Estate planners and Elder law attorneys utilize many different tools to achieve the desired results for their clients. One such instrument is the living trust (revocable inter vivos trust). While this tool is very useful in certain circumstances, it is sometimes oversold as an answer for all of the ills of estate administration that the popular press complains about. More and more people are establishing living trusts after attending a "free seminar" or with the help of the many do-it-yourself books currently on the market. As use of the living trust has increased, so have the misconceptions and problems surrounding it.

Several years ago there was a great deal of national publicity focused on ways to "avoid probate." In some states, the probate process had gotten cumbersome and expensive. In some cases, estate assets were being tied up for unduly long periods of time. It was thought that much of this could be avoided by turning "probate" assets into "non-probate" assets. Non-probate assets include life insurance payable to a named beneficiary, bank accounts and real estate that are held jointly with the right of survivorship, and trust assets. The disposition of non-probate assets is governed by the instrument itself, e.g., the life insurance policy, signature card, deed, trust agreement. Probate assets are all other assets owned by a decedent at the time of his death. The disposition of these assets is determined by the terms of the will or, if there is no will, by the laws of the state in which the decedent resides at the time of his death. Living trusts are sometimes promoted as the perfect answer, a mechanism for completely avoiding probate.

A living trust is a trust established by you during your lifetime. This trust typically permits (but does not require) you to transfer assets to the trust during your lifetime, and, if you do, then the trust is administered for your benefit, as well as that of your spouse, during your lifetime. Upon your death, your will leaves the bulk of your assets (those not transferred to the trust during your lifetime) to the trust, and the trustee manages and distributes the trust assets according to your instructions which have been incorporated into the trust agreement. You may amend or revoke the trust at any time during your lifetime and, if you have transferred money or property to the trust, you may retrieve it during your lifetime. Assets transferred by you to the trust during your lifetime and held in the trust at your death avoid estate administration ("probate").

Few, if any, living trusts accomplish the goal of totally avoiding probate. To be effective in avoiding probate completely, your every asset must have been transferred to the trust during your lifetime and held by the trust at your death. Most currently existing living trusts are un-funded or funded with only a portion of the assets of the decedent. Household goods, personal effects, checking accounts, cars, boats, and numerous other assets are seldom put into trust because it is inconvenient. Assets not in the trust or with a right of survivorship pass through probate.

The probate process, in South Carolina at least, is neither expensive nor particularly cumbersome. It does require that assets be inventoried and valued, that creditors be notified, and that an accounting of all receipts and disbursements be made by the Personal Representative. The major expense and primary delay factor in handling an estate is not the probate process but instead is the inventory and appraisals of property (in and out of a trust); the preparation and filing of the federal and state estate tax returns; estate income tax returns; final individual income tax returns; and the payment of any taxes due. A living trust does nothing to impact these expenses. Both probate and non-probate property are included in the taxable estate. Assets of a living trust are subject to federal and South Carolina estate taxes just as are any other assets of the estate.

Funding a living trust may create a problem with long-term care planning. At this time in the United States there are basically three ways to fund a long-term stay in a nursing home: self-pay, long-term care insurance, or Medicaid. The Medicaid application requires that an applicant list all the assets transferred into a trust in the sixty months prior to applying. A transfer of assets to a trust will result in a disqualification from receiving Medicaid benefits for some period of time. If long-term care planning is a concern, careful consideration should be given to funding a living trust.

There are several valid reasons for using a living trust. The ultimate disposition of the assets, although not necessarily their value or identity, may be kept confidential; whereas, the dispositive terms of a Will are a matter of public record. A living trust can set up a mechanism for handling your assets in the event of incapacity, a concern that can also be addressed with a well-drafted Durable Power of Attorney. If there is apprehension about a challenge to the Will, a living trust may be the preferred method of disposing of property because it may be more difficult to contest. If the estate includes real estate in more than one state that will pass under a Will, an ancillary estate administration must take place in each state in which real property is located. Holding such real estate in a living trust avoids this complication and its resulting expense. If you are worried that your spouse will not be able to handle the financial affairs of the family after your death a living trust with an alternate trustee might be helpful.

The choice to establish a living trust should be carefully considered. It requires balancing your present needs with the long term consequences of your decision. Before you decide that a living trust the answer to your needs, it is a wise idea to consult with qualified attorney.

The information in this article was prepared as general and supplemental information and may not be applicable to the reader's particular legal needs or circumstances. It should not be relied upon as a substitute for legal or other professional services. For such services consult a competent professional advisor.

M. Robin Morris, R.N., L.L.C., Attorney At Law, 164 Waccamaw Medical Park Court, Conway, S.C. 29528; Tel. 843-347-7998. Member of National Academy of Elder Law Attorneys. ©1998