Estate Planning-Trusts 101
More and more individuals are putting their assets into Revocable Living Trusts (“RLT”), which are completely flexible and broadly adaptable arrangements for management, protection and distribution of a family’s assets.
A RLT is created during your lifetime and is funded with most or all of your assets by simply re-titling the assets to yourself as trustee.
While you are living, you will have complete control over the assets in your revocable trust. Upon your death, trust assets will be distributed according to your instructions, not the default provisions set by state statute.
A RLT is revocable during your lifetime, which means that its terms are changeable and assets in the trust can be re-transferred to your name if desired without adverse tax consequences.
A RLT is a private agreement where the distribution of assets under the terms of the trust is not subject to the publicity given to wills in probate proceedings. A probated will goes through the courts and becomes a matter of public record.
The complete flexibility of a RLT means that one can be drafted to suit your individual needs and family situation.
When you create a RLT you can act as your own trustee, so there are no management fees or loss of control. You can change or modify the trust terms at any time, change beneficiaries, add or delete assets held by the trust without tax consequences.
A RLT does not complicate the management of your assets. While protecting your property within a living trust, you can do whatever you can do now with your assets and property. You can buy, sell, borrow, make gifts, etc. With a RLT you retain control over all your property and assets during your lifetime, and you determine distribution of your estate after your death. Since a RLT is revocable, it has no income tax consequences during your lifetime; no separate tax return is even filed, and all trust income is reported under your social security number.
With a RLT, you are also appointing someone else (a professional, a trusted friend, or a family member) to manage the assets in your trust for your benefit in the event you become incapacitated or unable to make decisions for yourself (e.g., Alzheimer’s, a stroke, an accident, etc.) and, because the assets are in a trust, no court administered conservatorship will be required. Under a RLT, you have the successor trustee of your choice ready to step in and take over your affairs until you recover, or for the remainder of your lifetime.
For married couples, the estate tax liability which would otherwise be due at the death of the survivor can be greatly reduced or completely eliminated by proper planning. This is particularly important in states that impose their own estate tax, and do not provide the “portability” currently available under federal law. This planning can be accomplished in a Revocable Living Trusts (“RLT”) (although it can also be accomplished through wills, this would require a separate probate at the death of each spouse). How much can be saved depends on the size of the estate and the estate tax laws at the time of the surviving spouse’s death. At the same time, the trust can also insure that the estate of the first spouse to die will ultimately go to his or her children (or heirs) even though the surviving spouse is provided the lifetime economic benefit of all assets and has complete management and control over the entire trust.
A Revocable Living Trusts (“RLT”) allows you to AVOID PROBATE.
Probate is a court procedure that is required if your assets are distributed without a will, under a simple will or under a will with a testamentary trust. In court probate proceedings, the court changes the legal ownership of your property when you die. During probate the court must determine the validity of your will and supervise the payment of all your debts and taxes as well as the distribution of your probate estate to the people you name in your will. This process may take six months to a year or longer and is a matter of public record.
Assets that you leave to your heirs by a will goes through probate, but property passed through a RLT does not. With a RLT you can avoid the delay in the distribution of your estate entirely; the assets of your estate can be distributed to your designated beneficiaries immediately upon your death.
With a trust, minor beneficiaries can have a trustee can manage and invest the trust funds free of the costs and restrictions that arise when a court must appoint and supervise a guardian of the property until the beneficiary comes of age.
Additionally, with a trust, you can continue the management of a beneficiary’s assets to whatever age you desire; certainly beyond age 18 (the age at which ALL guardianships must terminate).
The management of a beneficiary’s assets can include disbursement of assets and/or funds in increments, according to the directions you put in the trust (e.g., 1/3 distribution at age 25, 1/3 distribution at age 30, and the balance at age 35). Of course, the trustee can use any or all of the trust principal for the benefit of the beneficiary during this period. Also, if there is any question of management skills or capacity of the beneficiary, or to insure that your estate does not go to a son-in-law or a daughter-in-law, the trust can continue for the child’s lifetime and then pass to the child’s issue at his or her death. This will also keep your assets in your family rather than having them be subject to attachment by the state for medical treatment. You can protect the assets from any potential of dissipation of the entire estate while providing for the beneficiary’s needs, as determined by you. With a Revocable Living Trusts (“RLT”) these trusts are already in place at the time of your death and will begin immediately for the benefit and protection of your beneficiaries.
When property passes through probate, you incur executor’s fees, attorney’s fees and court costs, all of which can be quite substantial depending on the size of your estate. These are fees generally set by state law and are usually based entirely on the size of the estate being probated rather than on the amount of time and work involved. There may also be additional extraordinary expenses of probate (i.e., tax returns, life insurance, etc.).
All of these fees and expenses can significantly reduce the estate to be distributed to your beneficiaries.
With a Revocable Living Trusts (“RLT”) these fees and costs can be greatly reduced. Your assets are transferred immediately to your designated beneficiaries outside the court system and in accordance with the directions specified by you in the trust agreement. Costs of administration of a living trust are minimal and are generally based on the actual time and/or services required.
With a Revocable Living Trusts (“RLT”) you should create a “pour-over” provision in your will which adds other assets to the trust at your death. Thus, all of your assets will be in one vehicle managed by one trustee under a single trust agreement.
When a will goes through probate, the court freezes the assets and asks anyone to come forward and contest the will if they please. Creditors are invited to come forward with their claims and heirs may challenge certain bequests under the will if they are disappointed because they received less than they had anticipated.
With a living trust, however, assets are not frozen and can be distributed to your designated beneficiaries immediately without the highly technical and public requirements of probate.
A disgruntled heir would have to hire an attorney and file a civil suit against each beneficiary to stop distributions. In addition, you can protect a distribution to a beneficiary from being reached by the beneficiary’s creditors, from alimony attachments, and even from the beneficiary him/herself.
Creating a Revocable Living Trusts (“RLT”) can furnish needed attention to your assets. A living trust permits you and/or your appointed trustee to take timely advantage of investment opportunities and. conversely, to dispose of investments no longer desirable. With a RLT, you set up the machinery to provide a continuity of management at death and the immediate shift of income from yourself to your beneficiaries at your death.
If you own real property in another state, a Revocable Living Trust (“RLT”) will eliminate the need for and additional cost of probate in that state (called “ancillary probate”). With a RLT, property owned in other states will pass to your beneficiaries immediately according to the terms of your trust.