all of assets intended for their own child or grandchild. In all of these cases, a living trust could provide for the management of assets and support of loved ones without giving them the asset outright.
Trusts can be funded with any of a variety of assets – real estate, financial accounts, life insurance proceeds, and bequests in a will are just a few potential sources of trust assets.
In my next article, I’ll review how living trusts can be used to reduce Connecticut estate tax liability.
Living trusts are not appropriate for everyone. Only after consulting a qualified, ethical attorney who will take the time to understand your situation and objectives, and explain your options, is it possible to make an informed decision as to whether a living trust is appropriate for you.
Practical Probate: Advantages of Living Trusts Part 4
By Domenick N. Calabrese, Judge
Region 22 Probate District
This article on advantages of living trusts examines how trusts may be used in planning for Connecticut estate taxes. Connecticut estate taxes may be due after a Connecticut resident passes away. Beginning in 2011, there is a $2 million Connecticut estate tax exemption. This means that the first $2 million of each Connecticut resident’s estate is exempt from Connecticut estate tax liability when that person dies.
However, between a married couple, the exemption is unlimited: any amount could be transferred to the surviving spouse after the death of the first spouse. There would be no Connecticut estate tax liability, even if the value of the estate exceeds $2 million. This unlimited exemption comes at a “price” however: the deceased spouse’s $2 million exemption is lost. A trust can be established to “save” the Connecticut estate tax exemption - $2 million – upon the death of the first spouse.
Let’s look at a fictitious example of how this might work. Edgar and Florence Poe, a Connecticut married couple, have $4 million in combined assets. They also have three adult children. Edgar’s will and Florence’s will each provide that upon the death of the first of them to pass away, all assets go to the surviving spouse.
Edgar is the first to pass away. According to Edgar’s will, all of his assets go to Florence. There is no Connecticut estate tax due because of the unlimited spousal exemption, and Florence now owns $4 million in assets.
When Florence passes away, if the Connecticut estate tax laws don’t change, only the single $2 million exemption will be available for Florence if she doesn’t remarry. If Florence’s estate is valued at $4 million, $2 million will be subject to Connecticut estate taxes, with a Connecticut estate tax liability of about $XXXXXXX. Edgar’s $2 million Connecticut estate tax exemption is essentially “lost” in this example.
Next, let’s look at the same couple – Edgar and Florence, with $4 million in combined assets. In this example, Edgar and Florence create specially drafted living trusts designed to preserve the estate tax exemption. In Edgar’s will, there is a provision that, upon Edgar’s death, $2 million goes directly to Florence; the other $2 million is transferred to a living trust for the benefit of Florence. Because of the $2 million Connecticut estate tax exemption, the assets passing into the trust are not subject to Connecticut estate tax. Because of the unlimited spousal exemption, the $2 million passing directly to Florence is not subject to Connecticut estate tax.
Disadvantages of Living Trusts
Practical Probate: Disadvantages of Living Trusts
By Domenick N. Calabrese, Judge
Region 22 Probate District
In my last four articles, I reviewed the advantages of living trusts. Like any other estate planning tool, living trusts have advantages and disadvantages. This article will briefly examine some of the disadvantages of living trusts.
Living trusts must be drafted by an attorney to maximize the possibility that your wishes and objectives will be consistent with the terms of the trust. The cost of having a living trust drafted depends on several factors, including the complexity of the trust and the client’s objectives.
Assets must be transferred into the living trust in order to realize many, but not all, of the advantages of the trust. Frequently, family members of someone who recently passed away bring the decedent’s living trust to the probate court. They are unpleasantly surprised to find that nothing was ever transferred into the trust. This defeats the ability of the trust to bypass the probate administration process for assets that may have been in the trust if they had been transferred into it.
Transferring assets into the trust can be time-consuming and complex. For example, if real estate with a mortgage is transferred into a trust, the lender may accelerate the mortgage if the property is transferred into the trust without the permission of the lender.
Living trusts do not reduce Connecticut probate fees. Assets in revocable living trusts are included in the calculation of Connecticut probate fees. Unscrupulous purveyors of living trusts have been known to discuss “probate fees” (sometimes using probate fees from states other than Connecticut and including attorney’s fees in the “probate fee”) in their living trust sales pitches. Often, this practice misleads potential clients to believe that living trusts reduce Connecticut probate fees. What’s not disclosed is that attorney’s fees charged to draft the living trust can easily exceed probate fees.
Not all assets may be transferred to a living trust. For example, stock options and community property generally cannot be transferred to a living trust.
It’s possible to accomplish some advantages of living trusts using less complex and less expensive legal tools, such as survivorship, payable on death, beneficiary designation or a durable power of attorney.
Another misrepresentation about living trusts is that anyone with assets valued in excess of an arbitrary number, for example, $75,000, should have a living trust. Such broad statements are designed to encourage the sale of living trusts and are not, by themselves, a reasonable basis for deciding whether a living trust is right for you.
Only after consulting a qualified, ethical attorney who takes time to understand your situation and objectives, and explain your options, can you make an informed decision as to whether a living trust is appropriate for you. Avoid “one size fits all” living trust packages that are sold to attendees of “free” seminars. That approach serves only to benefit high-volume, mass-production sellers of living trust packages.
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