Choosing a Living Trust for Estate Planning

By Howell, Curtis C. | The CPA Journal, August 1994 | Go to article overview

Choosing a Living Trust for Estate Planning


Howell, Curtis C., The CPA Journal


Living trusts (a.k.a. inter vivos or self-declaration trusts) may be useful gift/estate planning devices. The use of a living trust in gift/estate planning depends largely on the individual circumstances of the taxpayer. Many of the reasons a living trust is selected instead of a will as a means of inter-generational asset transfer are non-financial in nature. Two taxpayers with identical assets living in the same state may choose different forms of estate planning devices depending upon what amounts to personal preferences.

Both living trusts and wills offer options that will suit some taxpayers better than others. The counsel given by some living trust proponents (salespersons?) that almost everyone can benefit from a living trust usually provides inadequate information concerning the entire living trust creation and maintenance process.

BRIEF HISTORY OF LIVING TRUST MARKETING

One of the first to examine the benefits of living trusts was Norman Dacey in his book, How to Avoid Probate!: published in 1965. More recently Alexander Bove's book, The Complete Book of Wills and Estates, provides an excellent source of estate planning information.

Unfortunately, during the 1980s, a trend emerged that shifted the emphasis from the "how-to" books of earlier decades to what can only be described as a marketing blitz. Lawyers and financial planners have found many of the attributes of living trusts make these trusts attractive for mass marketing. Unfortunately, some marketing tactics, such as "special no-charge seminars," turnout to be nothing more than a high pressure sales pitch. A California lawyer has aired a 30-minute commercial where he claims that "anyone who owns a home" should have a living trust.

These ambitious entrepreneurs pale in comparison to what some attorneys have called "living trust factories." These outfits sometimes solicit customers door-to-door, and for approximately $1,000, sell a mass marketed living trust document that consists of little more than boilerplate language. James Quillinan, chairman of the estate planning, trust, and probate law section of the California state bar, calls some of these factories "outright crooks."

The living trust phenomenon has even spawned a secondary industry. The American Family Living Trusts of Rancho Cordova, California, has advertised a training program in insurance industry magazines promising, "You can learn to sell living trusts in less than one day."

The preceding information is offered as a caveat to those considering a living trust as a vehicle for estate planning. But a warning is merely a warning, and should not discourage taxpayers from considering the potential benefits of a living trust. For certain persons, depending upon the assets in their estate, where they live, and personal preference, a living trust can be a very smart move.

FUNDAMENTALS OF LIVING TRUSTS

A living trust is essentially the same as other trusts. There are three parties to the creation of any trust. First, the grantor or settlor is the person who creates the trust by having a trust agreement drawn-up that details the grantor's wishes for the management and disposition of the property contributed to the trust. After the trust agreement is written, property must be transferred from the grantor to the trustee. This process is known as funding the trust and only after the trust is funded does the trust come into existence.

The second party involved in the creation of a trust is the trustee. The trustee is the person who controls and manages the trust's property and is responsible for the assets' safekeeping. The trustee operates in a fiduciary capacity, and usually the trustee's principal concern is the maintenance of trust corpus and not the production of trust income.

The third and final party to a trust is the beneficiary. Beneficiaries usual fall into two broad categories. The first category of beneficiaries are those who receive the income that results from the successful management of the trust property, and these persons are often referred to as the income beneficiaries.

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