3.9 Uses of Trusts

• Library: Estate Planning in Virginia (Virginia CLE) (2018 Ed.)

3.9 USES OF TRUSTS

3.901 Avoiding Probate. ⁶³ As discussed in paragraph 3.8, the use of a funded living trust can avoid having the assets in the trust included in the grantor's probate estate as long as the assets are not paid to the estate of the grantor under the terms of the trust agreement. In addition to avoiding the probate tax and administration expenses to the extent they are based on the size of the probate estate, use of a funded trust can also avoid having the dispositive scheme of the decedent become a matter of public record. While a will must be probated and therefore becomes a part of the public record, a trust agreement is not probated. Nevertheless, in some cases a trust agreement may become a part of the public record if the trust owns real estate and the trust agreement is required to be filed when the real estate is transferred by the trustee.

A funded living trust also avoids publicizing the nature and value of the assets the client owned at his or her death, because the inventory filed by the personal representative lists only the assets in the decedent's probate

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estate and does not include any assets held in a revocable trust, unless they are distributable to the estate.

It is possible that a funded living trust may prevent a delay in the administration of the estate, because the assets paid to the trust will become immediately available to the beneficiaries. Although in some jurisdictions creditors of the estate may not have a right to assets held in a funded living trust unless the initial transfers were fraudulent, in a taxable estate the trustee of a funded living trust may be subject to transferee liability for unpaid federal and state income and transfer taxes. Consequently, a trustee of a funded living trust is often as reluctant as the personal representative of the decedent's estate to make distributions to beneficiaries before the estate has received a closing letter from the Internal Revenue Service indicating that no additional federal estate taxes are payable.

Although the funded living trust purportedly avoids administration expenses, the trustee must handle the administration of the trust assets and will incur expenses and generally will be entitled to compensation. Therefore, it is possible that the total cost of administering an estate that involves funded living trusts will not be significantly less than the cost of administering an estate that includes all of the decedent's assets, undiminished by transfers to living trusts before the decedent died.

3.902 Managing Assets. As mentioned in paragraph 3.8, one reason for funding a living trust is to provide for the management of a person's assets once the person can no longer handle his or her own financial affairs or no longer desires to do so. A person can transfer his or her assets to the trust while he or she is still competent or give an agent under a durable power of attorney the right to transfer assets to the living trust once the agent believes the principal is no longer capable of handling his or her own financial affairs. In addition, an individual may wish to transfer assets to a trust to provide for the management of the assets while he or she is out of the country or otherwise unable to manage the investments. Although a durable power of attorney can serve the same purpose, it is generally easier for a trustee of a trust to deal with third parties concerning assets held in a trust than it is for an agent to deal with the assets of a principal because the trustee actually has legal title to the assets, while the agent is only acting on behalf of the principal. Assets held by the trustee will be administered and disposed of according to the terms of the trust agreement as established by the grantor.

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3.903 Tax Savings.

A. Credit Shelter Trusts. Regardless of whether the client uses a living trust or a testamentary trust, one or more trusts may be necessary after the death of the client if the client wishes to take advantage of the applicable credit amount that is available to each individual or individual's estate for federal transfer tax purposes, especially if the individual wishes the assets to be available to a surviving spouse without being estate taxable upon the death of the surviving spouse. ⁶⁴ By transferring assets equal in value to the unused basic exclusion amount ⁶⁵ to a trust (sometimes referred to as a "credit shelter trust" or a "bypass trust") for the benefit of his or her spouse, a client can provide for a spouse during the spouse's lifetime and yet ensure that the assets will not be includible in the surviving spouse's estate for federal estate tax purposes. As a result, whatever is left in the trust upon the death of the surviving spouse passes free of estate tax to the intended beneficiaries of the first spouse to die. Of course, if the client is not concerned about retaining assets for the benefit of the surviving spouse, assets equal to the basic exclusion amount can pass at the decedent's death directly to children or other beneficiaries, and the same transfer tax savings will be accomplished.

The 2010 Tax Act provides that the applicable credit amount available to a deceased spouse is transferable to the surviving spouse if the estate of the first spouse to die files an estate tax return, calculates the unused credit amount of the deceased spouse, and transfers the unused credit amount to the surviving spouse. ⁶⁶ The "portability" of the basic...