NOTICE: The following information is intended for educational use only. It is not intended to replace or supplement any tax or legal advice. Anyone should obtain tax and/or legal counsel before implementing any planning methods described herein.
Regardless of the size and value of a family estate, a Revocable Living Trust (RLT) can appropriately address virtually every family estate-planning need and provide the privacy, convenience, safety, and control that everyone wants. The usefulness, efficiency and cost savings of a fully funded living trust is well established. A living trust should be used as the foundational estate-planning device for every family with legitimate planning needs.
The Reality of Probate –
When a person dies with assets in his name alone, as happens in the case when using a stand-alone testament/will, that person has become a decedent property owner. A decedent is obviously unable to transfer property to the living. The primary purpose of probate is to transfer title of assets from the decedent to the decedent’s heirs. This retitling of assets – first to the decedent’s personal representative then to the decedent’s heirs – requires a court sanctioned and supervised procedure called probate.
Problems with Probate –
Inherent complexities usually accompany the process. Probate normally requires detailed paper work, filings, hearings, appraisals, personal representative fees, court fees, lengthy holding periods and the like, all of which can incur a substantial amount of time and resources to process. Administrative fees will increase when ancillary probate becomes necessary for real estate not in the decedent’s domicile. In addition, privacy is completely forfeited with probate; it is deemed a public matter – not a private concern. Because of the lack of privacy and control and the prospect of seeing the estate shrink due to improper planning, a decedent’s family experiencing the probate process is subjected to another unwanted component – stress. Probate should be avoided, and that can easily be accomplished with proper planning.
Conservatorship… Probate for the Living –
Conservatorship requires a probate court to supervise and control the management and administration of an incapacitated person’s assets. An aged or ill person may demonstrate erratic behavior or make irrational decisions or is unable to make any decisions at all. At that point, loved ones will be forced to petition to have that one adjudicated as being legally incapacitated. Conservatorship, then, is essentially a public declaration of an individual’s incompetence A Durable Power of Attorney (DPA) may help avoid the conservatorship process. But, powers of attorney bestowed upon a DPA agent can be easily controlled or even terminated by any court-appointed conservator. The reason is that the DPA agent was never “titled” the property (as the trustee of a trust would be) that he is supposed to control. Moreover, DPAs do not operate under contract law which is why they are limited in functionality. However, a fully funded living trust will normally avoid all conservatorship problems including the limitations of a stand-alone DPA arrangement.
The Operations of a Living Trust –
In simple terms, a living trust is an agreement between the trustor (also called the settlor/grantor) and the trustee. The two agree to enter into a contract wherein the trustor transfers title of assets to the trustee so that s/he can manage, and eventually distribute, those assets on behalf of the beneficiaries of the trust. Remarkably, with a living trust, one person or a married couple can be (and wear the hats of) all three parties – trustor, trustee, and beneficiary – at the same time.
When the trustor/trustee dies, the successor trustee (originally appointed by the trustor) immediately assumes the office, title, and duties of the trustee without any outside approval or supervision. The ability of trustee succession to the title of assets occurs by operation of law through the legal, binding agreement of the trust. Unlike a will, probate court supervision is not required to accomplish the legal titling of assets to the successor trustee. After the death of the trustor, the trust becomes irrevocable – meaning it cannot be altered or amended – and the successor trustee will continue to manage, or immediately disperse, the trust assets to the beneficiaries per the instructions in the trust. It’s that simple!
The Primary Benefits of a Living Trust –
In addition to avoiding probate with its inherent complexities and problems, including being subjected to self-serving individuals who are hired to conduct probate procedures, a living trust offers many other benefits. The following is a partial list of reasons to consider a trust:
Estate Tax Planning. When structured properly, a living trust can help maximize the full use and value of a married couple’s transfer/estate tax credits (exemption equivalent amounts) to help avoid or even eliminate unnecessary taxation. Improper transfer tax planning can be very costly and hazardous to an estate.
Privacy for the Estate. By inherent design, a living trust is a private arrangement. Unless otherwise required by a formal order, an estate owner utilizing a living trust can maintain total privacy regarding all affairs of the family estate both during life and after death. Conversely, probate estates are a matter of public record which can exhibit (a) the assets of the estate, (b) the names and ages of the heirs including the amounts and times of asset dispositions incurred to them, (c) the debts of the estate, and (d) other sensitive information.
Maximum Control. A living trust allows an asset owner to exercise prudent dispositive control over his/her estate that can be maintained even after death. A large sum of money suddenly acquired by an unsophisticated recipient may cause many more problems than it solves. An incremental, age-based allocation formula is an example of one of many methods that can be incorporated into a trust to exercise asset dispositive control. In fact, to the extent a beneficiary’s inheritance is held in a trust, it is protected from any creditor claims against that beneficiary – including divorce settlements (in all but two states). In addition, a decedent’s family loses primary control of the estate duringprobate – otherwise avoidable with a trust.
Recipient of Insurance Proceeds. A living trust can be a great receptacle for life insurance proceeds benefiting minor children (unless estate tax issues would warrant the use of an Irrevocable Life Insurance Trust). If a minor child or grandchild becomes a recipient of life insurance, or any other asset for that matter, and no trust has been established before hand, then the probate court will create and supervise a statutory trust to receive and manage the life insurance proceeds, and any other assets, for the benefit of the minor child. Such obvious lack of planning can incur significant ongoing management and administrative fees over an dependent child’s account that could otherwise be easily avoided.
Maximizing Stretch IRA Rules. IRAs (and other qualified retirement plans) can be payable to living trusts under the new “stretch-IRA” and “see-through” rules. Taxpayers can generally benefit their (unsophisticated) IRA beneficiaries by imposing limited withdrawal sanctions on IRA funds. That is accomplished by having IRA withdrawal rights payable to a living trust and therefore completely controlled by the terms of the trust. Without that control, an IRA beneficiary can demand and receive an immediate and full withdrawal of the IRA the day after the account owner’s death.
Special Needs Children. Parents with an incapacitated child currently receiving SSI benefits have a special planning condition to consider. If a distribution from the parent’s will or trust is directly allocated to such a child, then a partial or even full disqualification of the governmental entitlement will likely occur. However, a properly drafted Special Needs Trust contained within a living trust can provide funds to benefit that child under a statutory standard and therefore not disqualify the child from receiving future SSI benefits.
Business Continuation. Transferring the management duties of a closely held family corporation or other limited liability entity(s) is often a concern for the owners. A post-mortem management structure in such case should always be arranged in conjunction with a family trust. That will allow the trustee to be the effective manager of the family corporation where corporate interests have been allocated to children or grandchildren. When a closely held business interest is held in a trust, the courts will not be meddling in the managerial operations because it was not subjected to probate in the first place. In addition, a living trust can be an ideal entity to serve as a succeeding general partner of a family limited partnership and trustee of a charitable trust.
Deterrent to Contestations. A living trust seems to be much more impervious to contests against an estate than a will. We have had enough several first hand experiences to verify this fact. We have seen our own trusts hold up perfectly in litigated situations caused by a disinherited or disgruntled child. Wills are frequently contested often incurring undesirable end results.
Avoids the Joint-Tenancy-Survivorship Trap. A living trust, because of its probate avoidance abilities, precludes the necessity to own property jointly with another person in order to avoid probate. If a parent recasts personal property ownership into a joint-tenancy-with-right-of-survivorship (JTWROS) deed (or any asset/account) with a child, then the control of that property has been forfeited. Each respective tenant in a JTWROS ownership arrangement can be deemed to own 100% of that property for the purposes of satisfying a creditor of that respective tenant. In other words, if the donee/child gets sued, the parent could end up losing the property to a judgment. In addition, JTWROS held property between spouses also forfeits any beneficial tax planning otherwise available with the unified transfer tax credit planning available with a Marital A/B Trust.
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