THE ERIE COUNTY BAR ASSOCIATION ON "LIVING TRUSTS"

From The Bar Association of Erie County Living Trusts: A Consumer's Guide- What Is a Living Trust?:

"A living trust is an agreement between an owner of certain assets and a trustee, whereby the owner (the trust's creator) transfers assets into the name of the trustee, who in turn, invests, manages, and distributes them for the benefit of the creator and/or other beneficiaries pursuant to the terms of the written trust agreement. It typically provides for the management of assets during the creator's lifetime as well as for their disposition after his or her death. A living trust is therefore to be distinguished from a testamentary trust created under a person's will, which comes into being only on death.

Some living trusts, such as life insurance trusts (designed to keep insurance proceeds out of their creators' taxable estates) and so-called "Medicaid trusts" (established to preserve assets against depletion by the costs of long-term health care), are irrevocable.

The type of living trust described throughout these pages is a revocable trust, which can be changed or revoked by its creator at any time. Usually, this revocable living trust provides that income from trust assets is to be paid to the creator during his or her lifetime. Upon the creator's death, the assets may be held in further trust for other beneficiaries or distributed outright to them.

Why Are Living Trusts Becoming So Popular?

Living trusts are being heavily promoted as will substitutes and probate-avoidance devices here in New York and throughout the nation. Aggressive marketing, often by so-called financial planners who are not attorneys, through free seminar programs or by mail-order, do-it-yourself trust kits, has prompted many people, especially senior citizens, to purchase living trusts, sometimes for thousands of dollars, and to rely on them as the sole means of disposing of their estates.

Much of the business of marketing living trusts is done by out-of-state companies through regional franchise operations. Hence, a New York consumer may purchase a pre-printed trust document that does not conform to New York law and requirements. Unfortunately, also, many of the advantages claimed for living trusts by promoters are exaggerated, if not directly misstated. Complaints from senior citizens about the high-pressure sales tactics of trust promoters have prompted investigations by the attorneys general of a number of states and resulted in some indictments. In New York, the attorney general has issued a warning about living trust scams.

What Is Probate and Should It Be Avoided?

The promoters who are aggressively marketing living trusts as will substitutes seek to convince consumers that probate is a lengthy, expensive process from which only living trusts can and should protect them.

Probate in New York State, however, differs from the process in many other states. In some states, courts exercise continuing jurisdiction over estates to protect the interests of potential will contestants until approval of the final distribution of assets. In such states, the term "probate" refers to the entire course of the estate administration which, depending on the size and complexity, can take as much as several years.

Probate in New York, however, is simply one part, the initial stage, of the estate administration. Probate signifies the procedure to prove the validity of a deceased person's will and involves establishing that the maker of the will signed it in accordance with the legal requirements and that he or she possessed the proper mental capacity. The process ends with the court's appointment of the executor to administer the estate.

In routine cases, New York probate takes a matter of days or weeks; in more complicated situations involving heirs who are under disability or who cannot be located, several months. Consumers should be aware that in New York, apart from probate, the administration of assets under a living trust after the creator's death takes approximately the same amount of time as administration of an estate.

When Is a Living Trust Appropriate?

A living trust can be an important estate planning tool for some people in some circumstances, but it is not appropriate for everyone. Since a living trust provides for lifetime management, it may be especially suitable for an older person with moderate to substantial assets ($150,000 and up) who no longer wants to manage those assets. Such a person can create a trust, with a bank or trusted individual as trustee, to relieve the creator of investment and management worries during his or her lifetime and also to dispose of the trust assets on death.

A living trust can also be useful to hold out-of-state property. If a person dies owning real property in his or her own name (for instance, a condominium or vacation home) in another state, the executor of the will may have to initiate a separate probate proceeding in that state to pass title to the property, after the original probate in the state of domicile. Placing that property in a living trust avoids the necessity for the additional proceeding in the non-death state. Tax proceedings, however, may still be necessary in the other state, whether or not the realty was held in a living trust.

Who Can Be a Trustee?

Under current New York law, the creator of the trust can be a trustee as long as he or she is not the sole trustee and the sole beneficiary. A trust can have several trustees. The creator can name a trusted family member or friend, or a bank or trust company, to be trustee or a co-trustee. A successor trustee should also be named in the trust agreement. Banks and individuals can charge commissions for acting as trustees. Commission rates are prescribed by law, though the trust agreement can set forth different rates. Family members may waive trustees' commissions.

Is the Transfer of Assets to a Living Trust Subject to Gift Tax?

Since the creator retains the right to revoke or terminate the trust, the transfer of assets is not considered a completed gift for gift tax purposes. No gift tax returns need to be filed and no gift taxes are owed.

Who Pays Income Taxes on Income Earned by Trust Assets?

In the typical revocable living trust, in which the creator has retained the right to receive the income as well as revoke the trust, all income is taxed to the creator. The trustee may file a simple tax return annually to show the trust's income and to indicate that it will be reported on the creator's personal income tax return.

Does a Living Trust Save Estate Taxes?

Some consumers are purchasing living trusts in the mistaken belief that revocable living trusts offer estate tax savings that wills do not. In fact, because the trust's creator retains the right to terminate the trust and obtain the property back, trust assets are includable in his taxable estate at death. In a living trust is is possible to make use of the same type of tax planning utilized in wills to maximize estate tax savings. A living trust, however, offers no advantage over a will in this regard.

Does a Person with a Living Trust Also Need a Will?

If "everything" the creator of a trust owns is put into the name of the trustee during the creator's lifetime, a will is not needed, since the trust will dispose of that property at death. Practically speaking, however, it is neither possible nor desirable for most people to transfer everything into a trust. Furniture and other personal property, automobiles, and checking or other bank accounts typically remain in the creator's name and thus become part of the probate estate at death.

In order to dispose of these assets at death, a will is necessary. The will can make a disposition of personal property and then "pour-over" or distribute the balance of the estate to the living trust, to be disposed of in accordance with its terms. Even if a person has a living trust, therefore, he or she must have a will, and if the assets remaining in that person's name exceed $10,000 in value or consist of real property, the will must be probated.

Can a Living Trust Be Contested?

The validity of a living trust and the mental competency of its creator can be challenged in court. Under current New York law, the legal capacity required to sign a trust is higher than the capacity required to sign a valid will, which may make a living trust easier to contest than a will.

How Do the Costs of a Living Trust Compare to Those of a Will?

In comparing the costs of trusts and wills, consumers should take into account the cost of preparation of the document, attorneys' fees for administration and settlement after the death of the testator or creator, executor's and trustee's commissions, court filing fees, and the costs of funding the trust. Although some trust marketers claim that living trusts save the alleged high costs of probate, they may fail to note that except for court filing fees, attorneys' fees for administering and settling an estate are generally comparable to attorneys' fees for administering and distributing assets under a living trust after its creator's death.

Court filing fees for the probate of a will do not represent the kind of onerous expense some trust promoters allege, ranging from $35 for an estate valued at under $10,000 to $1,000 for assets valued at over $500,000. The probate filing fee for the estate of a middle class decedent with probate assets between $100,000 and $250,000 is a relatively minimal $335. And, any savings in court filing fees realized with a living trust may be more than offset by the cost of the trust document itself, which, even for a fill-in-the-blank form, can be one thousand to several thousand dollars.

Taking all such factors into consideration, costs associated with living trusts may in many cases be comparable to, but can be even higher than, costs for probating a will and administering an estate.

Caveat

Consumers are being bombarded with a great deal of information about living trusts. Some of that information is misleading, and some of the claimed advantages of living trusts are exaggerated. It is therefore important for someone considering a living trust to consult with an attorney experienced in estates and trust law to discuss its pros and cons in light of his or her particular circumstances, and determine whether it may be an appropriate part of his or her estate plan.

NOTE: This material, based on New York Law, is issued to inform, not advise. No person should ever apply or interpret any law without the aid of an attorney who knows the facts, because the facts may change the application of the law."