Thursday, March 29, 2012

Living Trust vs. Probate Essay

Living Trust vs. Probate Essay

Living Trust vs. Probate: Advatageous/ Disadvantageous
1. Introduction
It is always very painful when somebody dies and thinking about distribution of property and possessions in such a case seems meticulous.

People are spending al their lives in order to accumulate possessions so that their life and life of whom their love and care be more comfortable.

In this paper I will research into aspects of after death property and possessions dispositions and how this could be managed for the maximum benefit and lesser expenses for all involved. I will compare living trust and probate and describe their advantages and disadvantages in different situations.

Our Service Can Write a Custom Essay on Living Trust vs. Probate for You!

2. Living Trust vs. Probate
Even though death is inevitable event in event person’s life, when living he can decide what to do with his or her possessions and property and how to distribute them among potential heirs. There is also the option that upon one’s death the court will decide who will obtain the wealth, but this seems not very promising.

Living trust is generally referred to as the trust that is created during lifetime of the person aiming either to reduce taxation expenses or establish the long-term management of property. The trust usually consists of assets of the Grantor, or the trust creator, that are managed and distributed by a Trustee to Beneficiaries, or person, people or organizations, who are supposed to receive the property that is under the trust. A Living Trust is can be also called a Revocable Trust, during the lifetime of the person he or she can revoke or cancel the trust at any time. But after the death it becomes irrevocable and can no longer be changed.

2.1 Advantages and Disadvantages of the Living Trust
[A] trust that is created by the settlor’s declaration of trust, by his or [A] trust that is created by the settlor’s declaration of trust, by his or her inter vivos transfer to another, or by beneficiary designation or other payment under a life insurance policy, employee benefit or retirement arrangement, or other contract is not rendered testamentary merely because the settlor retains extensive fights such as a beneficial interest for life, powers to revoke and modify the trust, and the right to serve as or control the trustee, or because the trust is funded in whole or in part or comes into existence at or after the death of the settlor, or because the trust is intended to serve as a substitute for a will”.

The important thing is that the revocable trust is a very valuable estate planning tool. But it is not the ‘universal remedy for real estate planning’, as can be frequently marketed. The main argument for the living trust can seem to avoid probate and for some cases it is true, but the advantages of the revocable trust are not limited to that. First of all it is incapacity situation. With a revocable trust, a trustee can be said to manage the financial affairs of the grantor in case he is incapacitated. If there is no such a trustee, the court will be asked to declare the individual incompetent, which is a very embarrassing and costly process. Such procedures can arouse conflicts in the family and result in lasting court battles. A living trust provides the contingency plan to deal with grantor’s inability to manage his assets. With this trust, the person is able to specify in advance whom he wants to manage his possessions and property in the incapacity occurrence.

The second advantage is referred to probate. A living trust eludes the expense and the delay of probate, as it can be expensive especially for the large estates in states where executor and attorney fees are law fixed as the probate estate percentage. Court costs and legal fees can reach up to 10% from the gross value of the estate. On the other side, the cost of establishing of the living trust is not more then 1% of the estate and it can be easily settled in several weeks.

The third advantage is publicity related. A living trust avoids the probate publicity. The grantor can just name beneficiaries in the trust that will be unknown to the public. But there are some exceptions, as in some states the estate tax return is required to be submitted to probate court, even if the probate is not required, and it contains all trust documentary copies. And another two exceptions are when the trustee asked the court for the trust instructions interpretations and when the trustee is sued by any of the decedent’s beneficiaries or creditor.

The forth advantage is related to multistate administration, as the living trust avoids administration in many jurisdictions when assets are held in different states.

The other advantage relates to family disputes. As members of the family that are not beneficiaries are not supposed to be alerted regarding terms of the living trust, faction among members of the decedent’s family is significantly decreased. In this case, all members of the family without exceptions are informed about the terms of a will; probate gives the possibility for the family to argue over the will’s terms. The living trust can be appropriate when the person wants to disinherit some family member without clamor.

In most jurisdictions, the trust is said to be less exposed to challenge on the basis of grantor’s capacity lack, duress or fraud, than a will. Furthermore, in many jurisdictions, when a will is contested, nobody is allowed to access the estate assets until the validity of the will is set. But a trustee commonly is allowed to use assets of the trust in order to defend its validity, producing the supplementary deterrent to trust’s challenges.

Then comes spouse disinheriting. In most states, spouse doesn’t have the choice to choose a statutory share instaead of what is trust provided. Nevertheless, a spouse that is not enough provided for under a will can choose to take against the will and obtain a statutory share. Spouse disinheriting can not be a responsible action, but for those who want to create a living trust can be the best way.

Place of the trust is another advantage. The disposition of the trust is not required to be the same as the domicile of the grantor. Living trust can be established in any state with more favorable laws to the estate planning goals of the grantor. Besides, the grantor can express a wish to empower the trustee to change the citus of the trust in case of necessity. The advantages of this flexibility must be well thought against the value and delay of settling an estate when trust is not situated in the grantor’s state of living. For instance, if the living trust is not situated in the same state where probate of the will is needed, proceedings of the probate can be rather difficult.

And finally the last advantage is related to tax planning. In accordance with Internal Revenue Code section 663(b), the trustee of the living trust can choose to treat any distribution made during the first 65 days of any taxable year of the trust as made on the last day of the preceding taxable year. Such tax planning flexibility cannot be applied to the estate.

Among the disadvantages of the living trust on the first place is cost. Even though this depends from case to case, establishment of the living trust involves legal and other expenses. A trust that is specially designed can cost between $700 and $3,000 or even more, this depends on the size of the estate, as well as on complexity and prevailing attorney fees in the area. Trust funding can also be expensive and lasting process. For instance, services of an attorney are required for any real estate transfer. In the same manner, in case of professional trustee use, his annual fees can reach up to 2% of the total amount of the assets.

Another disadvantage is related to property titling. A person should acknowledge the differences between individual holding of the property and holding it as a living trust trustee. The living trust holds title to property and acts correspondently. Some financial institutions may not provide a mortgage on the property that is owned by the trust, as lender can have some difficulties in selling such a mortgage on the secondary market.

Insurance of the trust property is another unpleasant thing. Some insurance companies may not insure property that is owned by the living trust. For instance, an insurance company may not insure a vehicle that is trust-owned in order to avoid coverage of unknown number of individuals who are in this trust or who are allowed to drive this vehicle.

Living trusts are subject to IRC section 665-668 "throwback rules" and estates are not. Even though income accumulation in the estate as a tax shelter is not the main advantage with current tax rates, itcan become the future factor.

IRC section 267 is also related to trusts: losses are canceled when assets are being distributed to beneficiaries. This is supposed to come into force after the death of the grantor when property is distributed from the living trust to a beneficiary for pecuniary bequest funding.This cannot be applied to estates.

And the last disadvantage refers to the creditors’ claims. With the living trust, there is no deadline for filing claims by creditors; such suits can last for years after the death of the grantor. But in the the case with will, terms are strictly established and there is a deadline. Creditors often have about six months after a will is admitted to probate to current claims.

2.2 Advantages and Disadvantages of Probate
When one hears the word “probate”, he usually imagines the costly and slow court process. But after the thorough investigation it appears that probate is not that bad for many families. Probate is said to be the legal procedure of will validation. It can be determined once and after the death of the person his property is distributed to heirs in accordance with will provisions. So, the person should consider the option of going through probate if the most of his assets avoid probate. A large portion of estate of the person may not fall under the control of his will. Property of this kind includes items owned jointly with survivorship rights, incuding bank accounts, cars and house, or has a definite beneficiary such as retirement plan benefits or life insurance death, annuities and individual retirement accounts.

Then if the person has a small and simple estate, it most probably will slip through probate.6

When creditors are not posing any problems, then probate is the right choice. As I have already mentioned, creditors often must file claims against an estate during the period of six months. Probate will be also a good choice when the heirs are not supposed to fight for the estate in the court.

The person should consider this alternative, if his estate is costs not more then $600,000, as there are no estate taxes in this case. With living trust the person will not be able to avoid income or estate taxes in any way.

And the person should consider avoiding probate in case of owning a large or complex estate. The proper distribution of property that is owned in more than one state, for example, is said to be very complicated procedure under the will. In this case, setting up trusts can appear much cheaper and easier.

This option will not also work if the person wants to avoid publicity, estate taxes are the great concern or the person may wish the professional management of his or her property after his or her death.

3. Conclusion
In the conclusion I would like to summarize that there is no universal answer whether to establish the living trust or probate. In this research paper I described series of situations in which each of the alternative would fit best, and before making the final decision, the person should evaluate his or her possessions and property in accordance with criteria discussed above.
-----------------------------------------------------------------------------
Get Custom Essay on Living Trust vs. Probate
ATTENTION!!! HotEssays.blogspot.com provides free sample essays and essay examples on any topics and subjects. EssayLib.com essay writing service produces 100% custom essays, term papers & research papers, written by quality essay writers only. The prices start from $10 per page. You can order a custom essay on Living Trust vs. Probate now!