A living trust can ease financial planning and estate concerns

By Joseph L. Raad

Family problems!  Tax problems!  The living trust may be helpful in solv­ing them all.  And you don’t have to be a multi‑millionaire to take advantage of the living trust’s problem solving capacity.

The reason for the living trust’s effectiveness in solving problems is twofold.  The living trust is a distinct legal entity, and the living trust is extremely flexible.  A living trust can be molded to satisfy any number of purposes, to accomplish any number of objectives.  If you have a financial‑planning concern, these facets of the living trust merit particular attention.

The Living Trust as a Legal Entity

Under South Carolina law, a living trust is a separate legal entity.  A trustee (the individual or institution who acts on behalf of the trust) can own property, enter contracts, retain advisors, and otherwise engage in financial deal­ings as a distinct, legally created “person.” This separate existence for purposes of state law may have significant advantages.  A living trust, for example, need not necessarily terminate when the individual who created the trust (the “grantor” or “trustor”) dies.  Assets property placed in such a trust during the grantor’s lifetime will generally be excluded from his or her probate estate ‑ with corresponding savings in probate costs.

Some taxpayers have found even more esoteric uses for the living trust as a tax‑planning (or tax‑avoiding) device.  While such taxpay­ers are sometimes compelled by the IRS to defend their out‑of‑the‑ordinary arrange­ments in court, the courts invariably agree on one point:  the independent legal existence of the living trust cannot simply be ignored by the Revenue Service.  Or, we might add, by anyone else.

The Flexibility of the Living Trust

Very basically, the legal entity known as a living trust is a device in which one party (the trustee) owns property to be used for the benefit of another party (the beneficiary).  Or for several other parties ‑ some of whom may be enti­tled to a present benefit, others of whom will not benefit until some time in the future.  At the end of the trust term, the trust property will be distributed to still another party (the remainderman).  (The term “living trust” denotes that the trust was created during the grantor’s lifetime.)

Grantor, trustee, income beneficiary, remainderman.  Those are the “players” in the living trust scenario.  What contributes to the trust’s flexibility, though, is that the same individual may act in more than one role.  A grantor, for example, may also be the trustee.

Sometimes, the income beneficiary of a trust and the trust remainderman will be the same. A seemingly peculiar arrangement of interests?  Suppose that Mr. Brown establishes a living trust for his ten‑year‑old daughter with his daughter as income benefi­ciary (the trustee could be given the discretionary power to determine whether or not income is actually distributed) until she attained the age of 21, at which point the trust property could be distributed to her outright as remainderman.  Properly arranged, such a trust might secure income and estate tax advantages for the Brown family (as well as accomplish certain non-tax objectives), and also qualify as a present‑interest gift for purposes of the gift‑tax annual exclusion.

The possible permutations of interests ‑ ownership and beneficial; past, present, and future ‑ are the principal sources of the living trust’s flexibility.  But they’re not the only sources of flexibility.  The trust instrument itself af­fords a grantor tremendous latitude in designing a trust that will satisfy his or her particular objectives. A trust’s provisions, for instance, may grant the trust­ee broad powers ‑ or greatly curtailed powers. A trust’s benefits may be payable immediately or only upon the occurrence of some future contingency (e.g., the grantor’s disability).  The possibilities are endless.  Furthermore, the creator of the trust can amend or revoke the trust agreement at will.  Other living trust agreements give the grantor the power to substitute trustees at the grantor’s dis­cretion.

Advantages of a South Carolina Living Trust

Provides for Payment of Expenses in Case of Disability.  Should you become seriously ill or otherwise incapable of handling your own personal finances, your trustee can be authorized to pay doctors’, hospital and nurses’ bills, to pay rent, taxes, electric and gas bills, and other costs of maintaining your household?  There need never be any doubt as to the availability of these funds for such an emergency or the authority to use such funds for your benefit. As the years go by, especially if someone is left alone and apart from rela­tives, this is a greatly valued benefit.

Creates a “Blueprint” for Financial Protection of Beneficiaries.  Through your trust, you may create a plan for the lifetime protection of your beneficiaries.  You can also make certain that no one but those you name in the trust instru­ment will ultimately receive your money when the trust terminates.

Avoids Estate Settlement Delays.  Disposition of the property will not be prolonged by the usual delays involved in estate settlement.  There will, therefore, be minimal interruption in the flow of income payments from the trust to your beneficiaries.

Reduces Estate Settlement Costs.  The assets in your trust are not themselves subject to probate procedures, although generally subject to tax.  This holds down usual estate settlement costs considerably.

Avoids Publicity.  Since a trust is a private agreement, it will not become a matter of public record at your death.

Is Less Readily “Challenged” Than a Will.  Bequests under a will to relatives, friends, servants, employees, or even to charities are, on occasion, challenged by relatives disappointed because they were not named or because they received less than they had anticipated.  Experience shows, however, that it is much more difficult to claim mental incompetence or undue influence if a trust has been established and in operation under the observation of the maker during his or her own lifetime.

Remains “Current” Despite Changes in Residence.  Normally, moving to another state will not affect the operation and continuation of the living trust (al­though wills should be reviewed at such times).

Offers Complete Flexibility to Meet Changing Family Circumstances.  This is important.  You are perfectly free to revoke the trust and take back the assets if you wish.  Full flexibility will always be preserved because you remain able, at all times, to change your trust to conform to whatever significant changes may occur in your own family and property circumstances.

A distinct legal entity of almost limitless flexibility.  That’s the living trust.  And that’s why the living trust is a problem‑solver. The wealthy have long been familiar with its capabilities in that regard. But the advantages of the living trust are hardly limited to the super‑rich.

Joseph L. Raad is Senior Counsel with Morton & Gettys Law Firm in Rock Hill, SC. He is a Certified Specialist in Estate Planning and Probate Law. He can be reached at (803) 366-3429 or joe.raad@mortongettys.com.

Information or interaction on this page should not be construed as establishing a client-attorney relationship or as legal advice. For advice about your specific situation, please consult one of our attorneys.

Joseph L. Raad

Senior Counsel

P 803.366.3429  F 803.366.4044