Frequently Asked Questions about establishing an Estate Plan using Living Trusts
What is a Living Trust?
It is a contract for the private administration of your estate, that unlike a Will, avoids probate and conservatorships because the courts honor the intentions of the parties to the contract, but it will only control your assets if you have changed title or beneficiary designation to the name of the trust.
Why would I want a Living Trust?
The alternative is a Will, which guarantees a long drawn out, very expensive, public judicial process known as probate, usually does not control all of your property, does no disability planning whatsoever, involves complex legal rules which are often different in every state, and is public. On the other hand, a trust avoids probate and conservatorships, does plan for disability, is a better vehicle to control your assets, is governed by the simple legal rules of contract which are usually the same in every state, and are private.
Additionally, although you can plan for taxes in a Will, you must go through probate to do so whereas in a living trust you can plan for taxes without going through probate.
Lastly, a married couple can double their estate tax exemption with a living trust, which in 2008, is worth $2,000,000 in estate tax-free assets, and for many families is just enough to completely avoid estate taxes.
How can a Living Trust save estate taxes?
If you die in 2008 and the net value of your estate (assets minus debts) is more than $2,000,000, federal estate taxes must be paid on the excess at a rate of 45%. If you are married, your living trust can include a provision that will let you and your spouse leave up to $4,000,000 tax-free to your loved ones, saving up to $900,000. If you die in 2009 when the estate tax exemption is $3,500,000, the same trust will let you and your spouse leave up to $7,000,000 tax free to your loved ones, saving up to $1,575,000.
How does it work?
Technically, you change title or beneficiary designation to your assets, as appropriate, to the name of your trust, and the trust terms, not the courts, will then control the assets. However, contrary to popular opinion, a trust is not a "magic book." There are many reasons that trusts fail, including but not limited to:
- client not educated as to alternative objectives
- controlled by attorney
- not funded
- not updated
- not in compliance with law
- improper trustee
- team of advisors not consulted
Another reason that trusts fail is the improper selection of trustees. You should therefore review your selection of trustees with a counseling-oriented estate planning attorney before implementing the trust.
If I have a trust, do I still need a Will ?
Yes, you need a Will that will simply "pour over" all assets into your trust at death, acting as a safety net in case you forget to transfer any assets into your trust during life. This Will also goes through probate but is necessary to insure that all assets are controlled by the trust terms.
What are the Benefits of a Living Trust?
- Avoid Probate. If you own combined assets, including life insurance if you are married, that exceed $100,000, a Living Trust may make economic sense because the probate fees on $100,000 in California are $8,000.
- Avoid Conservatorships. Even if the value of your assets is low, if you were to become mentally incompetent or incapacitated, a Living Trust would avoid the expense and embarrassment of Conservatorship proceedings.
- Plan for Disability. You can add instructions which clearly define "disability" and provide for a preference to be taken care of in your own home in case of incapacity, thus potentially avoiding very expensive nursing homes up to $90,000 per year in California, and providing instructions to preserve dignity in case of disability by instructing the trustee on the personal, medical, social, recreational, spiritual and travel needs of the disabled trustmaker.
- Control of assets under one plan. Title or beneficiary designation, depending upon the asset, controls your assets at death. There are various forms of title including but not limited to Joint Tenancy, Joint Accounts, Tenancy in Common, Multiple Party Accounts, Payable on Death Accounts, Totten Trust Accounts, Individual Accounts, Community Property with Right of Survivorship Accounts, Uniform Transfer on Death Accounts, Uniform Transfer to Minor Custodian Accounts. Beneficiary can be designated to any individual or trust desired. Without a trust, each different form of title will control the recipient and cost to transfer of each asset. With a trust, all assets are controlled by the terms of the same trust and if you want to change anything, you just amend the trust and the change applies to all assets.
- You can double your estate tax free exemptions if you are married and thus can reduce or eliminate estate taxes.
- Ancillary document can eliminate unnecessary capital gains tax for joint tenancy property.
- Provides maximum privacy
- Much quicker distribution of assets to beneficiaries
- Asset remain in trust until you want beneficiaries to inherit
- Remarriage protection for surviving spouse and divorce protection for children
- Values Promotion
- Creditor Protection of beneficiaries after 1st death
- Multi generational planning.
- Dispute Resolution
- Business Continuation Planning
- Relatively inexpensive, easy to set up and maintain
- Can be changed or revoked at any time
- Difficult to contest
- Prevents court control of minor's inheritance
- Can protect dependents with special needs
- Prevents unintentional disinheriting and other problems of joint ownership
- Professional management with corporate trustee
- Peace of mind.
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