WILLS OR TRUSTS? The Case For Living Trusts
How To Eliminate The Hassles Of:
PROBATE
LAWYERS
DELAYS
LEGAL SYSTEM
INTRODUCTION TO LIVING TRUSTS
Simply put, living trusts are an expedient way to transfer property
at your death. A living trust is a legal document that controls the
transfer of property in the trust when you die.
Generally, living trusts are established during an individual's lifetime
and can be modified or changed while that person is still alive. Circumstances
do change and the option to make alterations in the trust is important.
For this reason, a living trust is set up on a "revocable" basis. Revocable
means you can modify or change the trust's provisions. Your other option
would be to create an irrevocable trust. Once put in place, you are
unable to change the terms of the trust regardless of the circumstances.
As you will see, living trusts speed up the process by which your property
moves to your designated beneficiaries after you die. Today, and into
the foreseeable future, this is vitally important as the United States
is experiencing an unprecedented wealth transfer.
It is estimated, according to "Fortune" magazine, that some $6.8 trillion
worth of assets will soon pass from parents to children, grandchildren,
friends, charities and others. The questions remains: how will this
wealth be transferred? Will it be the traditional methods of wills
and probate or the new revolution of estate planning that has incorporated
living trusts? Many legal experts believe that living trusts are the
future of wealth transfers.
The concept of living trusts has created controversy simply because
the legal profession seems evenly split on the issue. Estate planners
seem to favor living trusts but there are enough opposed to the concept
to avoid a clear majority decision.
Living trusts are also called "inter vivos" trusts, a Latin term preferred
by attorneys. The Internal Revenue Service calls them "grantor" trusts.
All mean the same thing.
The Internal Revenue Service, however, recognizes the living trust
as a valid estate planning tool and exhibits no prejudice against it.
There are specific provisions in the tax laws that deal with living
or grantor trusts.
The revocable provision means that while you live, you still effectively
own all of the property that has been transferred into the trust. You
can sell it, spend it, give it away; in short, do anything you wish
since the property is still yours. The trust itself is merely a document
in your lifetime that truly doesn't begin to function until you die.
Then, the trust operates to transfer your property privately, outside
of the reach of probate, to the specific individuals or organizations
to whom you wish to leave your worldly possessions.
What is probate? Why do people try to avoid it?
Technically speaking, probate is the process by which one proves the
validity of a will in court. If there is no one contesting the will,
this should not take long. If there are complications, probate can
take years. For those of you familiar with the works of Charles Dickens,
recall "Bleak House" and the neverending probate case of Jarndyce vs.
Jarndyce.
Probate has come to mean not just proving the validity of the will
but the entire administrative sequence involving the passing of an
owner's title to property after the owner's death. The deceased's property
is inventoried and creditors are identified and paid after the payment
is made to the estate's attorney, executor and tax entities.
The term "probate" also identifies the court which has jurisdiction
over the estate probate and administration. Probate court also has
jurisdiction over the guardianship of minors and mentally incompetent
adults. All wills go through probate.
The average length of the probate process is twelve to eighteen months.
Any estate transactions in that time must be approved by the probate
court.
This can create havoc for beneficiaries. Since a living trust replaces
a will and doesn't need validation from the probate court, considerable
time and hassle can be saved.
This, then, is the purpose behind living trusts. The trust is simple
to establish and, when carried out, makes it easy to transfer property.
The trust is a matter of explicit instructions as to who gets what
property after the owner dies. Like a will, the trust should cover
all expected and unexpected events that might occur. The details tell
the designated trustee how to use the money and property in the trust.
A living trust is a capable substitute for a will and a document that
more and more people, disillusioned with the probate system, are turning
to in their estate planning.
TERMS YOU SHOULD KNOW
Before proceeding further, it might be helpful to define a few terms
for you. These terms will occur often during this text and in the actual
living trust process, so it's important to familiarize yourself with
their definitions.
A/B TRUST: Common term for a "marital life estate trust", generally
used by couples whose estates are valued at more than $600,000.
ACCUMULATION TRUST: A trust that does not pay out all of its income
until certain circumstances occur.
ADMINISTRATION: Courtsupervised distribution of the probate estate
of the deceased. The person who manages this distribution is called
the EXECUTOR if there is a will or an ADMINISTRATOR if there is not.
BENEFICIARY: The person or organization legally entitled to receive
gifts made under the provisions of a legal document such as a will
or trust.
CODICIL: An amendment to a will. It is a separate legal document, properly
witnessed and executed.
CORPUS: Property owned by the trust, commonly referred to as "corpus
of the trust".
DEATH TAXES: Amounts levied on the property of the deceased called
estate taxes (federal) and inheritance (state) taxes.
DURABLE POWER OF ATTORNEY: A general power of attorney that will continue
to be valid after its maker becomes incapacitated or incompetent.
DURABLE HEALTH CARE POWER OF ATTORNEY: A special power of attorney
in which the maker gives another person authority to make health care
decisions when the maker is unable to do so, due to injury or sickness.
ESTATE: In general, all of the property you own when you die.
ESTATE PLANNING: The legal maneuvering by which one dies with the smallest
taxable and probate estate possible, with the ability of passing on
your property to your beneficiaries with the least amount of hassle
and expense.
INTESTATE: To die without a will or other valid estate transfer device.
Estate will go through probate and be passed to heirs who are specified
in the applicable state's laws.
IRREVOCABLE TRUST: A trust that cannot be changed, once established,
except by court action in a proceeding referred to as REFORMATION.
JOINT TENANCY: A form of property ownership by two or more people where
the death of one owner causes the transfer of that individual's share
to go directly to the remaining owner(s). A will has no power to change
the joint tenant's right of survivorship. This is another common tool
used to avoid probate, a lthough there may be gift tax consequences.
LIVING TRUST: Trust established while the maker is alive and which
becomes immediately effective. It remains under the control of the
maker until death. It allows property to pass to beneficiaries free
of probate.
LIVING WILL: A document that provides instructions to physicians, health
care providers, family and courts as to what lifeprolonging procedures
are desired if a person should become terminally ill or be in a persistent
vegetative state and unable to communicate.
PERSONAL PROPERTY: All property other than land, buildings attached
to the land, and certain oil, gas and mineral interests.
PER STIRPES: A legal term meaning that if a person dies, the inheritance
will pass to heirs in equal shares. It means "by right of representation".
POUR OVER WILL: A will that transfers the decedent's assets that are
subject to the will to a trust that was already in effect prior to
the decedent's death.
POWER OF ATTORNEY: A legal document whereby, a person authorize someone
else to act for them.
PROBATE: Court proceeding in which the authenticity of a will is established,
an executor or administrator is appointed, debts and taxes are paid,
heirs are identified, and property in the probated estate is distributed
according to the dictates of the will.
QUALIFIED TERMINABLE INTEREST PROPERTY TRUST: Also referred to as a
"QTip" trust, it allows a surviving spouse to postpone, until his or
her own death, payment of estate taxes that were assessed upon the
death of the first spouse. The surviving spouse is still entitled to
all of the income from the property.
REVOCABLE TRUST: A trust that can be changed by the trust maker at
any time. Living trusts are revocable trusts.
SETTLOR: Another name for a maker of the trust, also called "trustor",
"grantor" or "creator".
TENANCY IN COMMON: A form of joint ownership of property. Each owner
is able to sell or give a way his or her share of property, as well
as pass it along separately at death. There is no right of survivorship.
TESTACY: Dying with a valid will in place. All property controlled
by the will passes through probate.
TESTAMENTARY TRUST: A trust created by a valid will.
TRUST: A legal arrangement under which one person or institution controls
property given by another person for the benefit of a third party.
TRUSTEE: The person who, or institution which, manages the trust and
its property under specific instruction.
WILL: A legal document that is used to pass property to heirs following
a person's death. A will only becomes effective at the death of its
maker.
TRANSFERS
The purpose of the living trust, as mentioned, is to be able to transfer
property to a designated beneficiary(ies) without the usual hassles
associated with wills and probates.
However, your living trust can't transfer property it doesn't own.
Therefore, the first step in making the trust effective is to transfer
ownership, or title, of a property to the trust's name. It's safer
to transfer the title to the trust's name rather than to the name of
the trustee since it is more likely the trust name will continue even
if you change trustees.
For the purposes of transferring title into a trust's name, there are
two classifications of property: that which has an ownership document
and that which doesn't.
Property without ownership documents include the following:
_ household possessions and furnishings;
_ clothing and furs
_ jewelry
_ tools and most equipment
_ antiques
_ art work
_ electronic and computer equipment
_ cash
_ precious metals
_ bearer bonds
These items are transferred to a trust simply by listing them on a
trust schedule. That's it! Pretty simple, right?
Property that has ownership documents requires a reregistration of
ownership into the trust's name. Once the trust document has been established,
signed and notarized, this process should begin. The document of the
title must clearly show that the trust is the legal owner of the property
or the trustee will not be able to legally transfer any of that property.
The type of property owned by the trust which requires this reregistration
of ownership includes the following:
_ real estate
_ bank accounts
_ stocks and stock accounts
_ money market accounts
_ mutual funds
_ most bonds, including U.S. Government Securities
_ safety deposit boxes
_ corporations, partnerships and limited partnerships
_ cars, boats, motor homes and airplanes
If you set up a trust and fail to reregister ownership of a specific
property, it will remain outside the trust after you die. If you do
not have a will, property will pass through intestacy and your state's
succession law. The chances of leaving it to the person you wanted
it to go to are reduced, and you will not avoid probate of the propertywhich
is the purpose of a living will! Do not fail to reregister property
that has a title. You prepare a new title document for each piece of
property, transferring ownership into your trust's name. With real
estate, for example, you must prepare and sign a deed listing the trust
as the new owner. Then have the deed must be notarized and properly
recorded. For bank accounts, ask your bank for the proper form. You
can usually accomplish this in one trip.
TRUSTEES
When you establish a living trust, you must name a trustee. In fact,
you should name both an initial trustee and a successor trustee in
the event the initial trustee becomes incapacitated and cannot serve.
The trustee is the individual who or institution which actually manages
the trust assets that you transfer in, according to the specific instructions
you've given. The appointment is important, as this person or entity
will have the responsibility of honoring your wishes your after death.
The initial trustee is, most often, YOU! That's why it's called a living
trust. Since it's revocable, you can change assets in the trust as
circumstances dictate. While you're alive, the trust can conform to
your specific wishes.
It is important to understand this: a living trust does not take the
control of your property from you- until you die. You handle it while
you're alive. It's merely tucked away in a convenient legal vehicle
that takes over immediately after you die and passes the property along
to the people you designate without publicity and without the potential
lengthy delay and costs of probate.
If you've set up a marital living trust, usually both spouses are cotrustees.
When one spouse dies, the other spouse continues as the initial trustee.
It is possible to name someone else other than you and/or your spouse
to be the initial trustee. It is uncommon and unnecessarily complicates
your trust arrangements as you must keep separate records of the trust.
You should work with your attorney to select a capable trustee if you
wish.
Because something could happen to the initial trustee, it's vital to
name a successor trustee. This is the ind ividual who will be distributing
your assets according to your wishes after you die, or if you become
unable to manage the trust due to injury or illness. For property not
held in the living trust, creation of a durable power of attorney and
a health care durable power of attorney can designate someone else
to carry on with the nontrust assets.
If your trust is a marital one, the successor trustee would not take
over until after the second spouse dies.
The successor trustee could also die or become incapacitated, so it's
imperative that you name an alternative trustee, too, to take over
as successor in that circumstance.
What does the successor trustee do? If your instructions are explicit
as to how you want property transferred at your death, then the job
is somewhat easier. However are still things you must do:
_ Obtain copies of the death certificate of the initial trustee
_ Present death certificate, copy of the living trust and proof of
successor trustee's identity to the various financial institutions
or organizations that have the property/assets
_ Prepare documents of title transfer from the trust to the beneficiary(ies)
as appropriate.
_ Supervise distribution of trust assets where no title is involved.
_ If necessary, the successor trustee may manage a child's trust if
the beneficiary is a child who has not reached the age at which the
initial trustee designated the property to be transferred. The successor
manages the property for that individual until he or she reaches the
specific age outlined in the original living trust. This may be the
only task the successor trustee is actually paid to do. If required,
the successor trustee might also file federal and/or state death tax
returns.
It is important to name a successor trustee, preferably one whom you
feel will diligently carry out your wishes. It may even be someone
who is also a beneficiary of the trust assets. If there is any question
about whom you should name, consult with an attorney for suggestions.
WILLS
A will is a written document detailing instructions as to how you want
your assets divided up after your death. You might also include information
as to a child's guardianship, how (or if) you are to be buried and
the appointment of an executor of your will.
The two main types of wills are:
_ attested
_ holographic
The attested will is the most common. It is usually prepared by a lawyer
in typewritten form and signed in front of several witnesses who have
no benefit in the will whatsoever.
The holographic will is made without a lawyer, written on plain paper
in your own handwriting, dated and signed. If your wishes are clear,
this should be as effective as the attested will. It will more likely
be disputed than an attested will and be subject to the interpretation
of the courts, where anything could happen. Attested wills are safer
for carrying out your final instructions.
Most people think they should have a will. Many people do, however,
do not have a will because estate planning is generally not a high
priority to many people nationwide. There are many fine estate planners
around the country who work with individuals, but the average person
doesn't put much thought, time or effort into addressing this important
financial task of preparing for asset distribution after death.
Attorneys will be glad to help you do an attested will and may not
charge much to do so. They'll get paid later- when the will goes through
probate court. The payors will be your beneficiaries, who will see
assets drain as a result of legal fees and court costs.
Probate can be lengthy, especially if the will and estate is a complex
one. Not only does a will diminish the value of the property, it may
also slow down the time it takes to actually transfer it to the designated
beneficiary.
A will does let you choose your heirs, but the advantages stops there.
You will not avoid probate, estate taxes (if any), death income taxes,
privacy of transfers or incapacitation. These are the primary reasons
one should set up a living trust INSTEAD of a will.
There is a will that is important when establishing a living trust.
It's called the pourover will. This documen t puts any assets you failed
to place in your living trust during your lifetime into the trust after
your death. In effect, it "pours over" assets from the will to the
trust. This document may also name the guardian for minor or incapacitated
children.
The pourover will is a "failsafe" device to ensure that any property
left out of the trust will be placed there. It is also a backup to
the living trust in case it's invalidated for any reason. The pourover
will can substantiate the trust simply by reaffirming its terms. It
would be difficult for one or more heirs to challenge successfully
both a living trust and a pourover will if their conditions and instructions
are similar.
ESTATES
What is an estate? Exactly what are we trying to protect with a living
trust?
An estate is essentially all the property you own (your assets) minus
anything that you owe (liabilities). This calculation, assets minus
liabilities, will yield a net worth for you. This is the value of your
estate at the time it is calculated.
The size of your estate is important. More important is the value of
your taxable estate. This will equal, roughly, the value of your estate
less property left to your surviving spouse or to charity.
The other estate calculation of note is the probate estate. This is
the portion of your estate that must go through probate before it can
be distributed. Leaving your assets via a will puts them through probate.
The difference between the taxable estate and the probate estate should
be considerable if you plan your estate properly. For example, let's
say your estate calculation is $400,000. By transferring the title
of your house, valued at $250,000 and your Chrysler stocks, valued
at $75,000, to a living trust, you have reduced your PROBATE estate
by $325,000 to $75,000. Your goal should be to try and reduce the probate
estate to zero if possible.
Living trusts will save probate costs. They do not avoid death income
taxes. There are other things you can do, planningwise, to reduce your
taxable estate, but a living trust is not one of those. You can and
should, however, reduce or even eliminate your probate costs.
Proper estate planning, in general, can accomplish all of the following:
_ select your heirs
_ choose amount and time of distribution of inheritance to heirs
_ avoid probate
_ eliminate or reduce federal estate taxes
_ eliminate death income taxes
_ maintain control over your assets
_ maintain both privacy and flexibility
_ leave directions and the power to act if you are incapacitated
_ leave funeral instructions
| It is of course not full article. You should login first to show full article. If you have not account, please register. It is FREE!!! |
|
