"Avoid probate and minimize estate taxes with an estate plan that includes a living trust!"

These kinds of pitches have appeared across the country in ads promoting all kinds of seminars. The ads typically suggest the attendees will learn:

  • The evils of probate and how to avoid them.
  • How to maintain control over your estate.
  • How to set up a living trust.

You might suspect that living trusts are just a marketing scheme to make attorneys, financial planners and insurance agents rich. But, in fact, there is much to recommend them. They have some disadvantages, too. Let's take a look at both sides of the equation.

A living trust is a trust that a lawyer creates for you, which holds all of your assets. It's a vehicle for keeping your estate out of probate when you die. Probate is a process that ensures the terms of your will are properly carried out, but it can be difficult and expensive. The cost of setting up a living trust -- it starts at around $1,000 -- can save your heirs a lot of time and money in the long run.

The living trust originated in English common law. It seems that English kings and lords would unjustly take property away from people whenever it suited them. To protect their assets from the Crown, people would place them in a trust. Property would be re-titled into the name of the trust and that enabled the property to pass from one generation to the next, untouched by the Crown. The validity of the trust was upheld by English courts, and subsequently the colonists brought the idea to this country.

With that background, it is easy to understand why the living trust has been promoted as a way of preventing attorneys from "confiscating" too much of an estate. Attorney fees in states like California can be very high. Henry Abts III, in his book, The Living Trust, writes, "A California court recently found that $23 million was not an excessive probate fee . . . even though the estate was $1.4 billion. I still wonder how $23 million of legal expenses can possibly be justified."

Setting up a living trust doesn't mean you don't need a will. A will may still be used in coordination with a living trust. In that capacity, it is referred to as a "pour over" will. It covers any assets that are not transferred to the living trust during your lifetime.

Although, I am not an attorney, I have seen a lot of estates. In most, if not all, situations they benefit from a living trust. I have seen far more advantages than disadvantages to using a living trust. Here they are:

  • It allows you and your family to avoid the public scrutiny associated with probate, in which your assets and their disposition are a matter of public record.

  • It creates a single receptacle to receive and distribute all your assets upon your death.

  • It can control, coordinate and distribute all your property interests while you are alive, if you become disabled and on your death. You can also arrange for your well-being under your own terms as you advance in years, become ill or mentally incompetent.

  • It can be changed or amended at any time during your lifetime.

  • There are no adverse lifetime income tax consequences.

  • Continuity of cash flow and investments in your portfolio is not interrupted by your death.

  • Strategies for avoiding estate taxes with a will are also available using a living trust. The living trust itself does not save estate taxes but you can set up tax-saving trusts -- such as credit shelter trusts -- within the structure of a living trust. (See a previous Game Plan for more on credit shelter trusts.)

  • The living trust is transportable from state to state since it is legal in every state.

  • A living trust is more difficult to attack by disgruntled beneficiaries than a will.

Be sure to check in with an estate planning attorney. This should not be a do-it-yourself job.

Many of you ask for resource information on some of these subjects. Here are three excellent books:

  • The Living Trust by Henry Abts III, (NTC/Contemporary Publishing).
  • Your Living Trust and Estate Plan by Harvey J. Platt (Allworth Press).
  • Protect Your Estate, second edition by Robert Esperti and Reno L. Peterson, (McGraw-Hill).

Thanks for your email and have a great week.

Vern Hayden is a certified financial planner in Westport, Conn. He is a financial consultant and advisory associate of Financial Network Investment Corp. He also is an owner of Hayden Financial Group. His column is not a recommendation to buy or sell stocks or to solicit transactions or clients. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds. While he cannot provide investment advice or recommendations, Hayden welcomes your feedback at Hayden4t9@aol.com.

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