A caller to Norris & Norris PLC recently asked about creating a revocable trust, also called a "living trust," as a substitute for a will to transfer assets upon death.

Living trusts have often been promoted as a way to avoid probate. Since probate in Tennessee is generally easy and inexpensive, however, it pays to take a closer look at whether a living trust would be appropriate for your situation. Generally, unless you have unusual circumstances, in Tennessee a will is a better way to dispose of assets after your death.

What is a Trust?

A trust is a legal arrangement governing how assets are managed and distributed. It is set up with a document called a trust agreement in which a Grantor transfers title to assets to a Trustee to manage on behalf of a Beneficiary. In a living trust, the Grantor is usually both the Trustee and the Beneficiary, at least until the Grantor’s death. The Grantor may terminate the trust or change the terms of the trust at any time. At the Grantor’s death, the trust agreement names a new Trustee, who then distributes the assets according to the terms of the trust.

Does a Trust Save Inheritance Taxes?

A living trust does not save death taxes. The estate tax rules are the same regardless of whether the assets are transferred under a will or a trust agreement.

Do Living Trusts Avoid Probate?

To avoid probate, the Grantor cannot leave any property subject to probate titled in his or her own name, instead of being titled to the Trustee of the living trust. This includes assets that the Grantor acquires after the trust is created. If this re-titling of assets to the Trustee is not done, the Grantor’s estate will likely have to be probated anyway.

Generally, when a Grantor creates a Living Trust, he or she also executes a will that "pours over" assets not titled to the Trustee into the Trust at his or her death. This will, however, has to be probated. So, the estates of many Grantors of living trusts do not really “avoid probate.”

Is Privacy a Benefit of a Living Trust?

Living trusts are private and there is no public record of the estate assets or beneficiaries. On the other hand, there is also no court supervision to protect the rights of the beneficiaries, as occurs in the probate process.

Are Assets Held In a Trust Protected from Creditors?

Assets held in a living trust are not protected from creditors. In contrast, when a will is probated, notice of the right to make a claim must be sent to any known creditors. Notice is also published in the paper. If a creditor does not file a claim within 4 months, that claim will be barred. There is not a similar deadline for creditors’ claims against assets held in a living trust.

Is Creating a Revocable Trust More Economical than Having a Will?

Creating a living trust and transferring assets to the trust may cost as much or more than having a will drafted and admitted to probate. So, if a person dies with a living trust but also has assets in his name, he will have to probate a will to transfer those assets to the Trustee. When this happens, the decedent has likely not saved money by creating the living trust.

When Does It Make Sense To Create A Living Trust?

There are times when living trusts do make sense, primarily for persons who own real property outside Tennessee. In addition, members of blended families may find living trusts useful in some situations. Living Trusts can also be helpful when used in combination with prenuptial or postnuptial agreements, in some circumstances.

Cautions Before Creating A Living Trusts

Living trusts have been promoted to such a degree that there is a specific provision of the Tennessee Consumer Protection Act addressing ads that market living trusts at workshops and seminars. These ads are required to recommend that an individual get advice from a lawyer, accountant or other tax professional about the true tax impact of a living trust and to make certain the individual’s assets are properly transferred to the trust.

Be cautious about agreeing to a living trust instead of a will unless you have consulted a lawyer or tax advisor.

Attorneys Christina Norris and Barbara Moss, at Norris & Norris PLC, are experienced in a variety of methods of estate planning. Talk with Christina Norris or with Barbara Moss to find out whether a will or a living trust is the better choice for you.

Call Norris & Norris PLC at (615) 627-3959.