Living Trust Problems

by Tom Streissguth
Both spouses may set up their own living, revocable trusts.

Both spouses may set up their own living, revocable trusts.

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A trust allows you to pass your assets to heirs without a probate court taking control of the process. The trust specifies how a trustee should distribute the assets. While some trusts are created when the grantor dies, others are created while the grantor is still alive, making these "living" trusts. There are important advantages to setting up a living trust, but there are some complications and potential pitfalls as well.

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Overlooking Ownership

You can place most investments, real estate, cash and valuables into a trust, but property registered in your own name must be transferred into the name of the trust. For real estate, this means executing a new deed naming the trust as the new owner. This can cause some complications for any title insurance policy you have on the property, as the title company may not recognize a trust as a true "successor in interest" to the property. In addition, you must choose the proper type of deed -- either a warranty (which guarantees your title to the property) or quitclaim (which simply surrenders your interest in the property).

Taxing Issues

A trust does not allow you to avoid income taxes, either as the grantor or the beneficiary. If you receive any income from trust assets, it must be reported to the IRS. In some cases, the trust itself must file an annual return and make estimated annual tax payments. Also keep in mind that tax-advantaged retirement accounts such as IRAs generally cannot be moved into a trust; they must remain your individual property, although someone else's IRA can receive trust assets.

Business Hang-Ups

Transferring business interests into a trust can raise some issues. If you operate a sole proprietorship or own a partnership share, transferring the interest to the trust should be straightforward. However, corporate bylaws or partnership agreements may restrict your right to change title on your shares. The trust should have very specific language on how the business will be transferred to the beneficiaries. In addition, if you've named someone else as a trustee, you must carefully consider the trustee's authority as far as the business is concerned.

Bothersome Beneficiaries

Naming a beneficiary may seem like a simple process, but trust grantors must consider myriad possibilities surrounding the proper distribution of trust assets. You can name primary, secondary and contingent beneficiaries; a revocable trust allows you to change beneficiaries at will, but an irrevocable trust restricts that right. The instructions on distribution of assets must be precise to remove ambiguity that may result in a legal dispute -- and, in the worst case, court and attorney's costs. Minor beneficiaries also pose a problem; minors cannot hold legal title to property, and you must name a guardian or custodian to receive real estate and other assets that you intend to pass to a minor.