Living Trust
FAQs
Contrary to what most people have heard and have been led to believe over the years, a Will is probably not the best way to plan your Estate – primarily because a Will does not avoid Probate when you die. In fact, a Will is a one-way-ticket to Probate – all Wills must be verified by the Court before they can be enforced.
Also, because a Will can only go into effect after you pass away, it provides no protection if you become physically or mentally incapacitated, a real concern of millions of older Americans, and you could easily end up under the control of the Probate Court before you die.
Fortunately, there is a simple and proven alternative to a Will – The Revocable Living Trust. Assets placed in Trust pass outside of Probate and that you keep control of those assets while you are living and makes sure your plan won’t be altered by the court or disgruntled relatives at your passing or incapacity.
Probate is the legal process through which the court supervises the implementation of your Will. The Court will order your assets to be inventoried and appraised; will make sure that your debts, including court costs, attorneys and executor fees are paid; referee any challenges or contests to your Will; and finally, relinquish the remaining estate to be distributed to your heirs. If you don’t have a valid Will, your estate must still go through the Probate system before being distributed to your heirs as defined under state law.
It is expensive. Legal/executor fees and other costs are currently estimated by the AARP at 8-10% or more of an Estate’s gross value (before debts are paid). These costs must be paid prior to your Estate being distributed to your heirs. Also, if you own property in other states, your family could face multiple Probates.
It takes time. Normally 9 months to 2 years. During this time, your assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without the court’s and/or executor’s approval. If your family needs money to live on, they must request a living allowance which may be denied.
Your Family has no privacy. Probate files are open to the public, so anyone (including a business competitor) can see what you owned and whom you owed. This also invites unhappy heirs to contest your Will and exposes your family to unscrupulous solicitors.
Your Family has no control. The Court has control. Having someone tell them who gets what and when – and having to pay for this outside supervision - can be very frustrating for your family and often leads to disputes.
You might be surprised at how much even a modest Estate costs, especially if real estate is involved – and don’t forget the other costs (time, lack of privacy, etc.) Verify your state's laws.
Not really – it usually just postpones it. When one of the joint owners dies, ownership will transfer to the other without Probate. But when the “second” owner passes on, or if both should die at the same time, the assets must be Probated before distribution. Watch out for the other risks too! When you add someone as a co-owner to your assets, you lose control. You expose it to the other owner’s debts. Also, you need your co-owner’s signature to sell or refinance; and if he/she is incapacitated you’ll have to get approval from Probate Court – even if your co-owner is your spouse.
If you can’t conduct business due to mental or physical incapacity, i.e. Alzheimer’s, stroke, heart attack, The court will appoint a conservator to act on your behalf and must approve all decisions made, even if you have a Will. Remember, a Will can only go into effect at your passing. The Court, not your family, controls how your assets are used to care for you. This can be expensive, time consuming and difficult to end if you recover. And it doesn’t replace Probate at death – your family would have to go through the court system twice!
A Durable Power of Attorney lets you name someone to manage your financial affairs if you are unable to do so. A Durable Power of Attorney for Health Care empowers the person you named to make certain medical decisions on your behalf if you are unable to do so. Properly prepared Durable Power’s of Attorney will prevent the Court from having to make decisions on your behalf. A well prepared Living Trust portfolio will include these documents for you.
A Living Trust is a legal document that, like a Will, contains your instructions for what you want to happen to your assets when you die. But, unlike a Will, a Living Trust avoids Probate at death, can control all of your assets and prevent the Court from controlling your assets at incapacity. Because there is no Probate with a Living Trust, all expensive Court proceedings and delays are eliminated. Your privacy is preserved and the emotional stress on your family is minimized. It can reduce/eliminate estate taxes through the use of credit shelter provisions in the Trust, is extremely hard to contest and even provides very effective prenuptial protection.
When you set up a Living Trust, you transfer assets from your name to the name of your Trust, which you control – such as from “Bob and Sue Smith, husband and wife” to “Bob and Sue Smith, Trustees for The Bob and Sue Smith Family Trust.” All the assets transferred are no longer your property (they are assets of the Trust) and are not subject to Probate when you die, and are not subject to court-imposed guardianship if you become disabled. The concept is very simple, but this is what keeps you and your family out of the Courts.
Absolutely not. You keep full control. As Trustee of your Trust, you can do anything you could do before – buy/sell assets, change or even cancel your Trust during your lifetime, (that’s why its called a Revocable Living Trust). You even file the same tax returns. Nothing changes but the title to your assets.
No, it is very simple. Your attorney, banker, Trust officer, financial advisor, investment broker, insurance agent, etc. can assist you, if need be. Make sure you change titles on all real estate (local and out-of-state) and other property with formal titles (checking and savings accounts, stocks, CD’s, insurance, mutual funds, etc.) Most Trust documents automatically include personal property without formal titles, (such as jewelry, clothing, art, home furnishings).
It will take a little time, but not a lot. It should only take a few weeks to prepare the legal documents after you make the basic decisions. You can do it now or pay the courts and attorneys to do it for you later. One of the benefits of a Living Trust is that all your assets are brought together under one plan. Don’t delay “funding” your Trust. Your Trust can only protect assets that have been transferred into it.
Although you can be a Trustee of your own Trust, some people select a Corporate Trustee (bank or trust company) to act as their Trustee or Co-Trustee, especially if they don’t have the time, ability or desire to manage their own Trusts, or if one or both spouses are ill. Corporate Trustees are in the business of managing Trusts – they are reliable, objective, government regulated and experienced investment managers. Their fees are usually very reasonable.
If you or your spouse are Co-Trustees, either can act and have instant control if one becomes incapacitated or passes away. If something happens to both of you, or if you are the only Trustee, your selected Successor Trustee(s) will step in.
At physical or mental incapacity, your Successor Trustee(s) looks after your care and manages your financial affairs for as long as necessary, using your assets to pay your expenses. When you recover, you automatically resume control. When you pass away, your Successor Trustee(s) pays your debts and distributes your assets according to your instructed wishes.
Successor Trustee(s) can be individuals (adult children, other relatives or trusted friends) and/or a Corporate Trustee. If you choose an individual(s) as your Successor Trustee, you should name at least one other choice in case that individual is unable to serve. If you do not have an individual capable of handling the duties of a Trustee, you may want to consider the Corporate Trustee option.
Unlike a Will, a Trust doesn’t have to die with you. Assets can stay in your Trust, managed by the Successor Trustee or Corporate Trustee you have chosen until your beneficiary(ies) (including minor children) reach the age(s) you want them to inherit, or to provide for a loved one with special needs.
If you are a married couple, one of the most important aspects or benefits of your Living Trust is the ability to avoid significant Federal Estate Taxes. Federal law allows every individual to transfer a specific amount during his or her lifetime, or at death, to one or more beneficiaries other than a spouse. This is known as the “unified credit amount”. This amount is $1,500,000 in year 2004 and is scheduled to incrementally increase to $3,500,000 in year 2009. The unified credit amount will be unlimited in 2010, only to be backed down to a maximum of $1,000,000 in 2011 and beyond. Married couples can transfer unlimited amounts to each other at death under the “unlimited marital deduction”, but this may subject the estate to unnecessary Estate Taxes upon the surviving spouses death, starting at 37% to as high as 55%. The way for most couples to avoid this problem is to establish an A-B Trust as the integral part of their Estate Plan.
Not quite. A Will can contain wording to create a Testamentary Trust to save Estate Taxes, care for minors, etc., but because it’s part of your Will, this Trust cannot go into effect until after you die and the Will is Probated. So it does not avoid Probate and provides no protection at incapacity.
Not when compared to the costs of Probate. How much you pay for your Trust depends on how complex your Estate is (type and amount of your assets) and whether you need additional tax planning. Be sure to ask for an estimate in advance.
Absolutely – preferably one who specializes in Estate Planning. An experienced Attorney can provide valuable guidance and assistance for your situation and assure the legal documents are prepared properly. Avoid generic “Do it Yourself” kits and form books. They can’t and don’t address every family’s unique needs and can be very dangerous.
You should have a Pour Over Will in case you forget to retitle any assets in the name of your Trust. The Will “catches” the assets and sends them into your Trust after your death. Those assets will probably still have to go through Probate first, but at least they can then be distributed as part of your overall plan.
No. A Living Trust is for financial and medical affairs – it lets others know how you feel about life support in terminal situations.
Not at all. In fact, they have been used effectively (in one form or another) for hundreds of years.