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Living Trusts FAQs

A Living Trust is a legal way to handle your estate planning that is different from having a Last Will and Testament.

Probate Avoidance

There are two main differences between having a Living Trust and a Will. The first is that with a Trust you do not have to go through the Probate Process. In Probate you submit all accountings of estate assets and distributions with the Probate Department, an Oregon State Agency. Distributions from a Trust are done outside of this government regulated system. Therefore you save money on court filing fees. The process of Trust distribution is also more private than the probate process. The government will be less involved in the process and there are not notification requirements such as publishing notice in the newspaper as there is in probate.

Tax Advantages

The second benefit of having a Trust is that if your estate (all of your assets) are valued at over $1,000,000 and you are a married person then you can utilize the Trust mechanism to reduce or eliminate estate taxes that will become due at your or your spouse's death. The state of Oregon wants to tax any estate that has a property value over the 1 million dollar mark. For example, if your estate is valued at 1.1 million then Oregon will tax $100,000 of your estate. The federal government will tax the value of an estate that is over 5.43 million dollars. Setting up an A-B (married persons) Trust for each spouse can up to double the amount your estate can hold before it is taxed. For example, without a Trust a husband and wife who own 2 million dollars of property may not owe any estate tax on the death of the first spouse. But, if all of the first spouse's property passed over to the surviving spouse upon the first spouse's death, then at the death of the second spouse, that person would have 2 million dollars in his or her estate. That means that Oregon would tax 1 million dollars of that estate. If that couple set up a Trust for each of them then they could greatly reduce their estate tax burden. On the death of the first spouse, instead of the property passing to the survivor, the property would stay in the Trust of the deceased person. The surviving spouse could take the income from this Trust, and, in emergencies, withdraw from the principle. Then, when the second spouse dies, each Trust will have around 1 million dollars in it, thereby greatly reducing the amount of estate tax owed.

Creating a Trust

Setting up a Trust is a two-step process. First you create a Trust document that is much like a Will. It identifies who will receive your property upon your death among other things. The second step is to fund the Trust which means that your bank accounts, real property, and other property will be owned by you as a Trustee of your Trust rather than by you as an individual. It is important to remember that when you open up new bank accounts or buy new property that the property is placed into the Trust.

Different Types of Trusts

The above section discusses the most common type of Trust, a Revocable Living Trust. However, there are other types of Trusts that are used in different situations. For example, an Irrevocable Trust creates a taxable event when money is placed into the Trust so these types of Trusts are not as common in estate planning as Revocable Trusts. However, there may be circumstances where you want to set-up a trust that can never be changed, altered or revoked. Perhaps this may be a Trust such as a Special Needs Trust which is designed to benefit a person who cannot fully support him or herself.

Special Needs Trust

A Special Needs Trust can be created for a person who has a condition such as a developmental disability, autism, or a traumatic brain injury which makes it difficult for that person to be independent and take care of all of him or herself. A Special Needs Trust names a Trustee who is in charge of handling Trust funds. The Special Needs Trustee makes such important decisions as how Trust funds will be invested and setting up a budget for the beneficiary of the Trust (the person with special needs). The Trustee should create a budget for the beneficiary so that the Trust Funds will keep the beneficiary in a comfortable living situation for the longest possible period of time. One very important element of a Special Needs Trust is to put specific wording in the Trust document that ensures that the government does not count the funds in the Trust as income which may disqualify the beneficiary from receiving public assistance. Many people who would have Special Needs Trust also qualify for public assistance money. Since the beneficiary may never be able to financially support him or herself it is important to preserve as many sources of funding to support that person as possible, including Trust Funds and government public assistance funding.

Charitable Trust

Charitable Trusts are irrevocable Trusts set up to benefit a a charitable or educational institution. A donor should think carefully before creating a Charitable Trust because of its irrevocable nature. Once the money is placed in the Trust there is no getting it back. Charitable Trusts can benefit religious groups, non-profit public service organizations, schools, and many other types of institutions. These Trusts can be created while the benefactor is alive or established as part of a Will. Charitable Trusts can provide the donor with certain tax incentives that do not exist with other types of Trusts. For instance, some of your donation can be deducted from the amount you owe in income tax. Also, the amount you donate to charity is deducted from the total amount of your estate when estate tax is being computed.

Testamentary Trust

A Testamentary Trust is a trust created in your Last Will. It is not a separate legal document. The most common reason for creating a Testamentary Trust is to control the amount of funds that are given in your Will to younger people. Young people are often too immature to handle receiving a large, lump sum of money For most younger people a large bequest from a parent's Will will end up doing more more harm than good. A Testamentary Trust puts the young beneficiary's share of your estate under the control of another person that you select. Your Trustee will then distribute funds to the beneficiary under the conditions that you outline in the Testamentary Trust. Many people wish to encourage their children to pursue higher education and so put wording in the Trust that if a beneficiary ceases to pursue his or her education then Trust Funds are only distributed under emergency situations. These types of clauses encourage your children to pursue their own careers and build their own estates while also allowing them to live comfortably until they can take care of themselves.

Trusts & Estate Tax Planning Resources