Living Trusts
[download
this publication]
What is a trust?
A trust is a relationship in which a person (or business) holds title
to property for the benefit of another person. The terms of this relationship
are usually described in a written document, which is commonly called
a trust instrument, trust agreement, declaration of trust or simply
trust.
Who are the parties to a trust?
The creator of the trust is commonly called the settlor, trustor,
or grantor. The person (or business) holding title to the property for
the benefit of another is called the trustee. A person for whose benefit
the trust was created is called a beneficiary. The grantor may choose
to be both a trustee and a beneficiary of the trust. However, a valid
trust is not created if one person is both the sole trustee and the
sole beneficiary.
What is a "living trust"?
A living trust, also known as an inter vivos trust (inter vivos is
Latin for "between the living"), is a trust created during
the lifetime of the grantor. It is to be distinguished from a testamentary
trust, which is a trust created through a will. Sometimes people confuse
a living trust with a living will.
A living will is a document a person signs stating their wishes about
being kept alive by artificial means, and has no similarity to a living
trust and is not an estate planning device.
What is a "revocable grantor trust"?
The term "living trust" is often used to refer to a specific
type of living trust – a revocable grantor trust. The grantor is the
trustee of the trust and is also the sole lifetime beneficiary. A successor
trustee is named to serve if the grantor becomes disabled or dies. Successor
beneficiaries are named to receive assets at the grantor’s death. The
grantor may revoke the trust or modify its terms at any time until he
or she dies or becomes legally incapacitated. This right to revocation
gives the grantor flexibility with his or her assets making this type
of trust the one people most often choose.
How does a revocable grantor trust avoid probate?
Probate administration is the court process to distribute property
owned by an individual at death. It is distributed in accordance with
the individual’s will, or according to state law if there is no valid
will. If an individual owns no property at death, there is normally
no need for probate administration. By creating a revocable grantor
trust and transferring all of your property to the trust, you can avoid
owning any property in your name alone at death, and consequently avoid
the need for probate administration. The terms of the trust can provide
directions to the successor trustee on how to distribute the trust property
after the grantor’s death. In this way, the trust acts much like a will,
except that no probate court involvement is necessary.
Will a living trust save me money?
A living trust will never save money for the person who creates it,
for the reason that there is a cost for the preparation of the trust
document and the associated documents required to fund the trust. In
addition, if realty is sold from the trust, before or after the death
of the grantor, a certificate of authority that the trust allows the
trustee to sell the property, is probably going to be required. There
will be extra costs for this as well as any possible amendments to the
trust. The successor trustee will most likely need legal counsel in
complying with the requirements of the trust and paying any applicable
death taxes.
If there is no probate estate, then recent changes to Michigan law
require that the successor trustee publish a notice to allow creditors
to file a claim against the trust. If there are no assets with which
to pay a claim, e.g., because the assets have already been distributed
to beneficiaries, then the trustee becomes personally liable. Since
it is advisable to have an attorney draft the necessary documents, additional
costs will be incurred. Many trusts have lay persons, e.g. relatives,
named as successor trustees, who serve with nominal or no compensation.
If a corporate trustee is named, such as a bank, the fees can be very
expensive. It is possible that the cost of a living trust will be less
than the cost of probate. If so, then the living trust you purchase,
while not saving you any money, will save money for your beneficiaries.
Is my trust responsible for my debts?
A trust does not protect your assets from claims of creditors. While
you are living the assets in your trust can be reached to satisfy court
judgments against you. After your death creditors can file a claim against
the trust if there are insufficient funds in your probate estate. If
the trust is for a married couple it can be reached to satisfy court
judgments against either spouse. Real estate and some other assets titled
in a husband and wife’s name (referred to as tenants by the entireties),
which is not in a trust, can not be reached to satisfy the individual
debts of one spouse. For this reason some attorneys advise married couples
to leave their home titled as tenants by the entireties and not transfer
it into a trust to keep it protected against creditors of one spouse.
Can a revocable grantor trust allow one to avoid
death taxes?
No. Avoiding probate does not mean death taxes are avoided. A deceased
person’s property (even if held in trust) is generally subject to the
Michigan Inheritance Tax and federal estate tax if it exceeds $ 2 million
(in 2006-2008; this amount will rise in 2009). Death taxes have complicated
rules and many exceptions. Certain trusts can be used to reduce the
amount of death taxes due. You should contact an estate planning attorney
for specific advice.
Can a revocable grantor trust help shelter my
assets for Medicaid eligibility purposes if I need long term care as
a nursing home resident?
Under Medicaid rules, the assets of a revocable grantor trust are
considered to be available to the grantor because the grantor can terminate
the trust at any time to gain access to trust property. Because the
trust assets are considered available to the grantor, they are treated
as the grantor’s property in determining the value of the grantor’s
countable assets for Medicaid nursing home benefit eligibility. While
a home in Michigan is generally exempt for Medicaid eligibility, it
is countable, (i.e. not exempt,) if titled in a revocable trust. In
some cases, married couples can benefit by having the home counted as
an asset and then transferred out of the trust later.
It also may be possible to shelter assets for Medicaid nursing home
eligibility purposes through transfers to an irrevocable trust which
prohibits the nursing home patient’s right to trust benefits. Medicaid
penalizes most transfers to trusts made within 5 years of a Medicaid
application. Medicaid law is complicated and a number of factors must
be considered before such a transfer. You should contact an attorney
if you want to use a trust for Medicaid planning.
What is an irrevocable trust?
If the terms of a trust do not provide a person with the power to
amend or revoke the trust, then the trust is an irrevocable trust. In
most circumstances, this means that the trust assets cannot be retrieved
from the trust nor used in a manner inconsistent with the terms of the
trust. Thus, careful consideration should precede the transfer of assets
to an irrevocable trust.
Can I create a trust on my own?
Although it is not illegal to draft your own trust, the complexities
of property and tax law make it risky. The advice and counsel of an
experienced attorney is strongly recommended. It is also advisable to
have an attorney draft the documents necessary to fund the trust. "Trust
kits" advertised for sale in many publications may provide a number
of generic fill-in-the-blank forms. However, the forms provided are
not necessarily tailored to your specific situation. Sometimes there
are insufficient instructions for "funding" the trust, an
essential aspect of having a trust to avoid probate. Funding the trust
means transferring assets owned by the grantor into the name of the
trustee. If this isn’t done, the assets will have to go through probate
at the death of the grantor. Whether the transfer of assets is done
by the grantor or an attorney, it is a very important part of the trust
and a failure to fund the trust is probably the biggest reason some
trusts fail.
It is also important to be aware that Michigan law treats a trust as
a separate legal entity from the grantor. Because of this it is imperative
that insurance coverage of any asset transferred to the trust must be
modified to reflect the change. In addition, planning factors peculiar
to the laws of your state may not be considered in the forms provided.
Finally, the instructions provided for completing these "trust
kits" commonly recommend that you take the completed forms to a
local attorney for review before executing them. An attorney presented
with such forms may reject them in favor of his or her own trust forms,
leaving you with the same attorney’s fee you would have paid without
the "trust kit".
More often what is encountered is a trust marketed and offered by
some type of organization, sometimes owned by an attorney, but frequently
not. Seminars for "free estate planning advice" and direct
mail solicitations are targeted at seniors. Things to be wary of are
misrepresented facts about commonly used probate avoidance techniques
and the need for and cost of a living trust, and exorbitant costs running
two to three times as much as an estate planning attorney might charge.
Before you sign on the dotted line, it would be a good idea to check
with the Legal Hotline for Michigan Seniors, the State Bar of Michigan,
or the Consumer Protection Division of the Michigan Attorney General’s
office.
Is a revocable grantor trust expensive to create?
For a given estate plan, the fee charged by an attorney for the preparation
for a revocable grantor trust will usually exceed the fee for the preparation
of a will. Because attorneys generally set their fees based upon time,
the higher fee for a revocable grantor trust may be explained, at least
in part, by the extra time involved setting up a revocable grantor trust
as part of your estate plan. This work includes drafting the trust and
any accompanying instruments, such as a pour over will (see next question),
assisting in the execution of all instruments, and funding the trust,
that is, transferring property to the trust.
If I have a revocable grantor trust, do I still
need a will?
Yes. An estate plan employing a revocable grantor trust is normally
accompanied by a pour-over will. A pour-over will transfers any property
solely owned by the grantor/testator at death to the trust. In this
way, it "pours" the probate estate over into the trust. Although
the grantor may have transferred all of his or her property to the trust
to avoid probate, a pour-over trust is needed to act as a safety net,
catching any property that was not transferred to the trust before death.
Should I have a living trust?
The use of a living trust to avoid probate is not new – trusts have
been around for a long time. They have typically been used in large
estates, not only for the possible avoidance of death taxes but also
to avoid the costs of probate, which are higher for larger estates because
there is often more complexity, work and fees. What is new is the marketing
of living trusts to people with small or modest – sized estates. In
many of these situations a living trust may or may not make sense, may
or may not save money. Because a living trust has a cost, it is never
a "savings" to the person making it, but intended to save
money for the person’s heirs. It is possible that in some situations
it might be a better decision to invest the amount of money a trust
would cost; the investment could grow to be worth more than the cost
of probate. As mentioned earlier, one can incur additional, extra costs,
beyond the initial one for preparation of the documents. And, there
are other, low cost options for avoiding probate. If you are considering
a trust you should consult with a lawyer knowledgeable in estate planning
and carefully review all of your options, given your particular situation.
If you found this information useful, consider making a tax-deductible
donation to the Legal Hotline for Michigan
Seniors.
[back to top]
|
