The Truth About Living Trusts in Utah

The following information reflects Utah law. It has been provided for informational purposes only, and is not intended to render legal advice. It is not intended to apply to any specific situation. Legal principles discussed can differ in individual situations. Before applying any of this information to your personal use, you should consult with your lawyer.

Trusts—Wills—Living Trusts—Living Wills. We hear these words frequently. Promoters tout the living trust as the solution to all estate planning needs. But are trusts really as good as the promoters say? This pamphlet explores some of the facts about living trusts.

QUESTIONS AND ANSWERS

Q: What is a trust?

A trust is a legal arrangement where one person, the creator of the trust (the trustmaker) transfers property to another person, the trustee, with instructions on how to manage and use the property for the benefit of a third person, the beneficiary. Thus, there are three positions in every trust—trustmaker, trustee and beneficiary. With most living trusts, it is common for the same individual to initially fill all three positions. Further, a trust can only work on property that is transferred to the trustee. Usually, the instructions for the trustee are prepared by the lawyer for the trustmaker.

Q: What is a “living” trust?

A living trust is simply a trust that you set up while you’re alive. You place assets in trust and choose a trustee. A living trust is usually revocable and can be revoked or amended by the trustmaker. In contrast, a “testamentary” trust is one you create by your will — it starts only at your death.

Q: Why do people use living trusts?

There are several reasons:

  • Living trusts are convenient asset holding devices. Assets can be held in a living trust until a specified future time and then distributed to the designated beneficiary. This can also work well for protecting minor children.
  • Living trusts protect privacy. A living trust is a private document and need not be placed in any public file (unless there is a lawsuit over the trust).
  • Assets held in a living trust are usually not subject to the delays of the probate process.
  • If property is owned in several states, using a living trust to hold title to each property will avoid the need to probate the property in each state.

Q: What are other advantages of a living trust?

If a trustmaker becomes disabled, the trustee of the living trust could continue to manage trust assets and use those assets for the trustmaker’s benefit, such as collecting monthly checks or paying bills, without any need for court approval. If a disability is prolonged, a living trust may avoid the need to have a guardian or conservator appointed by a court.

Q: Does a living trust save income taxes?

No. While the trustmaker is alive and holds the power to revoke, a living trust is “transparent” for income tax purposes and need not file income tax returns. That is, all income, gains, and losses from assets in the trust are taxed directly to the trustmaker. However, at the trustmaker’s death, a living trust usually becomes irrevocable. From that time on, the trust must file its own income tax returns each year and pay taxes on its income. Further, when a trust becomes irrevocable, the income tax rates for trusts (39.6% on $8,500) are much higher than the rates for individuals (15% on $8,500). Thus, trusts can sometimes cause higher income taxes.

Q: Does a living trust protect assets from creditors?

Not while the trustmaker is living. In most states, a person cannot avoid creditors by transferring assets to a living trust. Otherwise, everyone could avoid their just debts by using a trust. Yet, when the trust becomes irrevocable upon the trustmaker’s death, creditors of the trust beneficiaries would be unable to reach trust assets that remain in the trust.

Q: What are the disadvantages of a living trust?

  • Preparing a living trust document that includes the proper provisions for your family takes time and money.
  • Keeping a living trust updated takes time and money.
  • To make a living trust work, it must be “funded.” That means titles to assets must be transferred into the trust. Yet, each type of asset requires a unique type of transfer document and procedure.
  • Keeping a living trust funded takes time and effort. Each time a new asset is purchased or inherited, care is needed to make sure the asset is titled in the trust.
  • Trusts require some recordkeeping to keep trust assets separated from the trustmaker’s other personal assets.
  • Conflicts could arise between the trustee and the beneficiaries.

Q: Should I consider setting up a living trust?

Yes, if you have any assets you want preserved for yourself or your loved ones. It really doesn’t matter how old you are or if you are married or single. You may also want to encourage your parents or other loved ones to set up their own trusts to make things easier to manage when they die or become disabled.

Q: Is a living trust costly?

Not when compared to the costs and taxes that could arise from not planning properly. The cost to establish a living trust is a function of how detailed and complicated your plan is. However, set-up costs are not the only cost. A living trust requires regular maintenance to put new property into the trust and to amend the trust to keep it up to date. Failure to properly maintain the trust can make it ineffective and cause the initial setup cost to be wasted.

Q: How do I set up a living trust?

You must first select the design features of your living trust. You do this by consulting with a knowledgeable lawyer who can guide you through the many options available. Then, you work with that lawyer to prepare and sign your living trust document and to transfer your assets into the living trust. If you make yourself the trustee, you must remember to sign your name in all trust transactions as “Joe Doe, Trustee” instead of using only your name. To make things more efficient, you should collect the title documents to all of your major assets for review with your lawyer when you design your living trust.

Q: Is it difficult to transfer assets into a living trust?

No, but it does take time to do it right. You should consult with your lawyer to make sure that the assets have, indeed, been transferred to your living trust. Since some assets are controlled by beneficiary designations at death (IRAs, life insurance, etc.) special care is needed in deciding how to design those designations.

Q: Will I lose control over the assets in my living trust?

Not if you retain the power to revoke the living trust or the power to control trust investments. Those powers are commonly reserved by most trustmakers. Also, if you are the trustee of your living trust, you would have all of the powers of a trustee over the trust assets. You can also retain the power to manage the trust assets including the right to sell trust assets.

Q: Can I change my living trust after it is set up?

Yes, so long as the trust is revocable. Most living trusts can be revoked or amended by the trustmaker. Therefore, as long as you are alive and mentally competent, you can revoke or amend your living trust.

Q: If I have a living trust, do I still need a will?

Yes. A living trust only controls assets held by the trust. If there are other assets outside the trust, a will is needed to transfer these assets to the living trust at your death. Usually, a “pour-over” will is used for that purpose. So even if you have a living trust, you still need a will to make sure your assets go to whom you want, the way you want, and at the time you specify.

Q: Does my living trust control all of my assets?

No. A living trust can control only those assets that are transferred to the trust. There are several types of assets which would not automatically fall under the living trust’s control. These might include IRAs, 401(k), pension and profit-sharing plans, life insurance, joint tenancy property, payable-on-death (POD) accounts and other assets controlled by beneficiary designations. Coordination is needed between the language of the beneficiary designations on these assets and the language of your trust.

Q: When I die, what happens to the assets in my living trust?

When you die, the successor trustee of your living trust will hold or distribute the trust assets according to the instructions in the trust document.

Q: Someone told me a living trust must be used to save estate taxes. Is that true?

No. The amount of estate taxes is determined by who receives the assets at death, not by the type of document used to distribute the assets. For example, assets going to a surviving spouse pass free of estate tax. This is true regardless of whether the assets pass to the spouse outright, through a trust, by joint tenancy, by a will or by a beneficiary designation.

Q: I received a call from someone trying to sell living trusts. Should I buy one?

No. Trust “packages” bought from these vendors are not tailored to your specific needs. A number of questionable companies, playing on the fear of probate and suspicions of lawyers, are selling living trust “kits” by phone, mail order, over the Internet and through seminars. Most of the sales pitches contain exaggerated claims about trusts and estate planning in general. Your trust needs to be crafted to fit your personal needs.

Q: Who should be the trustee for my living trust?

Usually, you, as the trustmaker, would be the initial trustee of your living trust. Or, you and another person could be co-trustees together. Most people want themselves or a trusted loved one to serve as trustee. Yet, when a loved one is not available, you might select a bank’s trust department as your trustee. There are many factors and considerations that go into selecting a trustee. You should discuss these factors with your lawyer.

Q: What does a successor trustee do?

If you are the trustee and become disabled, the successor trustee assumes management of your living trust until you recover. When you die, the successor trustee will pay your debts and taxes and then distribute or manage the remaining assets according to your trust document.

Q: Who should be the successor trustee?

You may choose individuals, such as family members or trusted advisors, or institutions such as banks or trust companies to be your successor trustee. If you desire, you may designate two or more persons to serve together as co-trustees to get the benefits of shared administration of your trust. Again, you should consult your lawyer.

Q: Is a living trust the same as a living will?

No. A living trust deals with your assets and financial matters. In contrast, a living will deals only with your medical care and issues relating to ending life support.

Q: When does a trust come to an end?

A trust ends at the time set in the trust document. For example, it could end right after your death. Or, it could end after the death of a surviving spouse or other loved one. Or, it could end after all of your children have reached a specified age. Usually, a trust ends only after all debts and taxes have been paid and after all remaining trust assets have been distributed.