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Is a Living Trust Right for You? - ©
Jeffrey P. Buhrman 2006
In general - In its most basic form, a “trust” is a written
agreement separating the ownership of assets from their enjoyment. The
person who manages the trust assets is the “trustee.” The person who
enjoys the benefits of the assets is the “beneficiary.” The creator of
the trust is the “donor” (sometimes the “grantor” or “settlor”).
A “living” trust is a trust that may be freely changed or revoked by the
donor. Oftentimes, the donor also is the first trustee, as well as the
primary beneficiary. When a trust donor dies, a living trust becomes
irrevocable, and cannot be changed thereafter. At that time, the trust
may terminate with the second trustee distributing the assets as
directed in the document, or the trust may continue for other
beneficiaries. Sometimes a living trust is fully or partially funded
during the donor’s life. Other times a trust is funded only once the
donor has died.
The following discussion touches on some advantages and disadvantages of
living trusts.
Avoiding probate - A living trust is not subject to “probate.”
Probate is the process whereby the Register or Judge of Probate declares
a last will and testament valid, and appoints an executor to settle the
decedent’s estate. The assets of a living trust may be transferred to
surviving beneficiaries, without resort to the probate. Yet, many donors
of living trusts intentionally or unintentionally do not take full
advantage of this fact, but leave behind assets that require probate.
Therefore, even if you create a living trust, you also should have a
pour-over will to capture any leftover probate assets.
If you own real property in another state, it may be a good idea to deed
it to a living trust so as to avoid probate in that other state.
Reducing expenses - The fees for creating a living trust
typically are higher than the cost of a will. In addition, a trust may
incur fees and costs when transferring assets from the donor to the
trust. A professional trustee may charge annual management fees.
The costs of settling a decedent’s affairs (paying bills, inventorying
assets, preparing tax returns, and distributing assets) are roughly the
same whether the decedent employed a will or living trust. Trustees are
entitled to charge commissions similar to executor’s fees. Unlike a few
other states, Maine does not allow percentage fees that are unrelated to
the actual work performed.
A living trust does, however, avoid the “probate fees” levied by the
Probate Court. These fee are based on the value of the probate assets,
and in Maine, the highest probate fee is $800, plus $50 for every
additional $500,000 (or less) of value over 2.5 million.
Privacy - A living trust is not public information, and its terms
can be kept private. Only persons with significant interests in the
trust are entitled to know its terms. This aspect of privacy makes it
harder for heirs, creditors and busybodies to discover trust provisions.
Sometimes a “catch-22” may occur: a person who might challenge a trust
does not know about the trust. For the same reason, it can be hard to
prosecute trustee abuses, whereas the beneficiary of a will has easy
recourse to the Probate Court.
Avoiding contests - The probate process gives a decedent’s heirs
ample notice and opportunity to dispute a will, even when the heirs are
not beneficiaries of the will. A living trust provides less notice, but
is not immune from all contests and may be challenged on the basis of
incapacity or undue influence. Because of a trust’s private nature, it
may be hard for challengers to mount a successful case.
Trustees operate under similar rules as executors, and must to provide
accountings to trust beneficiaries. A trust beneficiary may sue for
accountings or to correct trust mismanagement.
Managing incapacity - A living trust may provide for a second
trustee to take over management of trust assets, if the donor becomes
incapacitated. This is a very positive aspect of living trusts, and
avoids the need for a court-appointed conservator. A durable financial
power of attorney may accomplish the same purposes with less expense,
but a living trust provides a sounder structure for managing assets and
allows for detailed instructions to the trustee. In contrast, a power of
attorney is a bare bones grant of power, without instructions.
Professional management - Some donors choose a living trust so
they can have a professional trustee run their affairs and supervise
their investments, either because the donor is inexperienced with
finances or no longer wants to deal with such details.
Saving taxes - Despite common misconceptions, a living trust
affords no income or estate tax savings. Trust income is generally
taxable to the donor, and the value of all trust assets are counted in
the donor’s estate when determining estate taxes. Any estate tax saving
provision carried in a living trust can also be inserted in a will.
Quicker settlement - Because a living trust operates outside of
probate, there usually is a faster and smoother transition in the event
of death. When a trust donor dies, a second trustee may quickly step in
to deal with the situation and make distributions and payments as
appropriate. In contrast, probate assets cannot be accessed until the
executor is officially appointed by the Probate Court.
Nonetheless many of the same encumbrances that slow down the probate
process also impede living trusts. The most common are paying bills and
taxes. In Maine, a large percentage of the assets of an uncontested
probate estate usually can be distributed inside of nine months. The
task of filing a federal estate tax return affects living trusts and
estates equally, when one is required.
Divorce - Under Maine law, a provision in a will leaving property to a
spouse is automatically revoked upon divorce. This is not true of the
provisions of a living trust. Unless a living trust is amended following
divorce, there may be an unintended distribution to an ex-spouse.
Medicaid - A living trust is of no help whatsoever if the donor
applies for Medicaid (now called “Mainecare”). A donor who transfers
assets to a living trust and later applies for Mainecare to pay nursing
home expenses will find that the trust assets are counted as resources
available to the donor, and payments from the trust to others may cause
ineligibility for Mainecare benefits for as long as five years (and
perhaps more, depending on the value of the assets transferred).
Scams - Periodically consumers of living trusts are plagued by
high-pressure sales techniques, big promises, and high fees. There has
been a lot of “hype” generated about living trusts, mostly because
probate is a nuisance in certain states, notably California & Florida.
Maine, on the other hand, does not charge huge probate fees, or allow
executors to cull four, five or six percent commissions. If an estate is
uncontested, Maine probate may take less than a year to conclude.
Finally, probate won’t be avoided by a living trust, unless the donor
makes a concerted effort to fund the trust with all of his or her
probate assets.
DISCLAIMER: This web site is provided
for general information only. It is based on Maine law. The law may
apply differently to your specific situation. Readers should seek
competent legal counsel for solutions to their individual problems and
advice about their individual situation. This web site by itself does not
establish an attorney-client relationship, nor should anything in this
web site be considered legal advice. |
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