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Living Trusts

How can a living trust help your estate?

1. For most clients, a living trust will avoid probate for all of the assets that have been transferred to the trust. Probate is a costly, time-consuming process that many estates do not need.

However, there are some cases in which having a living trust will not provide protection against probate because the estate has few probate assets.

2. A trust also can avoid a conservatorship, which can be expensive, time-consuming and restrictive. Conservatorships are needed when an individual can no longer manage his or her financial affairs. A conservator is appointed by a court and given the power to manage the conservatee's financial affairs, and also make decisions concerning the conservatee's living arrangements. A properly prepared trust can provide a successor trustee who will manage the trust for the benefit of the trustor, sometimes avoiding the need for a conservatorship.

3. For married couples with more than $1,000,000 in net worth, a living trust can reduce or eliminate federal estate taxes by setting up an Exemption Trust.

How is a living trust set up and funded?

1. A trust document is prepared that usually names the trustors (the persons who are setting up the trust) as the trustees of the trust. The trustees are responsible for managing the trust and its assets. The trust usually nominates other persons, banks, or trust companies as successor trustees. The successor trustee(s) will take over management of the trust after the death, resignation, or incompetency of the original trustee(s).

2. The trust also provides for distribution of the estates of the trustors after the deaths of both trustors. These provisions can be the same as those found in a will and might include trusts for younger beneficiaries, gifts to charities, etc.

3. Depending on the size of the estate, the trust might also include provisions that will reduce or eliminate federal estate taxes.

4. After the trust is signed, the trustors transfer their assets to the trust. If this is not done, additional legal work, possibly including a probate of these assets, will be required after the deaths of the trustors.

Advantages of living trusts:

1. Assets held by the trust will not be probated. Legal fees for probating an estate are usually much higher than the fees for adminstering a trust. Probates can also take a year or longer to complete, but a trust administration usually can be completed in a much shorter time.

2. If a trustor becomes mentally incompetent, the successor trustee can take control of the trust and avoid the cost of a conservatorship in most cases. Conservatorships are often used in situations in which someone can no longer manage his or her own financial affairs or personal care. A conservatorship is a court-supervised proceeding that can involve substantial legal fees.

3. Federal estate taxes can be reduced or avoided.

4. The trust is revocable during the lifetimes of the trustors. If an Exemption Trust is used, part of the trust will become irrevocable after the death of the first trustor.

Disadvantages of living trusts:

1. A living trust costs more than an estate plan that involves just a will.

2. Transferring assets to the trust involves costs and paperwork not required for less elaborate estate plans, such as a will.

3. Administration of an Exemption Trust can involve additional effort for the surviving spouse.

Frequently Asked Questions:

1. If I have a trust, why do I also need a will?

The type of will that is used with a living trust is called a "pourover will," because its job is to pour (transfer) assets into the trust if the assets were not transferred to the trust previously. This can occur if the trustees fail to make the transfers of assets to the trust, or if mistakes are made in titling the assets. A pourover will doesn't have the usual provisions that are found in a standard will and the only beneficiary is the living trust.

2. Does a pourover will have to be probated?

Probate is not required unless the assets that are subject to probate total more than $100,000. In that case, there will be a probate of the trust assets and also an administration of the trust assets.

3. What are probate assets?

Any asset that is in the decedent's name, and not in joint tenancy or in a trust. Assets that are not subject to probate include IRAs, 401Ks, and life insurance, assuming that a beneficiary has been named to receive the assets involved. Even these assets might be subject to probate if the beneficiary listed is the "estate" of the decedent or if no beneficiary is listed. Joint tenancy assets become the property of the surviving joint tenant, regardless of the provisions of the decedent's will or trust.

4. Do trust documents become public information when someone dies?

That could depend on state and local laws. California law, for example, requires that notice be given to trust beneficiaries and the decedent's heirs if all or part of the trust becomes irrevocable after the death. The beneficiaries and heirs are then given an opportunity to request a copy of the trust. The trust also might become public information is there is a court challenge to the trust, in which case a copy of the trust will be filed with the court.

5. Who should be chosen as the successor trustee?

Many clients choose their children, either as co-trustees, or in a particular order of succession. This can be a good choice, particularly if the proposed trustee has some experience with accounting or taxes. If there are no children, or if the clients would rather not use their children as trustees, other choices are other relatives, friends, or trust companies and banks. Regardless of who is chosen, that person must be responsible and able to devote the time required to the trust administration and management. The proposed trustee does not need to have an extensive knowledge of trusts, law, or accounting, but should be willing to seek professional help to carry out the administration of the trust.

6. Do I need a federal tax number for the trust?

No. A federal tax number is not needed for a trust for a married couple until one of the trustors dies, or both trustors resign as trustees or become incompetent. For a trust for a single person, a federal tax number will be required after the trustor dies. Until death or resignation, the trustors' Social Security numbers will be used as the trust tax number.

7. What is a special needs trust?

The beneficiary of a special needs trust is usually receiving benefits from a government program, such as SSI. Those benefits will stop if the beneficiary receives an inheritance because these programs have strict limits regarding the amount of income and assets that a beneficiary can receive. A special needs trust provides a source of money that is held by the living trust and paid in small amounts either to the beneficiary, or for his or her benefit. The trustee will not pay any amount to the beneficiary that would increase his or her income or assets beyond the limits set by the government program and cause the government benefits to stop. After the death of the beneficiary, the balance of the trust fund will be distributed to other trust beneficiaries.

8. What is a Qualified Domestic Trust?

If the surviving spouse is not a U.S. citizen, no marital deduction is allowed unless the assets to be transferred to the surviving spouse are instead transferred to a qualifed domestic trust, also called a QDT. The marital deduction allows married couples to transfer assets between themselves at death without subjecting those assets to the federal estate tax. At least one trustee of a QDT must be a U.S. citizen or a domestic corporation, such as a bank or trust company. The trust document must also provide the no distribution can be made from the trust unless the trustee who is the U.S. citizen or domestic corporation has the right to withhold federal estate taxes from the distribution.

9. Do I really need to read all of the pages of the trust before I sign it?

Yes, although the trust may be lengthy, you are expected to be familiar with its basic provisions and you should ask your attorney for an explanation of any parts of the trust that you do not understand. If a trustor does not understand the provisions of the trust, it might be declared an invalid agreement if it is challenged in court.