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ESTATE PLANNING & LIVING TRUSTS:QUESTIONS & ANSWERS:

CONTENTS

What Is A Living Trust?
Why Is It Called A Living Trust?
What Is Funding The Living Trust?
Does A Living Trust Avoid Probate?
What Is A Pour Over Will?
Will a Living Trust Avoid Estate Taxes?
Will a Living Trust Avoid Income Taxes?
Is A Living Trust More Private Than A Will?
Can A Living Trust Be Contested?
Will The Use of A Living Trust Save Attorney Fees?
Can A Living Trust Be Distributed Faster Than An Estate?
Could a Living Trust Do Some Harm?

What Is A Living Trust?

An inter vivos trust also known as a living trust is normally created for the purpose of holding ownership of some or all of an individual’s assets during Trusts that person’s lifetime, and for distributing those assets after death. A living trust may be revocable (meaning you can change the trust) or irrevocable (meaning you can not change the trust). The person who creates the living trust (known as the trustor, settlor or grantor) names a person who will serve as trustee and will follow the terms of the trust. While alive, the trustor may and usually does serve as a trustee and control the assets even though the assets belong to the living trust.

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Why Is It Called A Living Trust?

A trust is called a living trust when it is created and takes effect during the trustee’s lifetime. A trust created and taking effect upon the death of the trustor or grantor is a testamentary trust.

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What Is Funding The Living Trust?

Just establishing a living trust is not enough for the trust to be effective. The trust needs to be funded. That means transferring the assets to the trust to manage in a proper and legal manner. That usually includes deeds to transfer real property and bill of sales or some other form of transfer of ownership to transfer personal property to the trust. Making a list and attaching it to the trust is insufficient. Executing a living trust will not cause the trust to become operational until assets have been transferred to it.

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Does A Living Trust Avoid Probate?

If a living trust is properly established and funded by transferring all your assets to the living trust, it will avoid probate. If any property is left out of the trust, you will need to have a probate to transfer the property into the trust. That is done with a pour over will. There are other ways to avoid probate including joint tenancy with right of survivorship, beneficiary provisions with life insurance and retirement plans and BOD (Beneficiary on Death) designations on some bank accounts. One reason given to avoid probate is the cost. Many people overstate the cost of probate and the length of time it takes to probate a simple will. In Washington and many other states probate of a will usually takes little time for an attorney. The executor often does much of the work which is collection of the decedent’s assets, the payment of debts and death taxes, and the distribution of the remaining assets according to the will. The administration of a living trust has the same responsibilities. Since the steps necessary to settle a trust are similar to the steps necessary to settle an estate, the legal fees should be about the same. Some states such as California and New York have a probate statutory fee schedule for lawyers which seem high and normally not justified as compared to attorney fees in Washington. If you have property in those states a living trust may help to reduce legal fees.

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What Is A Pour Over Will?

A pour over will is required to be sure that any property that is not already transferred to the Living Trust is transferred to the Living Trust. It is insurance that all assets or that some last minute acquisition will be transferred to the Living Trust. A pour over will, like any other will, must go through probate if the deceased had assets that were not a part of the trust.

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Will a Living Trust Avoid Estate Taxes?

There is no estate tax advantage to using a living trust. While a trust may contain provisions that will save on taxes, these same provisions can be put in a will using a testamentary trust.

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Will a Living Trust Avoid Income Taxes?

The grantor is treated as the owner of the trust for income tax purpose and must report all trust income on his or her personal return under “grantor trust” income tax regulations. There is no income tax advantage. A living trust may increase income taxes after death. Some of the income tax rules for trusts are not as favorable as the income tax rules for estates. However, a revocable trust may be treated as part of the probate estate for income tax purposes.

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Is A Living Trust More Private Than A Will?

A will becomes a public record upon filing with the Court. The law requires that a will, whether probated or not be filed with the Court. A pour over will become a public record upon the death of the testator (the person who wrote the will). A living trust is a private document that is not normally subject to public scrutiny. However, when title to real property is transferred into or out of a trust, it is often required that the trust document be recorded at which point it becomes a public document. It is possible to have a less descriptive document summarizing the trust that may be used in the place of the entire trust agreement.

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Can A Living Trust Be Contested?

It is argued that a trust can not be challenged. A trust can be contested in a special court proceeding. There are more contests with wills as there are many more wills then there are living trusts. A properly prepared will is not often challenged.

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Will The Use of A Living Trust Save Attorney Fees?

In Washington, the legal fee for representing an estate would most likely be similar, whether the assets pass by trust or by will. The only legal costs saved by using a living trust are the costs incurred in a probate proceeding. However, the costs of probating a simple uncontested will should be minimal. On the other hand, there are extra legal feeds for drafting a living trust as opposed to a will, and the additional fees to fund the trust and maintain the appropriate accounting.

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Can A Living Trust Be Distributed Faster Than An Estate?

There is no law preventing an executor from distributing all or any part of the estate at any time, as long as the executor is willing to assume the risk of loss if there are additional debts, taxes, or if the distribution is incorrect. The trustee of a living trust is also liable for debts and taxes, and may delay distributing assets for the same reason. As a practical matter, most executors and trustees are reluctant to distribute assets until the death taxes have been settled.

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Could a Living Trust Do Some Harm?

Many people purchase living trust packages, sometimes for excessive fees. Sometimes, those trust documents may be poorly written and actually result in unnecessary taxes, legal fees or court costs to correct the problem. Further, a probate has advantages, too. Probate requires notices to beneficiaries and creditors. Probate's have a short time line for creditors to make a claim, while a trust would have statute of limitations that could be as long as six (6) years. It provides for a specific remedy if the estate is not distributed according to the will. Many people create trusts that give fewer rights to their beneficiaries and so, if the trustee turns out to be dishonest or hostile, the beneficiaries of a living trust may have difficulties in enforcing the provisions of the trust. Living trusts have advantages and disadvantages. Most people do not need them and are not benefited by them. A living trust is most likely to benefit someone who lives in a state with complicated or expensive estate administration requirements (not Washington), who has life insurance or retirement benefits which need to be held in trust after death (because of minor children), for tax reasons or who own real estate in other states.

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We have represented clients throughout South King County and more specifically Auburn, Maple Valley, Kent, Des Moines, SeaTac, Federal Way, Renton, Tukwila, and Burien.

To make an appointment, please call 425-277-0977 or click here for an Appointment.

Law Offices of David P. Tracy
108 Wells Ave. S.
Renton, Washington 98057
425-277-0977 Fax 425 277-4749


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