What's all this hype surrounding living trusts? Living trusts are advertised on television, in newspapers, in do-it-yourself kits and at seminars everywhere. In order to answer this question and determine whether the hype is factual and justified, it is necessary to have some understanding of Probate.
Arkansas law requires estates which consist of assets in excess of $50,000 or estates of less value that have creditors to be probated. Ark. Code Ann. '28-41-1-101 (Supp. 1995). This is true regardless of whether or not you have a will. Probate is the legal process of distributing your property to your survivors after death. If you have a will, the function of probate is to execute the instructions of your will. If you do not have a will, your property will be distributed in accordance to Arkansas law.
Generally, only the property you own in your name at death must pass through probate. Depending on the ownership of the assets or the designation of a beneficiary, certain assets avoid the probate process entirely, with or without a will.
A living trust is undeniably a useful tool in estate planning. A living trust allows the grantor, who is the creator and the original contributor of assets, to:
1. Maintain complete control of assets while living.
2. Avoid probate of trust assets at death.
Assets in the living trust avoid probate because the grantor does not own them anymore, the trust does.
For example, the grantor transfers legal title of assets to a trustee, who manages the property for the grantor=s beneficiaries. The grantor does not lose control of these assets because the grantor may name himself or herself as trustee. Also, the grantor maintains complete control since he or she can always change or abolish the trust at any time.
The Hype:
Probate costs a fortune.
The Facts:
Typically, there are at least four costs associated with every probate:
1. Filing Fees: Since probate is a legal process, the estate is opened by the payment of filing fees. Ark Code Ann. '16-14-105 (Supp. 1995). These fees vary from county to county in Arkansas. In Pulaski County, the filing fees for probate are $121.00.
2. Publication Fees: Arkansas law requires that notice of the appointment of a personal representative be published . Ark. Code Ann '28-40-111 (Supp. 1995). Fees for the publication of the notice are approximately $82.60.
3. Executor Fees: In most states, including Arkansas, this is a percentage of the value of all personal property. The maximum fees which can be charged are set by Arkansas law. Ark. Code Ann. '28-48-108 (Repl. 1991). For an estate consisting of $300,000, the executor's fees would be $9,150. However, in the majority of cases the person named as executor is a family member who waives the receipt of compensation.
4. Attorney Fees: In many states, excluding Arkansas, the old percentage fee schedules for lawyers have vanished. However, in Arkansas, unless agreed otherwise, the attorney's fees are a percentage of the value of all probate assets according to Arkansas law. Ark. Code Ann. '28-48-108 (Repl. 1991). For the same estate of $300,000, the attorney's fees would be $8,800.
There are fees other than those identified above. Arkansas law allows fees for accountants, engineers, appraisers, auditors, investment advisors or other persons whose services are reasonably required in the administration of the probate estate.
Because of these costs inherent in the probate process, a living trust, by avoiding probate, has a significant advantage over the simple will. Therefore, having a living trust generally saves money over probating a will.
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The Hype:
Probate takes forever.
The Facts:
Your assets can generally be distributed faster through a living trust than if they were to go through probate. Typically, there are at least two time delays associated with every probate estate:
1. Period to Challenge Will: An interested person may contest the probate of a will by filing an objection with the Probate Court. Generally, the objection must be filed within three months after the date of the first publication of the notice of the admission of the will to probate. Ark. Code Ann. '28-40-113 (b) (1987).
2. Period to Make a Claim Against Estate: The holder of a claim for injury or death caused by the negligence of the decedent must be filed within six months from the date of the first publication of the notice. The holder of any other type of claim is required to file it within three months after the date of the first publication of notice. Ark. Code Ann. '28-50-101 (Supp. 1995).
Because of the time delays inherent in the probate process, a relatively simple estate cannot be closed until the expiration of approximately seven to 12 months. However, probate estates have been known to remain open for years. Therefore, having a living trust generally saves time over probating a will.
The Hype:
Probate mandates the loss of privacy.
The Facts:
Living trusts are generally more private than wills. Wills do become public documents once they are filed of record with the probate court. Living trusts basically remain private. Your relatives or neighbors cannot go to the courthouse and get a copy of your living trust. They cannot determine what assets you owned and how the assets were distributed. Thus, your personal financial information remains private.
The Hype:
Living Trusts save estate taxes.
The Facts:
No! You will not save estate taxes since assets in the living trust are generally included in the taxable estate of the decedent for estate tax purposes pursuant to federal and state law. However, a living trust can be designed to be estate-tax oriented. In other words, just as with a will, attorneys who devote a significant portion of their legal practice to estate planning will know how estate tax-saving provisions can be placed in the living trust to eliminate the payment of estate taxes. For example, with proper estate tax planning, a married couples' combined estate of $1.2 million could be passed to their children with no estate taxes being paid. However, if no tax planning is done on the same estate, as much as $235,000 in estate taxes would have to be paid. As a general rule, estate taxes must be paid in cash in full within nine months following the decedent's death. The payment of estate taxes drastically reduces the assets which could otherwise be passed on to loves ones.
In conclusion, as a general rule, the living trust should always be the testamentary device of choice for today's estate planner because it saves money, avoids time delays and maintains privacy over probating a will. Also, much of the estate tax planning commonly provided by wills can be incorporated into living trusts. Therefore, the hype is usually factual and justified.
Assets in the living trust avoid probate because the grantor does not own them anymore, the trust does.
A living trust can be designed to be estate-tax oriented. In other words, just as with a will, attorneys who devote a significant portion of their legal practice to estate planning will know how estate tax-saving provisions can be placed in the living trust to eliminate the payment of estate taxes.
Scott D. Fletcher is the President of and a Principal in Fletcher Law Firm, P.A., in Little Rock, Arkansas. Fletcher Law Firm is a tax law firm that provides full service plan administration services to employers and plan sponsors and provides outsourced plan administration to third-party administrators, financial institutions, accountants and other professionals. [scott@fletcherlawfirm.net]
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