Vital “Step 2″ of the Living Trust Process
November 12, 2007 | Leave a Comment
I’ve published posts on the overall scheme in regards to revocable living trusts (Part I and Part II), but the issue of funding your living trust is so important that it warrants a post of it’s own.
It’s essential to remember that setting up your living trust is a two-step process. Step #1 is having the document prepared and formally executing it. Step #2 is funding it. Too many clients complete Step #1 and think that the process is over when they are really only halfway done. If you do not complete Step #2 then your estate will have to go through probate, which would obviously be a shame since the main reason for setting up a living trust is to avoid probate.
In regards to your real estate, your attorney should prepare a “quitclaim deed to trust” for you to sign which will transfer ownership of your real estate to your living trust, thereby funding the trust with your real estate. This normally takes place at the same time that you execute the trust itself.
As far a bank and investments accounts go, you will usually just need to fill out and sign a one-page document. Again, just like with the real estate, you are changing the title to the account so that the records of the financial institution indicate that your trust is now, technically, the owner of the account.
Please note that anything that has a designated beneficiary (life insurance, qualified retirement accounts, annuities, etc.) are already set up to avoid probate, regardless of whether you have a living trust. But it is generally a good idea to name your trust as the beneficiary of these assets, especially if you are a married couple and your attorney has set up credit shelter planning in your trusts to address estate tax concerns or if you have set up trusts for children in your living trust. Be sure to check with your attorney. Again, remember that this would be a change of beneficiary, not a change of ownership. Closing one of these accounts out and opening a new one in the name of your trust might trigger unnecessary penalties and taxes.
A Look at Living Trusts vs. a Power of Attorney
November 8, 2007 | Leave a Comment
Germantown, Tennessee
I recently read an article on the Aspen Daily News’ website which was really a cut above most “you need to have an estate plan” articles — good use of detail and examples.
Unfortunately I can’t hyperlink to the original article but here is an excerpt that I copied that I want to focus on:
In event of your disability, give someone you trust the power to manage your property. It’s called a power of attorney (although the person doesn’t have to be an attorney).
But there’s a problem: Some financial institutions won’t accept powers of attorney created more than six months before. You’re unlikely to renew a power of attorney this frequently. For a better solution, ask an estate planning attorney to draft a living trust for you. (The cost is probably $1,500 to $3,000.) The ownership of all your property is changed from your name to the trust’s name. As the sole trustee, you can do anything you like with the property.But if you become disabled, a person named in your trust steps in as successor trustee to manage the property on your behalf and for your benefit. All financial institutions accept this, no matter when the trust was written.
I haven’t had a problem getting “old” powers of attorney (any POA created by someone in the last 5 years) accepted by financial institutions, but a living trust really works better than a property power of attorney in the case of disability. Or, rather, I should say that a fully funded living trust works better. If you transfer ownership and change beneficiary designations to your living trust and then become disabled, your successor trustee really can step right in and handle your property for your benefit. If you set up a living trust but don’t fund it, and then become disabled, your property power of attorney can (hopefully) be used to fund your living trust at that time. I always include specific language allowing an agent, under a property power of attorney, to take care of this funding.
And, of course, a health care power of attorney is very important as well.
Let me put it simply: If you become disabled, having a fully funded living trust and powers of attorney will save you and your family a lot of time and money.
Do You Really Need a Living Trust? (Step 1 - Part II)
November 7, 2007 | Leave a Comment
Now that we have a general idea of what a living trust is…do you really need one?
Many estate planning lawyers will tell you that essentially everyone would be better off with a trust instead of a will, but I disagree. You need to remember that there are some downsides to having a living trust. First, your legal fee will be higher. Even for simple trusts you’re probably looking at a four-figure fee instead of a three-figure fee for a will. Then there is some legwork involved in regards to “funding” the trust (or re-titling your assets), which is a step that you do not need to take with a will. This can be a significant time commitment if you have a bunch of accounts spread out among many different financial institutions.
So when is the higher cost and extra work warranted?
First, I would say that if you own real estate in another state (many of my clients have a condo in Florida or a cottage on the Cape) then the need for a living trust is nearly a given. The reason is that if you die without a trust then your family will have a “double probate” situation…a full-blown probate process in Connecticut and the other state. This is an administrative headache that you should try to avoid at all costs.
Second, if keeing your estate planning private is a priority then a living trust is the best way to go. Marilyn Monroe’s Will is all over the Internet for everyone to see because a will is a public document after you die. Literally, anyone can walk in off the street, go to the probate court and ask to see a copy of your will without giving a reason why. Trusts are private documents.
Finally, if you have a relatively small and straightforward estate then going through probate shouldn’t be a big deal, regardless of the bad press that the Connecticut probate court system has received over the last few years. If you have a large and complicated estate then you should at least consider setting up a living trust.
Please remember the following important facts about trusts: (1) even if you have a fully-funded trust, upon your death your successor trustee will still need to file a few documents with the probate court, including an estate tax return even if no tax is due, (2) a simple living trust, with no credit shelter planning, does not avoid estate tax, and (3) even if you have a trust the probate court will still be entitled to charge a probate fee based on your gross taxable estate, which most of my clients are unpleasantly surprised to hear. In other words, living trusts do not avoid probate court fees.
Hopefully this post and the previous one has given you a better idea of what trusts are and how they work. But you should not determine whether you need one or not until you sit down and discuss them with an estate planning attorney.
Do You Really Need a Living Trust (Step 1 -Part I)
November 6, 2007 | Leave a Comment
Based on a lot of e-mail messages I have been receiving recently, this is the post that a lot of readers have been looking forward to…some honest commentary on how vital it is for one to own a “Revocable Living Trust” (RLT). Public interest in RLT’s has been running high for the last several years. This interest has been fueled a great deal by some attorneys who convince every client that they absolutely have to own one. They create this concept of RLT’s as documents that can do accomplish everything for you short of slicing vegetables. This isn’t the case because every client is different and RLT’s simply are not for everyone.
First, we should start with a quick sketch of how RLT’s work. When you sign an RLT you essentially create a legal entity that is separate and apart from yourself, and it is a document that directs how and where the trust assets are distributed when you die, just like a will does. You then transfer ownership of your assets (bank accounts, investments, real estate, etc.) into the name of your RLT. So when you die and the Probate Court wants to know what you owned when you passed away so that it can go through the probate process, the answer is that, technically, you owned nothing…your RLT owned eveything. Therefore, no probate.
Here is a message well worth repeating: Planning with living trusts does not end when the trust documents are signed (which is the case with wills). Please notice that a vital step in this process is actually putting assets into your trust, which essentially means re-titling certain assets so that they are legally owned by your trust. Otherwise, you’ll end up going through probate and defeating the primary purpose of having a trust. In other words, there are two very important steps to this process. Skipping step #2 (funding the trust) is, hands down, the most common mistake made with living trusts…and it’s a big one!
Please note that it is extremely important to sign a “pour-over” will along with your trust. It is a very short and simple will which simply says that upon your death, anything that is not already owned by your trust is poured over into your trust. This ensures that all of your assets are distributed in accordance with the instructions in your trust. Ideally, everything will already be owned by your trust when you die. But just in case you forgot to re-title a particular asset or just didn’t get around to it, then the pour-over will finishes the job and gets that asset into your trust. The considerable downside is that the asset now must go through the probate process, which is precisely what you were trying to avoid when you set up the trust in the first place!
