The
Basics.
As an alternative to a Will, some
may choose to dispose of their assets
through the use of a revocable trust.
A revocable trust is also commonly
referred to as a "living trust."
To ensure consistency, throughout
this text, we will exclusively use
the term revocable trust. A revocable
trust can be used to manage your
assets during your lifetime and
afterward. You are the beneficiary
of the trust assets while you are
living (meaning you can do with
them what ever you want), and you
have complete control over the trust.
You are free to buy and sell assets
in and out of your revocable trust,
and, as the name implies, the trust
may be revoked or terminated at
any time. Like a will, you designate
beneficiaries in the event of your
death, however, unlike a will, you
gain the advantage of being able
to distribute your assets while
avoiding courts and the attorneys.
Avoiding
Probate. Possibly the greatest
advantage of a revocable trust is
that the assets held in the trust
are not subject to probate upon
your death. Probate is a formal
court process whereby a judge, or
court personnel, oversee the distribution
of your estate. Probate may, at
times, be lengthy as well as costly,
depending upon the estate. Because
a court only has jurisdiction over
assets personally owned by you,
if your trust owns your assets,
the court has no jurisdiction over
your assets (even if you completely
own the trust).
Avoiding
Guardianships. Another advantage
to the revocable trust is that you
avoid a guardianship. Guardianships
are court proceedings, that would
be held on your behalf, in the event
you were incompetent, or could no
longer manage your own affairs.
In this instance, your family members
would need to go to court, and request
that one of them be appointed the
guardian of your person and/or estate.
This "court appointed" person then
manages your financial affairs,
and most likely your medical affairs.
Revocable trusts provide a mechanism
for a legal guardian to be automatically
appointed should you become incapacitated,
thus avoiding the potentially burdensome
guardianship proceedings.
If
a revocable trust is not for you,
you can still avoid guardianships
through the execution of two simple
documents, the Power
of Attorney, and the Durable
Power of Attorney for Health
Care. Click on their titles for
more information about them.
More
Privacy. Another advantage to
a revocable trust is that assets
held by the trust are privately
distributed. Because probate files
are a matter of public record, anyone
who wanted to, could look through
your probate file. They may be able
to view the will, the lists of assets,
their approximate value, and who
the assets are going too. Because
the court has no jurisdiction over
assets held in the revocable trust,
they are not included in the probate
file. Your trust assets are quietly
distributed by the successor trustee
to the beneficiaries you named.
Assets
in Multiple States. In today's
day and age, it is fairly common
for people to have homes in different
states. One key advantage to a revocable
trust is that you avoid the potential
for a double probate - a probate
occurring in each state you own
real estate.
Estate
Tax Reduction. For married individuals
with significant assets, an estate
tax (estate tax is comprised of
the tax due on the "transfer" of
assets because of the death of an
individual) avoidance mechanism
is built into the trust. Currently
our ability to pass assets to our
children is tax free only to a certain
level. The current value of assets
a married couple can pass to their
children upon death is $675,000.
A
married couple, with an estate that
is one million dollars or greater
can significantly reduce estate
taxes. Under federal law, an estate
tax return form must be filed within
9 months from someone's date of
death. Depending upon how large
your estate is, you may, or may
not, have to pay estate taxes. Creating
a revocable trust does not, during
your life time, save you any tax,
or avoid you having to pay tax on
highly appreciated trust assets
- even if these assets were worth
zero dollars when placed in the
trust.
Income
Taxes. No change occurs in the
means by which you file your income
taxes. No special tax payor identification
number is required. You simply use
your social security numbers. However,
in the event it becomes necessary
for your successor trustee to begin
monitoring the trust, the means
by which taxes are filed will most
likely change; you should consult
your local tax advisor as to what
these changes entail. The most common
change is the requirement that your
trust obtain a tax payer identification
number ("TIN").
What
Happens After Death. Many wonder
what exactly happens with a revocable
trust after death. Upon the death
of the "trust creator" (also known
as the "grantor" or "settlor"),
the successor trustee, your spouse,
or other close family member (the
persons you named as successor trustee),
takes charge of the trust assets
and the trust debts. They gather
them up, and itemize them. Your
successor trustee then pays the
debts, and distributes the remaining
assets in accordance with the terms
of your trust. Your trust may create
new trusts, for the benefit of your
grandchildren, your special needs
child, or your elderly mother and/or
father. Assets may be distributed
outright to named beneficiaries
in the form of money, real estate,
cars, personal items, shares of
stock, or the like. It is really
no different than what happens with
a will, other than the fact, the
courts are not involved, and it
is only the beneficiaries, and those
with whom you entrusted your trust
powers, who are aware of the estate
details.
What
Are Probate Assets. Fortunately,
not all assets require probating.
Life insurance, annuities, certificates
of deposit ("CD"), savings accounts,
and the like are generally exempt
from probate. This is because you
have a "contractual agreement" with
those holding this money, to pay
it to a beneficiary named in the
contract or agreement. For example,
a life insurance policy is nothing
more than a contract that requires
you to pay a monthly premium for
a stated period of time; in exchange,
you receive the insurance company's
promise to pay the insurance proceeds
to those you named as beneficiaries.
The courts will not address these
types of "contractual agreements"
because an insurance company, a
"third party," is holding the money,
the court simply assumes the insurance
company paid the money to those
named in the policy. The important
thing to remember however, is that
the above "contractual agreements"
may contain beneficiaries that,
because of a divorce, death, marriage,
or the birth of a child, are no
longer appropriate. Many people
forget to adjust their beneficiaries
over the course of their life, and
the dreaded ex-spouse has, on occasions,
received their late ex-spouse's
life insurance proceeds when they
were probably meant for someone
else. The advantage of the trust
is that if you make your trust the
beneficiary on all your "contractual
agreements" like life insurance,
any time you want to make a change
in the disposition of your estate,
you only need to make the changes
in one document, the trust. No longer
do you need to contact, or notify
insurance agents, estate planners,
or bankers of desired changes in
your estate plan.
Buying
And Selling Assets During Your Lifetime.
Having a revocable trust does
not affect your ability to buy and
sell assets. The only change necessary,
is that when you buy a titled asset,
i.e. a car, home, boat, or the like,
the title should be in the name
of the trust instead of your personal
name. Assets titled in the name
of the trust are then considered
a trust asset and will be distributed
according to the terms of your trust.
If you do not want an asset any
longer, you are free to sell it
or give it away. The point is, your
control over the assets is not restricted
in any way. If you purchase an asset
and neglect to title it using your
trust name, you can simply obtain
a new title at a later time. Our
trust package walks you through
titling these assets, and even provides
sample letters you can use to change
your titled assets.
Making
Changes: Making changes to a
revocable trust are simply made
by writing an amendment to the original
trust document. While it is simple
to make changes to your trust, it
is also important to discuss such
changes with competent legal counsel.
While rare, it is possible to make
unintended changes to your trust
which may have negative implications.
Incapacity.
If you become incapacitated, the
your named "successor trustee" takes
over and manages your affairs according
to the terms of the trust you created.
Before your successor trustees take
over the management of the trust,
two doctors must sign affidavits
which state that you are not competent
to manage your daily affairs. The
trust requires that these affidavits
must be served upon you before any
action can be started.
Living
trusts are useful in some states
to escape creditors, as trusts in
general are considerably more difficult
to attach than are personal assets.
The
Disadvantages of the Revocable
Trust. If you own assets,
there are few disadvantages to
the revocable trust. The single
largest problem with the revocable
trust is that it takes time to
re-title your "title assets" in
the name of the trust (again,
this is required to avoid probate).
It is important to remember, that
any "titled assets" not modified
to reflect the trust as the beneficiary,
or owner, will be subject to probate.
There is also a "myth" circulating
that suggests a revocable trust
will save you taxes. There are
no tax savings in utilizing a
revocable trust. The federal estate
tax laws (and the inheritance
or estate tax laws of most states),
provide that any assets over which
a person has the right to revoke
and claim as their own (such as
in a revocable trust) are includible
in the gross taxable estate, even
if no will is ever probated.
Probate
Defined. The word "probate"
has several different meanings,
which has been at the heart of
much confusion. The narrowest
definition of the word "probate"
is, the process by which there
is a legal determination that
a certain document requesting
that your assets be disbursed
is in fact your last will and
testament. Once a last will and
testament has been "probated"
it means that there has been a
signed legally binding determination
that this document is the last
will and testament of the decedent,
which will be used to administer
the estate and distribute the
assets. In many states, this is
usually the least difficult part
of the estate administration process.
However, in certain other states,
such as New York, Florida, California
and Texas, this procedure can
be burdensome, expensive, or both.
The second meaning of the word
"probate" is sometimes used to
describe the assets which passed
according to a will or by intestacy.
Intestate
Estate. An intestate estate
describes an estate who's assets
are distributed by statute, because
the person who died had no will
or other estate planning document.
In other words, if you do not have
a will or similar estate planning
document, your state or local government
will decide where your assets are
to be distributed.
