For years, many estate planning lawyers have implied that everyone should have a trust yet most Americans don’t have a simple will. And yes, living trusts certainly do avoid probate. But, there’s a whole lot more to a living trust than just that. Here are some factors to consider for yourself:
1. How much of your estate can you shield from probate?
One of the main advantages of having a living trust is being able to bypass the time and cost of probate, which is a process of administering an estate that can easily cost thousands of dollars and take several months and sometimes years to resolve. Fortunately, not all of your assets are subject to probate. Some exemptions are jointly owned assets with rights of survivorship and assets with designated beneficiaries like life insurance policies, annuities, and retirement accounts.
Remember, however, that your successor trustee is not free to distribute the trust property immediately. It’s not as simple as that. Just because your property is in trust doesn’t mean that your outstanding debts don’t have to be paid. Likewise, the federal government may still want to collect its estate taxes and your state government may still want to collect its inheritance taxes. There may also be trustee’s fees and attorney’s fees as well.
A reasonably efficient successor trustee will be able to determine fairly quickly just how much the potential debts and expenses will be, and he or she will then be able to make advanced distributions accordingly. In the final analysis, most revocable living trusts are able to distribute property more quickly and with much less cost than is possible through probate.
In many states, you can also add beneficiaries to avoid probate to bank accounts with a POD or “payable on death” form and to investment accounts with a TOD or “transfer on death” form. Your beneficiaries usually will just need to show up with a death certificate and a valid form of ID to get immediate access to the account. California lets you add beneficiaries to everything but real estate. With these methods, you can bypass probate on much of your estate, especially if you don’t own a home.
2. Will you qualify for simplified probate?
If your probate estate is going to a surviving spouse or domestic partner, or if it is small enough, you may also be able to qualify for a simplified probate process in your state. For example, in California, probate estates less than $150,000.00 in personal assets qualify.
3. How expensive is probate in your state?
If much of your estate is subject to the regular probate process, you’ll want to get a sense of what that could cost in your state since that can vary considerably. California has some of the highest attorney fees, which start at 4% of the first $100,000.00 of the gross probate estate and can easily add up to tens of thousands of dollars for larger estates. In this situation, a trust is much less expensive in the long run.
4. Do you own real estate out of state?
This is a reason to have a trust. That’s because unless you have a beneficiary deed in that state, the property will have to go through that state’s probate process with all the costs that entails. Owning property in another country can add another whole layer of complexity. Properties in other jurisdictions that are in a trust can be dispersed to beneficiaries pursuant to the trust in your jurisdiction (where your trust was drawn).
5. How comfortable are you with the estate being public?
In addition to the time and cost of probate, another downside is that it’s a public process. If you don’t want all those intimate details of your financial life and last wishes to be made public, a trust can protect your privacy. For example, you may not want your heirs to know the division of your assets since they may perceive it to be unfair, which can cause conflict or even legal challenges.
6. Do you have a child with special needs?
Trusts aren’t just about avoiding probate. Another good reason to have a trust is to provide ongoing financial support for a child or other loved one who may never be able to manage the assets themselves. Providing the inheritance to them directly may also disqualify them from receiving some forms of government support.
But, minor children aren’t the only ones who might squander an inheritance. Most experts agree that no one under the age of 25 should be given an inheritance outright because they generally are not mature enough to handle large sums of money. Of course, there are many people over the age of 25 that shouldn’t have money either. Some are spendthrifts at heart, others are in not-so-good marriages, and still others are going through bankruptcy. Then there are those who are just too frail and incapacitated to manage property on their own. Giving any amount of money or property to any of these people is never a good idea.
That’s when a trust becomes a vital part of your estate planning; i.e., a trust allows you to give your hard-earned money and property to those you care about while protecting it for them at the same time.
Let’s take a look at a typical example and see how it works. Let’s say that you have a 20-year old son who is a junior in college. If you and your wife both die, you’d probably want your son to get all your property, including the equity in your home, your life insurance, retirement plans, etc. If you reduce all your property to cash, it could easily amount to a good sum of money. For illustration purposes, let’s assume its $500,000. Having the executor of your estate write a check to your 20-year old son for $500,000 is probably not a good idea. Instead, it would be far better to create a trust for the benefit of your son with someone you trust – say a friend, family relative, attorney, or your local bank – serving as trustee. The trustee would then hold the money and invest it for your son’s benefit until he reached a more mature age, say age 25. In the meantime, the trustee would use the money to pay for your son’s schooling, his general living expenses, and any other expenses you might specify in the trust instrument – including a down payment on a home or a new business. Then, when your son reaches the age specified in your trust instrument, the trust would end and all property held by the trustee would be turned over to your son. And, because your son will probably be finished with his schooling at that time and already embarking on a career of his own, he’ll probably be mature enough to make good decisions regarding his inheritance.
7. Reducing or Eliminating Estate Taxes
Technically, a revocable living trust doesn’t save estate taxes, because there are no provisions in the federal tax laws that exempt revocable living trusts from estate taxes. However, living trusts are often used by individuals and families to take advantage of certain deductions and credits that are allowed under the tax laws.
For individuals dying in 2009, up to $3,500,000 was exempt from federal estate taxes. That exempt amount was made possible by virtue of a so-called “unified credit.” In addition to the unified credit, all property that passed to a surviving spouse was exempt from federal estate taxes by virtue of a so-called marital deduction. The “marital deduction” was unlimited, so you could transfer any amount of money or property to your spouse without paying any estate taxes on it.
For 2010, we had an anomaly in the tax laws, in that Congress allowed the estate tax to expire without coming to an agreement on what the tax rate and the various exemptions and deductions ought to be. Without any further action on the part of Congress, the estate tax automatically returned in 2011, with an increased tax rate and a unified credit amount equivalent to $1,000,000 instead of the 2009 amount of $3,500,000.
Then, for 2011, Congress restored the estate tax, with the exemption amount set at $5,000,000 and the tax rate reduced to 35%. In addition, Congress authorized a so-called portability provision relating to the exemption amount. Prior to 2010, if the first spouse to die failed to use all of his or her exemption amount, the unused portion was lost forever. For 2011 and beyond, that unused portion is not lost; instead, it is carried over to the surviving spouse to use in addition to the surviving spouse’s own exemption amount. That portability provision almost single-handedly eliminated the need to use a revocable living trust to reduce or eliminate the estate tax upon the death of the surviving spouse.
However, unless Congress acts before December 31, 2012, the portability provision will be lost; the exemption amount will be reduced to $1,000,000 and the tax rate will return to 55%. In that case, the revocable living trust will once again emerge as an invaluable technique to reduce or eliminate the federal estate tax upon the death of a surviving spouse.
So, here’s how this simple technique actually works. Assuming that the exemption amount is $1,000,000 and the tax rate is 55%, then here’s what typically would happen when a husband and wife have simple wills and a combined estate that exceeds $1,000,000.
Let’s assume, for sake of illustration, that you (the “husband”) and your wife each have estates worth $750,000. Let’s also assume that you die first and that all your property is left to your wife. Your estate will not pay any estate taxes because of the unlimited marital deduction. Upon your wife’s subsequent death, her estate would then be worth $1,500,000 [her $750,000 plus your $750,000]). Upon her subsequent death, her estate would pay a federal estate tax of roughly $175,000. That’s because her unified credit would shelter only $1,000,000 from the federal estate tax. The remainder of her property ($500,000) would be taxed at graduated rates reaching 55%.
You could eliminate this $175,000 estate tax very easily with a revocable living trust. Let’s assume, for example, that you don’t give all your property to your wife upon your death. Instead, you give her only $250,000 (just enough to keep her under the $1,000,000 exemption amount), with the remainder of your property ($500,000) passing to your revocable living trust. The trust would provide that your wife would be the primary beneficiary during her lifetime so that she could have access to the money if she needed it, with the remainder at her death passing to your children. In that case, no federal estate taxes will be paid upon your death because the property given to your revocable living trust ($500,000) is exempt from federal estate taxes under your unified credit.
By doing that, your wife’s estate will be worth $1,000,000, since she received only $250,000 from you upon your death. Then, upon her subsequent death, her estate will pay no federal estate taxes because the entire $1,000,000 will be exempt from estate taxes by virtue of her unified credit. The $500,000 still in your revocable living trust will not be taxed in your wife’s estate because she doesn’t own it, even though she is the preferred beneficiary and could receive distributions if needed. After all is said and done, your children will receive $500,000 from your living trust and $1,000,000 from your wife’s estate, for a total of $1,500,000, with no estate taxes having been paid – a savings of $175,000.
This very simple but highly effective technique – made possible by the use of a revocable living trust – would eliminate roughly $175,000 in federal estate taxes in the above example. However, as stated above, this technique assumes that the so-called portability provision under the estate tax laws is not in effect beyond 2012 and that the exemption amount is reduced to $1,000,000 and the tax rate is 55%. However, we don’t know at this time what Congress will do for 2013 or beyond. For this reason, it is very important that you consult with an experienced attorney or tax consultant if your estate may be subject to federal estate taxes.
8. Incapacity and Property Management
One of the major concerns that many of us have today is about our parents living in their own home. We worry about their bills being paid and whether someone will walk off with their money. In many cases, we are powerless to help them because all of their property is in their own name. Unfortunately, without doing some prior planning, the only option we have is to file an application with the probate court to have a guardian appointed for them. That’s a gut wrenching experience because all their personal and financial affairs will have to be paraded before total strangers, and they will be forced to suffer the indignity and humiliation of being declared incompetent.
It doesn’t have to be that way. A good Trust Estate Plan will be accompanied by a Power of Attorney. However, while a Durable Power of Attorney will allow you to designate the people you want to help you with your financial affairs and manage your assets upon temporary or permanent incapacity, it is only operational while the individual is still alive.
The end solution is a revocable living trust. A revocable living trust allows your successor trustee to take over whenever you resign or become incapacitated. There is generally no interruption in the management of your property, and there is no court supervision. Revocable living trusts also enjoy a greater level of acceptance throughout the legal and financial community, and almost all states provide a broad range of statutory powers regarding the management of trust property. Moreover, while it is true that a living trust isn’t effective unless your property is in the trust, a corresponding Durable Power of Attorney will enable your “attorney-in-fact” to transfer property into your trust if you can’t do it on your own.
9. Would you like to do something out of the ordinary?
Trusts are a fantastic tool for allowing the continuous operation of your wishes even after you’re gone. An example would be providing additional payments to heirs for taking specific actions like going to college or earning a certain amount of income on their own. Just be aware that the more complex you make the trust, the more benefits it can provide, thereby making it an excellent value in the long term, while simultaneously benefiting you and your family.
10. Avoiding a Will Contest
If you’re going to contest a will, you have to do is prove that the testator was either incompetent or under undue influence at the precise moment the will was signed. To contest a revocable living trust, you have to prove that the grantor was incompetent or under undue influence not only when the trust instrument was signed, but also when each property was transferred to the trust, when each investment decision was made, and when each and every distribution was made to the owner or anyone else. That is virtually difficult to do.
Moreover, it costs nothing to contest a will. All a disgruntled family member has to do is object when the will is presented for probate, then hire an attorney on a contingency fee basis, and wait for the final outcome. A disgruntled family member has nothing to lose. On the other hand, contesting a revocable living trust generally involves a substantial commitment of time and money. Whereas a will contest is heard in probate court, a revocable living trust contest may also be heard in civil court where there are substantial filing fees and formal procedures that have to be followed.
Still, some people argue that will contests are seldom successful, so why bother with a revocable living trust? The answer is threefold: First, a will contest puts a screeching halt to the settlement of an estate. Most will contests take a minimum of two or more years to complete and, during that period, no distributions will be made to anyone. Second, defending a will contest involves lots of attorney time that results in large attorneys’ fees. Even unsuccessful will contests can end up costing $50,000 or more in attorney’s fees. And, those fees come out of the estate, which means that much less for the beneficiaries. Third, many will contests are settled before they ever get to court. In that case, the estate will be further diminished by the amount of the settlement that is eventually reached. In the final analysis, will contests are time consuming and expensive. The best way to avoid them is by securing a revocable living trust.
You should always consult a professional to see whether a revocable living trust makes sense in your overall estate planning. Do you see from the above brief expose’ what a tremendous value a Revocable Living Trust package is—what you actually get in the form of practical and emotional peace and security for you and your family?
My “Trust Package,” as I like to refer to it, consists of all of the following documents, which inter-play with each other:
- Pour-Over Will
- Health Care Directive
- Living Will (Power of Attorney for Healthcare Decisions)
- Durable Power of Attorney for Assets
- Trust Certification
- Personal Property Designation
- Assignment to Trust
Please make sure you have all these essentials—secured by an Estate professional and particularized to your specific estate needs.