UNDERSTANDING
LIVING TRUSTS:
How You Can Avoid Probate, Save Taxes and More
I have a Will. Why would I want a living trust?
Contrary to what you have probably heard, a will may not be the
best plan for you and your family - primarily because a will does
not avoid probate when you die. A will must be verified by the probate
court before it can be enforced.
Also, because a will can only go into effect after
you die, it provides no protection if you become physically or mentally
incapacitated. In that event, the court could easily take control
of your assets before you die - a concern of millions of older Americans
and their families.
Fortunately, there is a simple and proven alternative
to a will - the revocable living trust. It avoids probate, and lets
you keep control of your assets while you are living, even if you
become incapacitated, and after you die.
What is probate? Probate is the legal process
through which the court sees that, when you die, your debts are
paid and your assets are distributed according to your will. If
you do not have a valid will, your assets are distributed according
to state law.
What is so bad about probate? It can be
expensive. Legal and executor or administrator fees and other costs
must be paid before your assets can be fully distributed to your
heirs. Costs vary in each state, but are usually 3% to 8% of an
estate's value. If you own property in other states, your family
could face multiple probates, each one according to the laws in
that state.
It takes time, usually 9 months to 2 years.
During part of this time, assets are usually frozen so an accurate
inventory can be taken. Nothing can be distributed or sold without
court and/or executor or administrator approval. If your spouse
or minor children need money to live on, they must request a living
allowance, which may be denied.
Your family has no privacy. Probate is
a public process, so any "interested party" can see what you owned
and whom you owed. The process "invites" disgruntled heirs to contest
your Will and can expose your family to unscrupulous solicitors.
Your family has no control. The probate
process determines how much it will cost, how long it will take,
and what information is made public.
Doesn't joint ownership avoid probate?
Not really, it usually just postpones it. With most jointly owned
assets, when one owner dies, full ownership does transfer to the
surviving owner without probate. But if that owner dies without
adding a new joint owner, or if both owners die at the same time,
the asset must be probated before it can go to the heirs.
Watch out for other problems. When you add a co-owner,
you lose control. Your chances of being named in a lawsuit and of
losing the asset to a creditor are increased. There could be gift
and/or income tax problems. And since a will does not control most
jointly owned assets, you could disinherit your family.
With some assets, especially real estate, all
owners must sign to sell or refinance. So if a co-owners becomes
incapacitated, you could find yourself with a new "co-owner" - the
court. Even if the ill owner is your spouse.
Why would the court get involved at incapacity?
If you cannot conduct business due to mental or physical incapacity
(Alzheimer's, stroke, heart attack, etc.), only a court appointee
can sign for you, even if you have a will. (Remember, a will only
goes into effect after you die.)
Once the court gets involved, it usually stays
involved until you recover or die. The court, not your family, controls
how your assets are used to care for you. This public process can
be expensive, embarrassing, time consuming and difficult to end
if you recover. And it does not replace probate at death, your family
could have to go through the court system twice!
Does a durable power of attorney prevent this?
A durable power of attorney lets you name someone to manage your
financial affairs if you are unable to. However, it may work too
well as it can simply give someone a "blank check" to do whatever
he or she wants with your assets. It can be very effective when
used with a living trust, but risky when used alone.
What is a living trust? A living trust
is a legal document that, just 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 prevents the court from controlling your assets
at incapacity.
How does a living trust avoid probate and prevent
court control of assets at incapacity? When you set up a living
trust, you transfer assets from your name to the name of your Trustee,
which you control, such as from "Bob and Sue Smith, husband and
wife" to "Bob and Sue Smith, Trustees under the Smith Family Trust
Agreement dated January 1, 2000".
Legally you no longer own anything (do not panic:
everything now belongs to your Trustee who manages the assets pursuant
to the terms of the Trust Agreement), so there is nothing for the
courts to control when you die or become incapacitated. The concept
is very simple, but this is what 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 (that is why it is called a revocable
living trust). You even file the same tax returns. Nothing changes
but the names on the titles.
Is it hard to transfer assets into my trust?
No, and your attorney, trust officer, financial adviser and insurance
agent can help. You need to change titles on real estate (in and
out of state) and other titled assets (stocks, CDs, bank accounts,
other investments, insurance, etc.) Most living trusts also include
jewelry, clothes, art, furniture and other assets that do not have
titles.
Also, beneficiary designations on some assets
(like insurance) should be changed to your trust so the court cannot
control them if a beneficiary is incapacitated or no longer living
when you die. (IRA, pension plan, profit sharing plan, 401(k), etc.
can be exceptions.)
Doesn't this take a lot of time? It will
take some time, but you can do it now, or you can 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.
Do not delay "funding" your trust. It can only protect assets that
have been transferred into it.
Should I consider a corporate Trustee?
You may decide to be the Trustee of your trust. However, some people
select a corporate Trustee (a bank or a trust company) to act as
Trustee or Cotrustee now, especially if they do not have the time,
ability or desire to manage their trusts, or if one or both spouses
are ill. Corporate Trustees are experienced investment managers,
they are objective and reliable and their fees are usually very
reasonable.
If something happens to me, who has control?
If you and your spouse are Cotrustees, either can act and have instant
control if one becomes incapacitated or dies. If something happens
to both of you, or if you are the only Trustee, your handpicked
successor Trustee will step in. If a corporate Trustee is already
your trustee or Cotrustee, they will continue to manage your trust
for you.
What does a successor Trustee do? If you
become incapacitated, your successor Trustee looks after your care
and manages your financial affairs for as long as needed, using
your assets to pay your expenses. If you recover, you automatically
resume control. When you die, your successor Trustee pays your debts
and death taxes, if any, and distributes your assets. All this is
done quickly and privately, according to instructions in your trust
agreement, without court interference.
Who can be successor Trustees? Successor
Trustees can be individuals (adult children, other relatives or
trusted friends) and/or a corporate Trustee. If you choose an individual,
you should name more than one in case your first choice is unable
to act.
Does my trust end when I die? Unlike a
Will, a trust does not have to die with you. Assets can stay in
your trust, managed by the Trustee you have chosen, until your beneficiaries
(including minor children) reach the age(s) at which you want them
to inherit, or to provide for a loved one with special needs.
How can a living trust save on estate taxes?
If you die in 2000 and the net value of your estate is more than
$675,000, federal estate taxes (starting at 37%) must be paid. If
married, in 2000 your living trust can include a provision that
will let you and your spouse leave up to $1,350,000 estate tax-free.
The exemption will gradually increase to $1 million by 2006. Family
businesses and farms that qualify an get a $1.3 million exemption.
Provisions can be inserted in a living trust to allow you to take
advantage of those estate tax savings.
Doesn't a trust in a Will do the same thing?
Not quite. 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 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.
Is a living trust expensive? Not when compared
to all the costs of court interference at incapacity and death.
How much you pay will depend on how complicated your plan is. Be
sure to get an estimate.
How long does it take to get a living trust?
It should only take a few weeks to prepare the legal documents after
you make the basic decisions.
Should I have an attorney do my trust?
Yes, but you need the right one. An attorney with considerable experience
in living trusts can provide valuable guidance and peace of mind
that yours is prepared properly.
If I have a living trust, do I still need a
Will? Yes, you need a "pour-over" Will that acts as a safety
net if you forget to transfer an asset to your trust. When you die,
the Will "catches" the forgotten asset and send it into your trust.
The asset may have to go through probate first, but it can then
be distributed as part of your living trust 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? No, they have been
used successfully for hundreds of years.
