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Estate Planning With Living Trusts
More for Your Heirs, Less for Fees and Taxes
As we write this article in 2010, if you die this year there is no federal estate tax due. By the time this article is printed, however, the laws may have changed. The fact that taxes may not be due does not relieve you of the responsibility of
making sure your estate plan is current. In other words, it’s important that your documents clearly state to whom you want to leave your assets.
As we often have said in the past, we believe a well-drafted, recently reviewed will is the foundation of an estate plan. Although we think everyone should have a will, increasingly we’re seeing many people using living trusts as their primary estate-planning document. However, not everyone is clear about how living trusts differ from wills. Therefore, we thought we would review this topic in this month’s article.
What’s a Living Trust?
A living trust is a legal document that names a trustee (or trustees) whose job it is to carry out the trust’s terms. Typically, you’re the trustee of your own trust, thus controlling your assets as long as you’re able. In the trust, you name successor trustees you want to act on your behalf should you die or become incapacitated. These might be family members, friends, attorneys or trust departments of banks. The trust also lists your beneficiaries and includes instructions to the trustee as to how you want your assets managed.
Usually, you establish a revocable living trust, one that you can change while you’re still alive. Once you transfer your assets into the trust name, they’re removed from the probate estate but still are included in the taxable estate.
If instead you establish an irrevocable trust — once assets are transferred into this trust, you can’t change its terms — both probate costs and estate taxes can be reduced. But you may have to pay gift taxes when you transfer assets to an irrevocable trust. Most people choose to establish a revocable living trust, which allows them the flexibility to change the trust’s terms.
Once you set up a living trust, you should transfer your assets to the trust’s name. For instance, if your brokerage and checking accounts are held in the name of “Mary Jones,” they now will be held in the name of “Mary Jones Living Trust, Mary Jones Trustee under the Trust agreement dated 9/1/10.” To change the registration of your accounts, you notify your broker and banker in writing of your desire to change the title on your accounts and provide them with a copy of the trust.
You will then need to open new accounts in the name of the trust, and your assets will be transferred from your existing accounts to the new trust accounts. Although the title of your account has changed, if you’re the trustee of your own trust, you can continue to manage your accounts as you’ve done in the past.
Transferring real estate into the trust’s name sometimes is more complicated, as some states tax assets when you change registration. Your lawyer can advise you as to which assets should be retitled in the trust’s name and which shouldn’t.
This may seem obvious, but we often find our clients have paid for the lawyer to put together the trust but never have transferred their assets into the name of the trust. For a living trust to work, all your assets should be transferred into the trust’s name.
Advantages of Living Trusts
Why should you bother to set up this second estate-planning document? Here are some of the key reasons individuals choose to establish a living trust.
• Avoids expenses of probate. If your assets pass to your beneficiaries by a will, your estate will have to go through the probate process. This involves fees that don’t have to be paid if your assets are titled in the name of a living trust. These probate fees vary from state to state.
• Avoids publicity. Without a living trust, your will and the amount of your estate become a matter of public record. For those seeking privacy, a living trust offers a solution.
• Speeds the distribution of estate assets. If you have put all your assets in the living trust’s name, your asset distribution will be expedited because going through the probate process takes time and costs money.
• Helps if you own property in other states. If you own property in more than one state, the executor of your estate may be required to open probate administration in each state where property is located. If the property is in the living trust’s name, this problem can be avoided.
• Provides limited protection from creditors. In some states, transferring your property to an irrevocable living trust can protect it from creditors. There are limitations on the protection, but this may be an advantage. A revocable living trust offers no asset protection.
• Avoids confusion about whom you want to act on your behalf. If you become incapacitated, the trust document clearly defines that your successor trustee should handle your affairs.
Disadvantages of Living Trusts
It does cost money to have a living trust prepared for you, and transferring the assets into the trust’s name may involve some fees. If you don’t have that many assets and your estate is relatively small, it may not be worth the cost of setting up a living trust. You have to decide whether paying these costs now rather than your estate paying probate costs later is worth it.
Is the Living Trust a Will Substitute?
Establishing a living trust doesn’t obviate the need for a will. If you have some assets that aren’t in the living trust’s name, the will disposes of them. If you have minor children, the will is the document in which a guardian is designated. The will is also the document in which you name the executor of your estate.
It’s also important to realize that neither your will nor your living trust will determine to whom your IRA will be paid. You must name a beneficiary for each IRA and other retirement plans you own. In fact, we recommend you also name contingent beneficiaries.
Use an Estate-Planning Lawyer
Before you act, consult an estate-planning lawyer to help you determine whether a living trust makes sense for you. Just like investments, each case is different and no estate-planning solution fits all. In next month’s article, we’ll discuss the duties of a successor trustee. Before naming one, you should make sure your successor knows what they will have to do.
Alexandra Armstrong is co-author of the fourth edition of On Your Own: A Widow’s Passage to Emotional and Financial Well-Being. She is a Certified Financial Planner practitioner and chairman of Armstrong, Fleming & Moore, Inc., a registered investment advisory firm in Washington, D.C. Securities are offered through Commonwealth Financial Network, member FINRA/SIPC. Investment advisory services are offered through Armstrong, Fleming & Moore, Inc., an SEC-registered investment adviser not affiliated with Commonwealth Financial Network.
Karen Preysnar, Certified Financial Planner practitioner, co-author of this article, is vice president in charge of financial planning at Armstrong, Fleming & Moore, Inc., and a registered representative with Commonwealth Financial Network.
Individuals should contact a financial planner, tax adviser or attorney when considering these issues. Commonwealth Financial Network does not give tax or legal advice. Consult your personal adviser before making any decisions. The authors cannot answer individual inquiries, but they welcome suggestions for article topics.