By Cory Larkin
Since 2000, American taxpayers may have saved over $100 billion in estate and gift taxes through the use of a specialized irrevocable trust called a GRAT, according to an article in the Washington Post. That’s roughly 1/3 of all estate and gift taxes collected in the same period. So, the power of trusts is real, but the question for you and me is what can they do for middle class Americans who may not have multi-million dollar tax problems to solve. The answer is quite a few things.
Consider the most common trust – a revocable trust, sometimes called a living trust. It’s extraordinarily simple. It can be likened to moving money out of your left pocket and into your right pocket. You maintain complete control of your assets, but from a legal standpoint, you as trustee now own the assets. It is a change in form, not substance. You continue to file only one income tax return each year, you may amend the terms of your trust anytime during your lifetime, and when you die your trust acts like a will in directing the administration and distribution of your estate.
“But,” you may protest, “why not just use a will then? Maybe I prefer to keep my money in my left pocket!” To this, I readily reply that it certainly is better for some people to use a will in their particular circumstances. At the same time, I would propose three advantages of using a revocable trust that you may find convincing in deciding what is best for you and your loved ones.
- Avoiding Probate. If you die with all your assets in your right pocket – owned by you as trustee – you will avoid the court probate process entirely. In your trust, you would name a successor trustee to administer and distribute your assets after your death according to your wishes. This is what an executor under a will would do, but in your case without the need for court oversight, filings, and fees that, depending on your state of domicile and where your property is located, can be formidable (e.g. Virginia’s probate process – and fees – is significantly more onerous than the process in D.C. and Maryland). Your successor trustee isn’t likely to just run away with your trust assets, either – the trustee is bound by fiduciary duties to your beneficiaries and presumably is someone in whom you have confidence.
- Planning for Incapacity. Your trust can be an efficient vehicle to help manage your assets if you become mentally incapacitated or otherwise unable to manage your affairs. By including certain provisions in your trust, a person designated as your successor trustee will be able to step in for you if it is necessary to pay bills, transfer assets, or carry out similar tasks. Your power of attorney does this as well, but the trust can be a better option in certain circumstances, such as when a bank refuses to honor a power of attorney (google it).
- Maintaining Confidentiality. In government, transparency is typically a good thing. When it comes to your personal information, however, it may not be so desirable. Your will, and the required probate court filings, are public documents. That means anybody can uncover the value of assets passing under your will at your death and the identity of your beneficiaries, among other things. This may not be a concern for some, but you may wish to keep your information private to the extent possible from curious in-laws, beneficiaries receiving unequal distributions, and opportunists seeking to take advantage of persons inheriting substantial estates. When your assets pass in trust at your death, your affairs remain private.
A revocable trust may require some additional effort and expense to set up during your life – in drafting the trust instrument and titling assets to the trust – but the advantages described above are considerable in comparison.
Cory Larkin is an attorney at Furey, Doolan & Abell, LLP, a law firm located in Bethesda, Maryland serving clients across the D.C. Metropolitan Area in estate planning, estate administration, and other areas of civil law. He is admitted to the District of Columbia, Maryland, New York, and New Jersey State Bars. You can reach Cory Larkin at firstname.lastname@example.org or (301) 652 – 6880.