by Nancy Rice, Esq.~There are all kinds of Trusts . . . Revocable, Irrevocable, Living, Testamentary, Disclaimer, Special Needs, etc. It is important to know if you need one and to know the differences between them.
Revocable “Living” Trusts have become increasingly popular as substitutes for Wills in estate planning. Many people believe that by creating a Trust, naming themselves as Trustees, and transferring their assets into the Trust, they will save taxes, simplify the administration of their estates, and save money for their children or other beneficiaries. Others believe that if they set-up and fund such a trust, their assets will be protected if they need to go into a nursing home.
Unfortunately, these beliefs are not based on fact:
Myth # 1: Revocable Living Trusts Save Taxes.
This is absolutely wrong. All of the assets in a revocable living Trust are subject to State Inheritance tax, the Federal Estate Tax, and here in this wonderful state, the New Jersey Estate Tax.
One of the reasons for this is because the Trust you set up (as Grantor or Settlor), you control (as Trustee), and of which you are the beneficiary (during your lifetime) is considered to be you for tax purposes. Makes sense, doesn’t it?
If you want to argue that assets in a trust should not be taxed at your death, you have to really give them away! If you want to use a Trust, it has to be irrevocable; you cannot control it, and you cannot (in most instances) be a beneficiary at all!
A living Trust is also treated as you for income tax purposes and thus saves no income taxes during lifetime.
Myth # 2: A Revocable Living Trust is Cheaper to Administer than an Estate.
This may be true for residents of some states (e.g., Florida), but the generalization is wrong more often than it is right.
In New Jersey, Pennsylvania, and many other states, the much-feared “Probate of a Will” usually takes less than an hour.
The real work in the administration of an estate is the 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 is almost exactly the same, because the Trust assets must be identified and sometimes liquidated (eg. a house), the debts must be paid, tax returns must be filed, and the remaining Trust assets must be distributed. The only advantage of a living Trust is that if a family member was the Trustee, the time and expense of searching for assets might be avoided.
Because 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, especially in New Jersey.
Myth # 3: A Living Trust can be Distributed Faster than an Estate.
This is also wrong. 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 or 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 reasons.
As a practical matter, most Executors are reluctant to distribute assets until the death taxes have been paid and the returns approved, which can take from nine months to two years, and there is no reason for the Trustee of a living Trust to distribute assets any more quickly.
When would a Revocable Living Trust be appropriate?
In my practice, I utilize Revocable Living Trusts to:
1) Privacy: When people would prefer that others not be given the opportunity to see what their Wills say (because Wills are public records, recorded when probated, and Revocable Living Trusts are private family documents and not recorded); and
2) Avoid Ancillary Probate: When clients own real estate in states where probate is difficult, especially Florida (so that we avoid the need to probate the Will in NJ and then again in another state, which is required to transfer real estate only).
Because State laws vary widely, it is important to work with a lawyer licensed in New Jersey, and because most lawyers are not familiar with the workings of trusts or tax law, a lawyer who specializes in Estate Planning.