Understanding Living Trusts & Estate Plans
What is an Estate Plan?
An estate plan is a carefully considered plan that takes care of you and your loved ones if you become disabled and when you die. It provides for your spouse and children in the most effective and hassle-free manner upon your death.
What documents are involved in an Estate Plan?
Most commonly they are a Will or a Living Trust with a Pour-Over Will, a Durable Power of Attorney for Asset Management and an Advance Health Care Directive, with HIPAA authorizations.
I have a Will, why would I want a Living Trust?
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 go into effect only 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, namely the Revocable Living Trust. Assets in Trust pass outside of probate and a Trust makes sure you keep control of your assets while you are living and ensures that your plan won’t be altered by the court or disgruntled relatives at your passing or incapacity.
What is Probate?
Passing Good Title to the Heirs: When you die with or without a will, Probate is the legal process through which the court ensures that your debts are paid and your assets are distributed according to your Will, thus passing good title to your heirs. If you don’t have a valid Will, your assets are distributed according to state law. In California, that is the law of intestacy.
What’s so bad about Probate?
– It is expensive. Court costs, legal fees and executor fees 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. If you own property in other states, your family could face multiple probates.
– It takes time. Normally 9 months to 2 years. During part of 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 can be denied depending on the circumstances.
– Your family has no privacy. Probate files are open to the public, so anyone (including a business competitor) can see what you owned and to whom you owed money. 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. It can be very frustrating for your family and often leads to disputes.
But I don’t have that much, why should I be concerned about probate?
You might be surprised at how much even a modest estate generates in fees and costs especially when real estate is involved. There are also the other “costs” of time and lack of privacy.
Doesn’t joint ownership avoid probate?
Not really. It usually just postpones probate. When one of the joint owners dies, ownership will transfer to the other without probate. But when the second or final joint tenant 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 the assets 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.
Why would the Probate Court get involved if someone were incapacitated?
If you can’t conduct business due to mental or physical incapacity (Alzheimer’s, stroke, heart attack, etc.), the court may have to appoint a conservator to act on your behalf and it 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!
Does a Durable Power of Attorney prevent the court’s involvement if I become incapacitated?
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 Powers 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.
What is a Living Trust?
A Living Trust, like a Will, is a legal document that 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 prevents 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 or eliminate estate taxes through the use of credit shelter provisions in the Trust. It provides excellent defenses against attack or contests. It can even provide evidence that certain assets are the separate property of the settlor and not community property.
How does a Living Trust avoid probate and prevent court control of assets if I become incapacitated?
When you set up a Living Trust, you transfer assets from your name as an individual to your name as trustee of your living trust, such as from “Bob and Sue Smith, husband and wife” to “Bob and Sue Smith, Trustees for The Bob and Sue Smith Family Trust.” As a result, the assets are no longer subject to Court imposed guardianship if you become disabled. The concept is very simple but keeps you and your family out of the courts.
Do I lose control of the assets in my Trust?
Absolutely not. You keep full control. As Trustee of your Trust, you can do anything you could do before – buy or sell assets, change or even cancel your trust during your lifetime. (That’s why it’s called a Revocable Living Trust.) You even file the same tax returns. Nothing changes but the title to your assets to you as Trustee.
Is it hard to transfer assets into my Trust?
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 (jewelry, clothing, art, home furnishings, etc.). You will need to assign your interest in corporations, limited liability companies, partnerships, patents, copyrights, leases, promissory notes and contracts to the trust, which is a simple task.
Doesn’t this take a lot of time?
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 those assets from Probate that have been transferred into it.
Who will act as the trustee of my Living Trust?
The vast majority of people creating a Living Trust act as their own trustee. In some instances when the Settlor (the owner) is ill or with a married couple when one or both spouses are ill, it may sometimes be advisable to ask an adult child of the Settlor(s) to serve as trustee. There are some rare instances where people select a corporate trustee (bank or trust company) or a non-profit trustee or a private fiduciary 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 and they have no one else to rely on. Corporate trustees, non-profit trustees and private fiduciaries are in the business of managing trusts – they are reliable, objective, government regulated and experienced investment managers. However, it is very important to investigate the corporate or non-profit trustee and private fiduciary before nominating them to serve as your trustee during your lifetime.
If I become incapacitated or die, what happens?
If you or your spouse are co-trustees, either can act and have instant control if one becomes incapacitated or passes away. If you select a corporate, non-profit or private trustee or co-trustee, they will continue to manage your trust for you. If something happens to both of you, or if you are the only trustee, your selected successor trustee(s) will step in.
What does a Successor Trustee do?
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) pay your debts and distribute your assets according to your instructed wishes.
Who can be a Successor Trustee?
Successor Trustee(s) can be individuals (adult children, other relatives or trusted friends) and/or a corporate, non-profit or private 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. In some instances, especially where there is a large estate, Settlors elect to have corporate (bank or financial institution) trustees handle the financial aspects of their estate and a family member to handle the “human” aspects of settling the Living Trust. In such instances, the corporate trustee has exclusive control of the decision making regarding the finances.
Does my Trust end when I die?
Unlike a Will, a Trust doesn’t have to terminate upon your death. Assets can stay in your trust, managed by the person 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. There is a limit to the life of a Living Trust under the Rule against Perpetuities but it can allow the trust to last for decades.
How does a living trust save on estate taxes?
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 tax law allows an unlimited transfer of property to a surviving spouse without imposing any estate tax. This is a result of what is called the “unlimited marital deduction.” Otherwise, the 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” or “unified tax credit.” This amount is currently $5,450,000 for each spouse. Essentially, upon the death of the surviving spouse, due to “portability” you will have $10,900,000 to pass to your beneficiaries free of estate tax.
Doesn’t a Trust in a Will do the same thing?
Not quite. Both a Will and a Trust contain provisions concerning the disposition of your estate upon your death. A Will can contain wording to create a testamentary trust to save estate taxes, care for minors, etc. But, because it is part of your Will, this testamentary 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, and a Trust can do both.
Should I have an Attorney do my trust?
Absolutely. It is preferable that you select an attorney whose principal focus is on 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 in what they don’t address or the manner in which they address the issues.
If I have a Living Trust, do I still need a Will?
It is standard practice in estate planning to provide you with a Pour Over Will which provides protection 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. The assets will probably still have to go through probate first, but at least they can then be distributed as part of your overall plan.
Is a “Living Will” the same as a Living Trust?
No. A Living Trust is for financial affairs. A Living Will is for medical affairs – it lets others know how you feel about life support in terminal situations.
Are Living Trusts new?
Not at all. In fact, they have been used effectively in one form or another for hundreds of years.
Who Should have a Living Trust?
Married or single, young or old – just about everyone can benefit from a Living Trust, especially if you have children (even more so if you are a single parent) or own any titled assets. If you want to make sure your loved ones (spouse, children or parents) will be spared from probate if something happens to you, you should have a Living Trust.
What is this HIPAA that everyone is talking about?
HIPAA stands for the Health Insurance Portability and Accountability Act. You might know it by the popular name of “medical records privacy act.” For the purpose of this discussion, even if you have nominated certain persons to speak with doctors, hospitals and medical staff about you and to review your medical records, you also have to provide particular authorization to those doctors, hospitals and medical staff that is compliant with the provisions of HIPAA. Without these HIPAA-compliant authorizations, doctors, hospitals and medical staff will not communicate anything to your loved ones or family. Lacking HIPAA authorization will stall any effort by your nominated agents under any health care directive and will not allow any successor trustee under the trust or agent under the durable power of attorney to seek counsel with doctors to determine your capacity. You can imagine that nightmare that can ensue. So, if you have a living trust, powers of attorney and/or health care directives, unless they contain the HIPAA-compliant authorizations, they may be far less valuable than you or the draftsman intended.
So, who needs a Living Trust?
– Any parent with minor children
– Anyone, single or married or domestic partners, owning real estate
– Anyone with an estate having a gross value in excess of the threshold amount for probate (e.g., $150,000 in California)
– Anyone desiring their assets to be held “in trust” after their death and not distributed immediately or distributed according to special terms
– Married couples whose combined estates have a net value in excess of the Unified Tax Credit
– Anyone with children or beneficiaries who have “special needs”
– Married couples in a second marriage wanting to protect the children of first marriage
– Business owners
– Domestic Partners
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