In recent years, living trusts have grown increasingly popular as substitutes for wills in estate planning. They are sometimes called revocable trusts or inter-vivos trusts. Living trusts can have several advantages over wills, including avoiding probate, avoiding guardianship, maintaining liquidity, and keeping privacy.
USING A LIVING TRUST
Most people understand the
importance of a will, but many are not familiar with trusts, Both a will and a trust can be used to
transfer your property when you die, but the similarity ends there. A will has no effect until you die, while a
living trust becomes operative during your lifetime to manage your assets. While a will is part of the public record a
trust is not, thus providing greater privacy.
Trusts are usually easier to amend than wills and less likely to be
contested by your heirs.
If you own real estate in more than one state a living trust can help avoid probate in each state. Probate in multiple states increases the cost and time to distribute your property to your heirs.
CREATING A LIVING TRUST
Your lawyer can prepare a living trust agreement that appoints a trustee to manage your property for your beneficiaries. To maintain control, you can be your own trustee. Commonly, the person creating the living trust is the first beneficiary while other provisions transfer the property to their heirs upon death. The trust agreement will provide details on your rights to change the trust, the duties of the trustee, how to distribute your property, how to provide for your family, and when an how to select a successor trustee.
You can cancel or change any of the provisions of your trust document, including the beneficiaries, the property they are to receive, and the trustee. You should review your trust every year to assure that it still meets your needs. Your lawyer can advise you about the legal and tax effects of your proposed changes and prepare a document that will accomplish those changes.
CHOOSING A TRUSTEE
As noted above, you can serve as your own trustee or you can appoint a professional trustee such as a bank or trust company. Most people appoint an individual such as their spouse, a relative, a friend, their lawyer or other advisor to serve as successor trustee. When deciding whom to select as trustees, you should consider whether they are worthy of your trust and are willing to accept the job.
A professional trustee may be the best choice if your property will be difficult to manage or distribute. The disadvantages of professional trustees are that they are impersonal and charge annual fees ranging up to two percent of the value of the trust assets. Furthermore, many professional trustees are unwilling to serve if the value of the trust assets is less than $100,000.
The trust document will describe the duties of the trustee to manage the trust property, keep records, prepare tax returns, and make distributions to the beneficiaries. The trust document can also designate a successor trustee or provide instructions on how to select the successor.
TRANSFERRING PROPERTY TO YOUR TRUST
After
creating your trust, you must complete the formality of transferring your
property to the trust. For example,
instruct your broker to transfer your stocks and bonds into the name of the
trust. Tell your insurance agent to
assign your life insurance policies to the trust. Deeds transferring your real estate should be
prepared and recorded in every county where you own real estate.
AVOIDING PROBATE
Although your living trust can help you to avoid probate for some of your property, you may still need a will. It may be inconvenient to transfer certain property, such as your car or your personal checking account to a trust. Such a transfer could make it difficult to insure your car; it might be harder to obtain credit if your checking account is not kept in your name.
A will may still be needed even if you transfer all of your property to a trust. A will is needed to appoint a guardian for your minor children. A will is also needed for assets that you acquire after the creation of the trust or may have neglected to transfer to your trust, such as furniture, clothing, and jewelry. The will can have a “pour- over” provision to transfer your property to the trust when you die. Such a “pour-over provision will cause your property to be distributed to the terms of your trust.
STATE LAW
You can use a living trust to choose the state for administering your estate. the state for your trust can be different from the state where you reside. This can enable you to select a state that has laws that are most favorable to you for income tax and inheritance tax purposes.
TAX PLANNING
For tax purposes, the trust property is treated as if you remained the owner. You will report income from the trust on your federal income tax return until your death. However, the creation and funding of a living trust does not have any federal gift tax consequences. A trust can be used to avoid estate taxes. Your lawyer can help you to design a trust that provides the most favorable tax treatment for you and your heirs.
CONCLUSION
Living trusts have many advantages in estate planning. Unlike wills, living trusts do not require lengthy and costly probate proceedings. Your property and heirs will not be listed in public records in a courthouse. And your property can be transferred to your heirs almost immediately after your death. The advantage of the living trust must be weighed against the expense and effort of creating and administering the trust.
Ask your lawyer whether a living trust is the right estate planning tool for you. Your lawyer can carefully draft a document to meet your needs and objectives and help you to reduce taxes for yourself and your heirs. Your lawyer can also help you prepare other estate planning documents, such as a will, a durable power of attorney, and a health care power of attorney.
LIVING TRUST CHECKLIST
B. Preserving privacy
C. Professionally managing your property
D. Handling of out-of-state real estate
E. Avoiding guardianship when
incapacitated
F. Avoiding will contests and family
disputes
G. Designating trustees and their
successors
2. Naming Your Beneficiaries
B. Your spouse
C.
Family
D.
Friends
E.
Charitable organizations
B. Record of income and expense
C. Tax returns
B. Bank accounts
C.
Stocks and bonds
D.
Life insurance
E.
Furniture, jewelry, etc.
B. Experience as a trustee
C. Trustworthiness
D. Understanding of beneficiary’s needs
E. Investment expertise
F. Affordability of fees
B. Death of beneficiary or trustee
C. Acquiring or disposing of property
D. Change in value of property
E. Changes in status or circumstances of
your beneficiaries
F. Increase (or decrease) in your net
worth
B. Living Will
C. Durable power of attorney
D. Health care power of attorney
E. Marital trust
F. Minor trust
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