Myths About Trusts, Taxes and Estate Plans Are Also Common

APRIL 21, 1997 VOLUME 4, NUMBER 42

The last Elder Law Issues described a number of the most pervasive misconceptions about Wills and the probate process. With the growth in recent years of Living Trusts (sometimes referred to as Revocable Living Trusts, Family Trusts or Inter Vivos Trusts), it may not be surprising to hear that there are almost as many myths about those estate planning instruments.

  • The Myth: A Living Trust will reduce estate taxes.

The truth: A fully revocable Living Trust (the most common kind) has no direct effect on estate taxes. Of course, no estate taxes are due on the first $600,000 in any event. Between husband and wife, it is relatively easy to increase that figure to $1,200,000 with or without a Living Trust. However, the kind of Wills (and probate proceedings) necessary to effect the same result as a Living Trust will almost always cost far more than the Living Trust. Consequently, the Living Trust is usually the preferred method of obtaining the $1,200,000 estate tax exemption for a married couple.

  • The Myth: Only rich people should think about Living Trusts.

The truth: Living Trusts tend to be oversold to middle-class Americans, with a growing number of insurance salespersons, financial planners and other paraprofessionals marketing them door to door like carpet cleaning (“we’ll be in your neighborhood next Wednesday and would like to stop by and show you how to avoid probate”). However, even though a Trust is not the magnificent tax saving, probate avoiding estate plan it is commonly portrayed to be, it may be an excellent tool for many people with assets worth less than the $600,000 estate-tax figure. Some of the people who should consider Living Trusts even if their estates are modest include:

  • Those with real estate in more than one state (including partial interests in family farms, vacation homes and condominiums).
  • Those with children (or parents, siblings or other beneficiaries) who suffer from mental or physical disabilities, or receive government benefits.
  • Those who wish to impose restrictions on the use of funds after their death.
  • Those who have a specific concern about incapacity (if, for instance, there is a family history of dementia or mental illness).
  • The Myth: Preparing a Living Trust is a sure way to avoid probate.

The truth: creating a Living Trust is the first half of the process of avoiding probate. In order to be effective, the Living Trust must own substantially all of the assets formerly titled in the individual’s (or couple’s) name. Too many trust salesmen establish the trust, but fail to “fund” it–to change the ownership of real estate, stocks and accounts. If that step is not completed, the Living Trust is worthless for probate avoidance.

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