Popular Misconceptions about Living Trusts

  1. Misconception #1: “I Can Avoid Probate by Having a Revocable Living Trust”
  2. Misconception #2: “I Can Avoid Death Taxes By Using a Revocable Living Trust”
  3. Misconception #3: “I Can Reduce Death Taxes More, Easier, Quicker, Simpler … (and with Less Chances of a Tax Audit) Using a Revocable Living Trust Than a Will”
  4. Misconception #4: “I Can Avoid or Reduce Income Taxes By Using a Revocable Living Trust”

Misconception #1: “I Can Avoid Probate by Having a Living Trust”

This isn’t a misconception at all. It is a primary reason for having a Living Trust —

So long as your Living Trust contains all your property at death,
or, more specifically —
So long as none of your property remains in your name at death.

The #1 “Time Bomb” regarding Living Trusts:

After-acquired property not transferred to the Trust.

All it takes is one asset, and
you may have just necessitated a probate.

Regardless of whether you’re married or single, probably you’re only hope for avoiding a probate if after-acquired property remains in your name at death is if it is personal property and your interest in it does not exceed $60,000. In that case, it should be subject to the Personal Property Affidavit procedure under RCW 11.62.010 — so long as you have a Pour-Over Will, one that says “any asset not already in my Living Trust I give to the Trustee of my Living Trust.” Your Trustee, as a “Claiming Successor,” should then be able to obtain the asset, transfer it into the Trust, and avoid a probate proceeding for that asset. If not, well, much of your planning may be wasted, as a probate proceeding for that one asset will likely be necessary. And remember, the goal is not to reduce the number of assets in one’s probate estate — the goal is to eliminate all assets from one’s probate estate.

Bottom-line: Living Trusts do have many advantages, generally revolving around their not requiring a probate proceeding at death. But, and this is a BIG BUT, if you use a Living Trust, you will need to be scrupulous to ensure that, indeed, you do:

  • Use it,
  • Use it for all your assets (perhaps in conjunction with other probate avoidance techniques), and
  • Not inadvertently take title to an asset in your own name and “forget” to re-title it in the name of your Living Trust. All it takes is one!

Misconception #2: “I Can Avoid Death Taxes By Using a Living Trust”

Death taxes for a Washington resident dying after May 16, 2005, now include not only the federal but also the Washington estate tax, imposed on the value of property that a Decedent owns or controls at death — how they pass to the survivors is immaterial (ie, whether by testacy, intestacy, Living Trust, Community Property Agreement, joint tenancy, etc.).

Whether you and your estate will be liable for any death taxes will be determined not only under federal but also Washington law (see Handling Estate Tax Issues for further details). Under both sets of law, as regards death taxes, there are only miniscule advantages or disadvantages to having, or not having, a Will or a Living Trust. Any death tax liability you may have will generally depend on the nature and value of your property at death, the nature of your interest in that property, and who gets what. The particular method that you use to transfer your property to others, specifically, whether it is transferred with or without a Will, by joint tenancy, by Community Property Agreement, by Living Trust, and so forth, does not matter for death tax purposes.

There is, however, a grain of truth to this misconception. You can reduce or avoid death taxes with a Will or Living Trust — not merely because you have a Will or Living Trust, but because of the way that you specify in your Will or Living Trust for your property to pass. Some ways can reduce and even eliminate death taxes — others can’t. The point is that having a Will or Living Trust itself doesn’t by itself have anything to do with death tax liability or estate tax savings or reduction. Death tax liability will be determined not by “Do you have a Will?” or “Do you have a Living Trust?” but, for example, by “If you do have a Will or Living Trust, what does it provide?”

Misconception #3: “I Can Reduce Death Taxes More, Easier, Quicker, Simpler … (and with Less Chances of a Tax Audit) Using a Living Trust Than a Will”

Yes, there is lots of hype on TV and in the mail and the newspapers that somehow, using a Living Trust will allow you to reduce and even eliminate death taxes. This is truly a “good news/bad news” situation. While it is true that using a Living Trust, just like using a Will, may allow you to reduce or eliminate death taxes:

There is NO SIGNIFICANT ADVANTAGE
to using a Living Trust over a Will
as regards any death tax liability you may have.

Any death tax advantage you may obtain by using a Living Trust
you should be able to obtain by using a Will (and vice versa).

Misconception #4: “I Can Avoid or Reduce Income Taxes By Using a Living Trust”

If anything, it may be possible to obtain more income tax savings through a Will and a probate estate than through a Living Trust, as it should be easier to justify prolonging the closing of a probate estate relative to that of a Living Trust. This income tax advantage, however, favors use of a Will over a Living Trust, and is likely to be significant only in very large estates or those producing a very large amount of taxable income.

Bottom-line: There are significant reasons in some circumstances for using a Living Trust as your estate planning vehicle. Choosing a Living Trust over a Will in order to more effectively eliminate or reduce any death or income tax liability you may have should not be one of your reasons. Both can be used for that purpose with virtually equal effect. Furthermore, a significant disadvantage to the use of a Living Trust is the potential for the “Time Bomb” problem described above, which, if it does occur, will likely eliminate a primary advantage of using a Living Trust — probate avoidance.