UNDERSTANDING TRUSTS
 |
 |
 |
 |
 |
 |
Alpha Planning
and Financial Services, inc.
a
and Financial Services, inc.
a
How You Can Avoid Probate, Save Taxes, & More!
I have a will. Why would I want a living trust? Contrary to what you've probably
heard, a will may not be the best plan for you and your family-primarily because a
will does not avoid probate when you die. A will must be verified by the probate
court before it can be enforced.
Also, because a will can only go into effect after you die, it provides no protection
if you become physically or mentally incapacitated. So the court could easily take
control of your assets before you die, a concern of millions of older Americans
and their families.
Fortunately, there is a simple and proven alternative to a will - the revocable living
trust. It avoids probate, and lets you keep control of your assets while you are
living - even if you become incapacitated - and after you die.
What is probate?
Probate is the legal process through which the court sees that, when you die, your
debts are paid and your assets are distributed according to your will. If you don't
have a valid will, your assets are distributed according to state law.
What is so bad about probate?
Doesn't joint ownership avoid probate?
Not reallly - it usually just pospones it. With most jointly owned assets, when one
owner dies, full ownership does not transfer to the surviving owner without probate.
But if that owner dies without adding a new joint owner, or if both owners die at the
same time, the asset must be probated before it can go to their heirs.
Watch out for other problems. When you add a co-owner, you lose control. Your
chances of being named in a lawsuit and losing the asset to a creditor is
increased. There could be a gift and/or income tax problems. And since a will
does not control most jointly owned assets, you could disinherit your family.
With some assets, especially real estate, all owners must sign to sell or refinance.
So if a "co-owner" becomes incapacitated, you can find yourself with a new "co-
owner" --the court-- even if the ill owner is your spouse.
Why would the court get involved at incapacity?
If you can't conduct business due to mental or physically incapacity (Alzheimer's,
stroke, heart attack, etc.) only a court appointee can sign for you--even if you
have a will. (Remember, a will only goes into effect after you die.)
Once the court gets involved, it usually stays involved until you recover or die.
The court, not your family, controls how your assets are used to care for you.
This public process can be expensive, embarrasing, time-consuming and difficult
to end if you recover. And it does not replace probate at death - your family could
go through the court system twice!
Does durable power of attorney prevent this?
A durable power of attorney lets you name someone to manage your financial
affairs if you are unable to do so. However, many financial institutions won't honor
one unless it is on their form. And, if accepted, it may work too well - giving
someone a "blank check" to do so whatever he/she wants with your assets. It can
be very effective when used with a living-trust, but risky when used alone.
What is a living trust?
A living trust is a document that, just like a will, contains your instructions for what
happen to your assets when you die. But, unlike a will a living trust, avoids
probate at death, can control all of your assets, and prevents the court from
controlling your assets at incapacity.
How does a living trust avoid probate and prevent court control of assets
at incapacity?
When you set up a living trust, you transfer assets from your name to the name of
your trust, which you control--such as from "Bob and Sue Smith, husband and
wife" to "Bob and Sue Smith, trustees under trust dated 1/1/200_"
Legally, you no longer own anything (don't panic: everything you own now
belongs to your trust), so there is nothing for the courts to control when you die or
become incapacitated. The concept is very simple, but this is what keeps you and
your family out of the courts.
Do I lose control of the assets in my trust?
Absolutely not. You keep full control. As trustee of your trust, you can do
anything you could do before--buy/sell assets, change or even cancel your trust
(that's why it's called a revocable living trust). You even file the same tax returns.
Nothing changes but the names on the titles.
Is it hard to transfer assets into my trust?
No, and your attorney, trust officer, financial advisor and insurance agent can
help. You need to change titles on real estate ( in-and-out-of-state) and other
titled assets (stocks, CDs, bank accounts, other investments, insurance, etc.)
Most living trusts also include jewelery, clothes, art, furniture, and other assets
that do not have titles. Also, beneficiary designations on some assets (like
insurance) should be changed to your trust so the court can't control them if a
beneficiary is incapacitated or no longer living when you die. (IRA, 401(k), etc. can
be exceptions.)
Doesn't it take a lot of time?
It will take some time--but you can do it now, or pay the courts and attorney's to do
it for you later. One of the benefits of a living trust is that all your assets are
brought together under one plan. Don't delay "funding" your trust. It can only
protect assets that have been transferred into it.
Should I consider a corporate trustee?
You may decide to be the trustee of your trust. However, some people select a
corporate trustee ( bank or trust company) to act as trustee or co-trustee now,
especially if they don't have the time, ability or desire to manage their trusts, or if
one or both spouses are ill. Corporate trustees are experienced investment
managers, they are objective and reliable, and their fees are usually very
reasonable.
If something happens to me, who has control?
If you and your spouse are co-trustees, either can act and have instant control if
one becomes incapacitated or dies. If something happens to both of you or if you
are the only trustee, your hand-picked successor trustee will step in. If a
corporate trustee is already your trustee or co-trustee, they will continue to
manage your trust for you.
What does a successor trustee do?
If you become incapacitated, your successor trustee looks after your care and
manages your financial affairs for as long as needed, using your assets to pay
expenses. If you recover, you automatically resume control. When you die, your
successor trustee pays your debts and distributes your assets. All is done quickly
and privately, according to instructions in your trusts, without court interference.
Who can be successor trustees?
Successor trustees can be individuals (adults children, other relatives, or trusted
friends) and/or a corporate trustee. If you choose an individual, you should name
more than one in case your first choice is unable to act.
Does my trust end when I die?
Unlike a will, a trust doesn't have to die with you. Assets can stay in your trust,
managed by the person or corporate trustee you have chosen --until your
beneficiaries (including minor children) reach the age(s) you want them to inherit,
or to provide for a loved one with special needs.
How can a living trust save on estate taxes?
The Federal Government passed a new law on June 7th 2001. They called it the
death tax repeal, but it is merely a temporary increase of the exemption for the
next ten years. If congress does not take further steps, then this repeal "sunsets",
and goes back to its original limits. No matter what the limits end up being,
essentially a living trust allows a married couple to both individually exercise their
personal exemption rather than the death of one spouse eliminating the personal
exemption that they could have excercised while alive.
A Living Trust can allow you to leave your family a larger portion of your estate
without any death tax being assessed.
Doesn't a trust in a will do the same thing?
Not quite. A will can contain wording to create a testamentary trust to save estate
taxes, care for minors, etc. But, because it's part of your will, this trust cannot go
into effect until after you die and the will is probated. So it does not avoid probate
and provides no protection at incapacity.
Is a living trust expensive?
Not when compared to all the costs of the court interference at incapacity and
death. How much do you pay will depend on how complicated your plan is. Be
sure to get an estimate.
How long does it take to get a living trust?
It should only take a few weeks to prepare the legal documents after you make the
basic decisions.
Should I have an attorney do my trust?
Yes, but you need right one. An attorney with considerable experience in living
trusts can provide valuable guidance and peace of mind that yours is prepared
properly.
If you have a living trust, do you still need a will?
Yes, you need a "pour-over" will that acts as a safety net if you forget to transfer
an asset to your trust. When you die, the will "catches" the forgotten asset and
sends it to your trust. The asset may have to go through probate first, but it can
then be distributed as part of the living trust plan.
Is a living will the same as a living trust?
No. A living trust is for financial affairs. A living will is for medical affairs--it lets
others know how you feel about life support in terminal situations.
Are living trusts new?
No, they've been used successfully for hundreds of years.
Who should have a living trust?
Age, marital status and wealth really do not matter. If you own titled assets and
want your loved ones (spouse, children or parents) to avoid court interference at
your death or incapacity, consider a living trust. You may also want to encourage
other familly members to have one so you won't have to deal with the courts at
their incapacities or death.
I have a will. Why would I want a living trust? Contrary to what you've probably
heard, a will may not be the best plan for you and your family-primarily because a
will does not avoid probate when you die. A will must be verified by the probate
court before it can be enforced.
Also, because a will can only go into effect after you die, it provides no protection
if you become physically or mentally incapacitated. So the court could easily take
control of your assets before you die, a concern of millions of older Americans
and their families.
Fortunately, there is a simple and proven alternative to a will - the revocable living
trust. It avoids probate, and lets you keep control of your assets while you are
living - even if you become incapacitated - and after you die.
What is probate?
Probate is the legal process through which the court sees that, when you die, your
debts are paid and your assets are distributed according to your will. If you don't
have a valid will, your assets are distributed according to state law.
What is so bad about probate?
- It can be expensive. Legal /Executor fees and the other costs must be
paid before you assets can be fully distributed among heirs. Cost vary in
each state, but are usually estimated at 3-8% of an estate's value. If you
own property in other states, your family could face multiple probates, each
one according to their laws in that state. - It takes time. Usually 9 months to 2 years. During part of this time, assets
are usually frozen so an accurate inventory can be taken. Nothing can be
distributed or sold without court and/or executor approval. If your family
needs more money to live on, they must request a living allowance, which
may be denied. - Your family has no privacy. Probate is a public process, so any
"interested party" can see what you owned and who you owed. The
process "invites" disgruntled heirs to contest your will and can expose your
family to unscrupulous solicitors. - Your family has no control. The probate process determines how much
it will cost, how long it will take, and what information is made public.
Doesn't joint ownership avoid probate?
Not reallly - it usually just pospones it. With most jointly owned assets, when one
owner dies, full ownership does not transfer to the surviving owner without probate.
But if that owner dies without adding a new joint owner, or if both owners die at the
same time, the asset must be probated before it can go to their heirs.
Watch out for other problems. When you add a co-owner, you lose control. Your
chances of being named in a lawsuit and losing the asset to a creditor is
increased. There could be a gift and/or income tax problems. And since a will
does not control most jointly owned assets, you could disinherit your family.
With some assets, especially real estate, all owners must sign to sell or refinance.
So if a "co-owner" becomes incapacitated, you can find yourself with a new "co-
owner" --the court-- even if the ill owner is your spouse.
Why would the court get involved at incapacity?
If you can't conduct business due to mental or physically incapacity (Alzheimer's,
stroke, heart attack, etc.) only a court appointee can sign for you--even if you
have a will. (Remember, a will only goes into effect after you die.)
Once the court gets involved, it usually stays involved until you recover or die.
The court, not your family, controls how your assets are used to care for you.
This public process can be expensive, embarrasing, time-consuming and difficult
to end if you recover. And it does not replace probate at death - your family could
go through the court system twice!
Does durable power of attorney prevent this?
A durable power of attorney lets you name someone to manage your financial
affairs if you are unable to do so. However, many financial institutions won't honor
one unless it is on their form. And, if accepted, it may work too well - giving
someone a "blank check" to do so whatever he/she wants with your assets. It can
be very effective when used with a living-trust, but risky when used alone.
What is a living trust?
A living trust is a document that, just like a will, contains your instructions for what
happen to your assets when you die. But, unlike a will a living trust, avoids
probate at death, can control all of your assets, and prevents the court from
controlling your assets at incapacity.
How does a living trust avoid probate and prevent court control of assets
at incapacity?
When you set up a living trust, you transfer assets from your name to the name of
your trust, which you control--such as from "Bob and Sue Smith, husband and
wife" to "Bob and Sue Smith, trustees under trust dated 1/1/200_"
Legally, you no longer own anything (don't panic: everything you own now
belongs to your trust), so there is nothing for the courts to control when you die or
become incapacitated. The concept is very simple, but this is what keeps you and
your family out of the courts.
Do I lose control of the assets in my trust?
Absolutely not. You keep full control. As trustee of your trust, you can do
anything you could do before--buy/sell assets, change or even cancel your trust
(that's why it's called a revocable living trust). You even file the same tax returns.
Nothing changes but the names on the titles.
Is it hard to transfer assets into my trust?
No, and your attorney, trust officer, financial advisor and insurance agent can
help. You need to change titles on real estate ( in-and-out-of-state) and other
titled assets (stocks, CDs, bank accounts, other investments, insurance, etc.)
Most living trusts also include jewelery, clothes, art, furniture, and other assets
that do not have titles. Also, beneficiary designations on some assets (like
insurance) should be changed to your trust so the court can't control them if a
beneficiary is incapacitated or no longer living when you die. (IRA, 401(k), etc. can
be exceptions.)
Doesn't it take a lot of time?
It will take some time--but you can do it now, or pay the courts and attorney's to do
it for you later. One of the benefits of a living trust is that all your assets are
brought together under one plan. Don't delay "funding" your trust. It can only
protect assets that have been transferred into it.
Should I consider a corporate trustee?
You may decide to be the trustee of your trust. However, some people select a
corporate trustee ( bank or trust company) to act as trustee or co-trustee now,
especially if they don't have the time, ability or desire to manage their trusts, or if
one or both spouses are ill. Corporate trustees are experienced investment
managers, they are objective and reliable, and their fees are usually very
reasonable.
If something happens to me, who has control?
If you and your spouse are co-trustees, either can act and have instant control if
one becomes incapacitated or dies. If something happens to both of you or if you
are the only trustee, your hand-picked successor trustee will step in. If a
corporate trustee is already your trustee or co-trustee, they will continue to
manage your trust for you.
What does a successor trustee do?
If you become incapacitated, your successor trustee looks after your care and
manages your financial affairs for as long as needed, using your assets to pay
expenses. If you recover, you automatically resume control. When you die, your
successor trustee pays your debts and distributes your assets. All is done quickly
and privately, according to instructions in your trusts, without court interference.
Who can be successor trustees?
Successor trustees can be individuals (adults children, other relatives, or trusted
friends) and/or a corporate trustee. If you choose an individual, you should name
more than one in case your first choice is unable to act.
Does my trust end when I die?
Unlike a will, a trust doesn't have to die with you. Assets can stay in your trust,
managed by the person or corporate trustee you have chosen --until your
beneficiaries (including minor children) reach the age(s) you want them to inherit,
or to provide for a loved one with special needs.
How can a living trust save on estate taxes?
The Federal Government passed a new law on June 7th 2001. They called it the
death tax repeal, but it is merely a temporary increase of the exemption for the
next ten years. If congress does not take further steps, then this repeal "sunsets",
and goes back to its original limits. No matter what the limits end up being,
essentially a living trust allows a married couple to both individually exercise their
personal exemption rather than the death of one spouse eliminating the personal
exemption that they could have excercised while alive.
A Living Trust can allow you to leave your family a larger portion of your estate
without any death tax being assessed.
Doesn't a trust in a will do the same thing?
Not quite. A will can contain wording to create a testamentary trust to save estate
taxes, care for minors, etc. But, because it's part of your will, this trust cannot go
into effect until after you die and the will is probated. So it does not avoid probate
and provides no protection at incapacity.
Is a living trust expensive?
Not when compared to all the costs of the court interference at incapacity and
death. How much do you pay will depend on how complicated your plan is. Be
sure to get an estimate.
How long does it take to get a living trust?
It should only take a few weeks to prepare the legal documents after you make the
basic decisions.
Should I have an attorney do my trust?
Yes, but you need right one. An attorney with considerable experience in living
trusts can provide valuable guidance and peace of mind that yours is prepared
properly.
If you have a living trust, do you still need a will?
Yes, you need a "pour-over" will that acts as a safety net if you forget to transfer
an asset to your trust. When you die, the will "catches" the forgotten asset and
sends it to your trust. The asset may have to go through probate first, but it can
then be distributed as part of the living trust plan.
Is a living will the same as a living trust?
No. A living trust is for financial affairs. A living will is for medical affairs--it lets
others know how you feel about life support in terminal situations.
Are living trusts new?
No, they've been used successfully for hundreds of years.
Who should have a living trust?
Age, marital status and wealth really do not matter. If you own titled assets and
want your loved ones (spouse, children or parents) to avoid court interference at
your death or incapacity, consider a living trust. You may also want to encourage
other familly members to have one so you won't have to deal with the courts at
their incapacities or death.
