How to Avoid Probate, Save Taxes, Protect your Children, and More... The Living Trust

The living trust, also known as a revocable living trust, is a written legal document similar to a will that sets forth your wishes and plans regarding matters during your life (what happen if I become incapacitated) and upon your death (who will inherit what and when).  Your wishes and plans can be changed during your lifetime as your circumstances change.  By creating a customized estate plan, which includes a living trust, you will have peace of mind that your wishes will be fulfilled upon your death.

Unlike a Will, a  revocable living trust:

Avoids Probate:
Probate is a court proceeding that transfers title of your assets to others upon your death.  Probate is time consuming, taking 9 months to 2 years to complete.  Probate is expensive costing approximately 4% of the gross value of your estate.  Probate is a public proceeding, which can subject your loved ones to the scrutiny of others.  A trust avoids probate and as a result minimizes court costs, legal and administrative fees, time delays, and it keeps matters private, without the burden of court involvement. 

Provides for Incapacity:
Under your trust you will choose an individual to manage your property and pay your bills, if you are incapacitated.  If you do not plan who this individual will be, the court is required to appoint someone through a conservatorship proceeding.  Like the  probate process, a conservatorship proceeding takes time, is expensive, and is open to the public.

Covers Life Circumstances:
Guardianships - for minor children
Blended Families - ensuring no one is unintentionally disinherited
Inheritance for Young Children - determining the ages and stages you want them to inherit
Inheritance for Adult Children - protecting them from creditors, divorce, or themselves
Inheritance for Grandchildren - teaching them good stewardship
Beneficiaries with Special Needs - protecting them from losing their public benefits
Beneficiaries with Addictions - avoiding adding fuel to the fire
Non-U.S. Citizens - preventing unnecessary taxation
Charitable Intentions - leaving a legacy of giving
Alternate Distributions - for unexpected life events

Prevents an Unnecessary Payment of Estate Tax:
Separate from the expense and delay of probate, your estate may also be liable for estate tax, also known as the death tax.  Under a trust you have the ability to reduce or even eliminate your estate tax exposure.  Tax laws change frequently and obtaining advice from a qualified attorney on tax matters is crucial. 

A revocable living trust is a loving document which can be very instrumental in helping your loved ones at times of overwhelming emotion and grief.  A trust provides your loved ones direction of your wishes and plans, which takes a huge burden off of them at a very devastating time.  It can also resolve potential disputes which could destroy relationships between your loved ones or even prevail over your true intentions.  Ultimately, a trust provides you maximum flexibility and control over your property and peace of mind that your plans will be followed upon your death.

If you answer “Yes” to any of these questions, we will recommend that the foundation of your estate plan be a Revocable Living Trust:

• Do you own real estate?
• Do you have small children and sufficient life insurance to raise them if you are gone?
• Do you have $100,000.00 in assets or more?

I have a Will. Why would I want a Living Trust?
Most people believe that a Will is an excellent plan for their estate in the case of their death.  Unfortunately, this is not true.  If you pass your estate on to your heirs using a Will, the Will will have to go through a court process called “probate”.  This is a court process to verify that the Will is valid, and settle any disputes over the estate before the Will can be enforced.  You don’t want your heirs to go through probate...if you love them, you will plan with the use of a Trust!

Additionally, a Will is only effective when you die...it does nothing for you if you are alive but incapacitated. We receive two to three calls each year that go something like this: “My mom fell and broke her hip; she is in a rehabilitation hospital and she is out of it.  I need to be able to pay her bills and take care of her finances.  She has a Will, and I am the executor, but the bank won’t allow me to write checks on her behalf.  What can I do?”.  The answer is that without a proper estate plan in place, this family will have to go to court to obtain a Conservatorship over the mom...time consuming, expensive, and a real headache with everything else this family is dealing with!

Fortunately, there is a simple and legal alternative to a Will – The Revocable Living Trust. It avoids all probate, and lets you keep full control of your assets while living - even if you become incapacitated - and after you die.

What is Probate?
Probate is the court process required when you die to verify your Will, if you have one.  If you don’t have a Will, this process determines who your closest blood relatives are that will inherit from you.  This court process also assures debts are paid.

• It is expensive!
  Probate fees paid to your attorney and/or executor are set by law at approximately 4% of the gross value of your estate. If you own property in more than one state, there may be a probate in each state.
• It takes time.
  In California, typical probates last 9 months to 2 years. Assets are frozen during this period - if your family needs money to live on, they must request a living allowance from the court which may be denied.
• You lose privacy.
  Probate files are open to the public, so anyone can see what you owned and who you owed. This invites unscrupulous solicitors to prey on your loved ones at a vulnerable time.

Why would the court get involved at incapacity?
If you lose your mental or physical capacity (due to Alzheimer's, stroke, heart attack, etc.), only a court appointee can sign documents for you - even if you have a Will. (Remember, a Will only goes into effect when you die.) Once the court gets involved it stays involved until you recover or die. The court, not your family, controls how your assets are used to care for you. This can be expensive, embarrassing, time consuming, and difficult to end if you recover. And it does not replace probate at death - your family would have to go through the court system twice!

Wouldn't a Power of Attorney Prevent this?
All Powers of Attorney end at death, so they cannot be used to avoid probate. Many also end at incapacity. Proper Durable Powers of Attorney may work, but they can be risky . . . you are giving someone else the power to do whatever they want with your assets. It is very effective when used with a Living Trust, but risky as a primary estate plan.

What is a Living Trust?
A Living Trust is a legal document that is similar to a Will in that it includes your instructions for what you want to happen with your assets when you die. But unlike a Will, a Living Trust avoids probate at death, and prevents the court from controlling assets at incapacity. It also provides tax planning to avoid paying unnecessary estate taxes.

How Does a Living Trust Work?
When you set up a Living Trust, you transfer assets from your name to the name of your trust, which you control. Legally, your Trust (ie: the Smith Family Trust) now owns your assets and you designate a back up trustee to handle your trust (according to your instructions) upon your incapacity or death. From a legal viewpoint, having a Living Trust means that you do not hold title to anything; since your assets are inside the Trust, the Trust holds title to everything. However, even though you have relinquished ownership of your assets, you still retain control of those same assets.  (Note: A Revocable Living Trust is considered a “disregarded” entity for tax purposes and asset protection.  What this means is that your trust does not have its own tax id number until your death; you simply use your own Social Security Number.  Therefore, you pay your taxes the same way you always have.  Likewise, because you have the power to cancel this trust at any time, there is no “asset protection” with a Revocable Living Trust.  If you are interested in asset protection vehicles, contact our office for a free consultation on the types of structures that may fit your needs).
Upon your death, since you have nothing titled in your own name (because your assets are titled in the Trust), there is nothing to probate. If you are married, the surviving spouse typically becomes the sole trustee and continues to have control over the assets.

Who should have a Living Trust?
It does not really matter your age, your wealth, whether you are married or single. If you own any titled assets (home, IRA, mutual funds, etc.) and/or have minor children, and you want to make sure your loved ones avoid the problems and cost of court interference at your death or incapacity, you should consider a Living Trust. And if your parents are living, you may want them to consider one so you won't have to deal with the courts at their incapacity or death.

As an additional benefit a Living Trust can provide for the care, support and education of your minor children or other young beneficiaries by providing management of the assets by the Trustee. The assets can be distributed to the children at an age or ages chosen by you. By implementing a Living Trust for this purpose your estate will also avoid the costs and burdens of court supervised guardianship for your minor children.

A Special Needs Trust can also be implemented for beneficiaries that are disabled and/or receiving government benefits.

Living trusts can also be used to ensure that both the surviving spouse and any children from a prior marriage receive fair treatment and protection.

A Revocable Living Trust can Help Eliminate Estate Tax
If you are married, each of you may pass the “Exclusion Amount” (currently $2,000,000.00 each for a total of $4,000,000.00) to your heirs, free of Estate Tax, BUT ONLY IF YOU HAVE A PROPERLY DRAFTED ESTATE PLAN.  This benefit does not happen automatically.

Married couples are granted the additional advantage of the unlimited marital deduction, which exempts assets passing from a surviving spouse from taxation. The marital deduction can provide a significant amount of benefits to the surviving spouse if used properly. This deduction does not reduce your taxes, it merely postpones payment of tax on assets passing to the surviving spouse until their death. (Please note that, if the surviving spouse is not a U.S. citizen, the marital deduction will not be available unless the property passes into a "Qualified Domestic Trust". This is a critical planning issue for non-citizen spouses.  Read more under “Types of Trusts”). 

• Avoids probate at death
• Avoids multiple probates if you own property in more than one state
• Prevents court control of assets at incapacity
• Provides maximum privacy
• Allows quick distribution of assets to your beneficiaries
• Assets can remain in Trust until beneficiaries reach the age(s) you want them to inherit
• Can reduce or eliminate estate taxes
• Inexpensive, easy to set up and maintain
• Can be changed or cancelled at any time
• Difficult to contest
• Prevents court from controlling finances when minor children inherit
• Can protect dependents with special needs
• Prevents unintentional disinheriting and other problems of joint ownership

Should I see an attorney to plan my estate?
Yes, preferably one who specializes in Estate Planning. An experienced attorney can provide valuable guidance and assistance, and assure your Trust is properly prepared.  Warning!!  Not all attorneys are the same!!  You want a law firm that specializes in the area of law you are looking for; you want someone with experience to guide you through the process so that you don’t have to invent a wheel you aren’t even sure of; you want someone to help you create not just a transaction, but a legacy of love to your family and heirs...so they know how you are, what you stood for, your hopes and dreams for their futures; how you obtained the wealth that you have; and what you hope they will do with what you are giving them.  This type of planning requires a firm with HEART, in addition to expertise.  (And we are that firm!)