WHY AREN’T LIVING TRUSTS JUST FOR THE RICH?
In the movies we watch or the books we read, the wealthy are visiting their bankers to talk about their trusts. Our high school and college textbooks only discuss wills. It’s no wonder many of us think trusts are just for the wealthy.
The fact is trusts are not just for the wealthy. Many people are using trusts rather than a Last Will & Testament because trusts give them and their successors more flexibility to manage their assets before and after death. A living trust can also allow someone of modest means to avoid the cost and delays of probate.
Trusts can be created while you are living or created after you die according to the instructions you provide in your will. A common trust created while you are living is referred to as a revocable living trust. A trust created after you die based upon instructions you provide in your will is known as a testamentary trust.
There are many types of trusts. The questions and answers focus on the use of living trusts and testamentary trusts and describe how these trusts differ from wills.
- What is a trust?
- What is a testamentary trust?
- What is a revocable living trust?
- How does a trust differ from a will?
A. A trust is an agreement creating a legal entity that can own property. There is no specific form used to create a trust. In general, a trust is made when:
- The trust document is signed by the person making the trust, called “the Settlor”; and
- Title to the assets are changed from being held by individuals to being placed in the name of the acting trustee.
Once the trust is made, the agreement may be amended and/or revoked, usually only by the person who originated the trust, e.g., the Settlor.
The trust documents are private documents. They are generally not filed with the courts or other government organizations.
The trust agreement identifies the person who is in charge of managing the trust assets. This person is called the trustee. The trustee may then manage the trust assets based on the powers described in the trust agreement.
The living trust sets forth how you, as grantor, want your property managed and distributed during your life and after your death. After it is drafted and signed, it must be funded to be effective. A trust only controls property that is specifically titled in the name of the trust. Real estate, bank accounts, stocks, bonds and many other types of assets can be re-titled to change the ownership into the name of the trustee of the trust.
A trust is a legal entity, recognized as such by the IRS, and ultimately has its own tax identification number.
Q. What is a testamentary trust?
A. A testamentary trust is a trust described in a will, created upon the death of the decedent. The trust agreement is actually embedded in the text of the will. In such a case, the trust did not exist at the time of the death of the decedent. It only was created following death. As a result, the trust is funded with probate assets.
The testamentary trust can provide some of the same features as a living trust: directions for managing assets for minor children, directing and providing income for your spouse or children and providing ongoing control of trust property. It cannot, however, be used as a method of avoiding probate because assets are not transferred to the trust until after you die. As the property is owned by you as an individual until your death, property is transferred to the testamentary trust only after you die.
Q. What is a revocable living trust?
A. A revocable living trust is a trust you create while you are living. It is a revocable trust because its terms can be revoked and/or amended until you become incapacitated or die. The living trust document describes how you want your trust assets to be managed during your lifetime and after your death and names one or more trustee(s) to manage trust assets according to the instructions specified in the trust agreement.
It is common for you, the person who makes the trust, to name yourself as the initial trustee. If a husband and wife create the trust, it is common that both Settlors are named as the initial Co-trustees.
The trust has the legal right to own property. Once a trust is created, the individuals who created the trust can transfer the title of property they own as an individual to the name of the trust. At the time of the Settlor’s death, his or her property is titled in the name of the trustee, rather than in the Settlor’s name as an individual. Because an individual does not own the property, property owned by a trustee is not subject to probate.
Q. Who manages the trust assets while you are living and when you die?
A. The person originally making the trust selects and names the trustee and the successor trustee. The trust can be a financial institution, or it can be an individual.
If you name yourself as the trustee when you create the trust, you manage the trust asssets while you are living .
When the original trustee can no longer act because of death, resignation or incapacity, the successor trustee you named will now manage the trust assets according to the instructions and rules described in the trust agreement. The successor trustee can do so in a private manner and without court supervision.
Fact: Trustee fees.
A trustee is generally paid “a reasonable fee”. When “institutional trustees” are named (such as a trust division of a bank), such institutions will charge a management fee to manage the trust assets, usually one to two percent of the value of the trust assets.
Q. How does the trustee transfer assets to the trust?
A. Without a trust, assets you own and can be titled in your name as an individual or as a joint tenant. Once you establish a trust, you can also title property in the name of the trustee.
To place assets in trust, the assets should be titled in the name of the person identified as trustee of the trust. For instance, your house title may list the owners as John and Mary Jones. Once the trust is created, you would file the necessary paperwork to change the title to John and Mary Jones, trustees for the John and Mary Jones Trust.
The trustee should create the paperwork necessary to change title on bank accounts, brokerage accounts, real property and other titled assets transferred to the trust.
Fact: IRAs and living trusts.
The IRS may view the transfer of your retirement accounts to a trust as a withdrawal. You will need to report the withdrawal on your tax return and pay any taxes due.
Do not transfer your IRA to your living trust before talking with an IRA expert.
Q. How does property without a title become a trust asset?
A. Much of the property we own does not have a title, including our jewelry, art, collectibles, digital assets and household items. You should prepare a Trust Schedule itemizing the property you want to be managed as a trust asset. Make sure the trust documents refer to the Trust Schedule.
Q. What if you don’t title property in the name of the trustee or create a Trust Schedule?
A. If the title is still held in the name of an individual, these assets are not trust assets. When you die, these assets will be managed as either a probate asset or an automatic inheritance asset.
Q. How does a living trust impact your income taxes?
A. For IRS purposes, doing business as a trustee is the same as doing business as an individual. You will report any income or expenses related to assets owned by your living trust in the same manner you would as if they were owned by your as an individual.
- You don’t need a separate tax identification number for the trust while you are living.
- You can still deduct mortgage payments.
- You can use the same rules for calculating gains and losses when you buy or sell trust assets.
Q. If you have trust assets, how do they impact your estate taxes?
A. They don’t. Trust assets are considered part of your taxable estate when you die. Trust assets are subject to estate taxes in the same manner as if they were owned by an individual.
Q. Why do you need both a Living Trust and a Will?
A. First, it is almost certain that when you die you will have assets which you have not transferred into the name of the trustee of the trust. You need a way to deal with those assets, even if all you do is write a will that pours them over into the trust.
Second, if you are leaving estate assets for the benefit of a minor child, in some states you may need a will to nominate a guardian of the person for the minor and or disabled child for whom you are leaving the gift.
Q. How is a trust different than a will?
A. A Last Will and Testament and a Living Trust both allow the authors to document who they want to be the beneficiary of their assets. There are several ways a trust differs from a trust.
Control of Assets After You Die
|A Will||A Trust|
|A will generally describes who inherits certain assets after your death.||Your trust can include instructions giving someone the right to income and the use of the property during their lifetime.|
|If you leave property outright to someone in a will, they become the owners of the property at the conclusiong of probate.||Your trust can also leave instructions on who has the right to income and the use of theh property when the first beneficiary dies.|
|When your beneficiary dies, their will, or state intestate succession rules, determine who will inherit the property you gave them, assuming they have not transferred or sold it prior to that time.||There are many situations in which you may want to control the second instance of inheritance. For example:|
|You want to provide your children with income but you want the assets to go to your grandchildren and not be subject to a divorce or death of a child.You have been married before. You want to provide income for your surviving souse but also want to be sure your children from your prior marriage inherit some portion of your assets when our surviving spouse dies.You want to be sure your children inherit your separate assets if you die first, eliminating any opportunity for a spouse or stepchildren to claim rights to your separate property. You have minor or disabled children and you want to provide for their support and choose when or if they inherit the principal|
|The intended time frame of probate is actually as short as possible-the process is not intended to allow an executor to spend years managing the assets in the estate.||A trust agreement may include elaborate directions regarding the management of certain trust assets and may contemplate an administration that lasts a very long time.|
|The executor may not be able to take control of probate assets without approval of the court, which may take some period of time.||A trustee can take immediate control of trust assets.|
Management of Money for Minor Children
|A Will||A Trust|
|If you leave money to your minor children via your will, a guardian will need to be appointed by the court to manage the funds.||If you leave money to your minor children via your trust, your trustee will manage the trust assets for the benefit of your minor children according to the instructions you include in the trust.|
|Depending upon the size of the inheritance, the courts may even govern how the money ought to be invested.||These instructions can include the age at which you want your child to have ccess and control of the funds. For instance, you can give a child access to 1/3 of their inheritance at age 15, 1/3 at age 30 and 1/3 at age 35.|
|When the child becomes an adult, at age or 21, depending on state law, he or she becomes the owner of all of the assets.|
Children With Special Needs
|A Will||A Trust|
|If you give your assets to a special needs child via a will, the assets are now considered property owned by the child. The value of the assets may eliminate the opportunity for a child with special needs to obtain assistance from available local, state or federal assistance programs.||If your trust has instructions to manage assets on behalf of a special needs child, these assets are not considered to be owned by the special needs child. As such, the value of these assets is not considered when applying for local, state or federal assistance.|
Avoiding Probate in Multiple States
|A Will||Only a Living Trust|
|Assets you own as an individual or that are owned by your “estate” are subject to probate.||If you transfer the title of property you own as an individual to your living trust, the trustee is the owner of the property.|
|If you own real estate in more than one state, our estate representative may need to open a probate case in multiple states.||Trust assets are generally not subject to probate in any state.|
|All documents filed with the courts become public information.||Your private life usually remains private.|
|Court fees and legal fees are set by state statute.||Your legal fees are negotiated or set by you, not state statute.|
|The estate representative does not have immediate access to probate assets. For example, if the stock market is falling, the estate representative may have to wait for and/or seek approval from the courts to buy or sell stocks.||Your estate representative has immediate access to your assets. If the stock market is falling, he or she can take immediate corrective action.|
|A testamentary trust does not avoid the need for probate, as the property is not transferred to the trust before your death. The probate courts will oversee the creation, funding and administration of your testamentary trust.|
|A Will||Only A Living Trust|
|If you have a will, most states require your estate representative to file the original. If the original cannot be found, some states will consider you to have died intestate.||If you have a living trust, copies of your living trust are considered authentic, binding documents.|
|A Will||Only A Living Trust|
|If you have a will and become incapacitated, nothing in your will can help manage your assets while you are living.||If you have living trust, your co-trustee or successor trustee can continue to manage trust assets without a court supervised conservatorship. Court supervised conservatorships are public processes, cost money and require the courts to supervise how someone manages your assets. A testamentary trust is create after you die. It does not provide value if you become incapacitated.|
Estate Tax Planning for Married Couples
|A Will||A Trust|
|If your estate is subject to estate taxes and you leave your property directly to your surviving spouse, he or she loses the $3.5 million dollar federal tax exemption||If you have a trust, the trust instructions can set up new trusts when you die, sometimes referred to as A/B trusts.|
|If you are married and do not take advantage of the opportunities of creating sub-trusts, you may be paying the federal and state government more taxes than ou need to pay.||The use of the A/B trust enables both you and your surviving spouse to claim the federal estate tax exemption allowance, potentially saving the estate millions of dollars. See estate taxes for more information about A/B trusts.|
Access to Safe Deposit Box
|A Will||Only a Living Trust|
|If you own your safe deposit box as an individual or as the last surviving joint tenant, upon your death your estate representative must follow state rules on how and when the safe deposit box may be accessed.||If your trust owns a safe deposit box, the trustee is considered the owner and has the legal right to access the box at any time.A testamentary trust cannot “own” a safe deposit box because a testamentary trust is not created until after you die.|
Management of a Business
|A Will||Only a Living Trust|
|If you have an ownership interest in a business, the ownership interest may be part of your probate estate if your estate plan is based on a will.||If you have placed your ownership interest in a trust, the trustee may manage your portion of the business interest without the need for court intervention or court costs.|
|A Will||A Trust|
|If you have a will and your assets are subject to probate, a formal creditor notification process must occur before the court approves completion of the probate.||If you have a trust, the trustee procedures in many states do not include formal creditor notification or creditor release processes.|
|The creditor must respond with any claims against the estate.||There may be no time limit on when a creditor may file a claim.|
|Once the time for filing a claim has expired, the estate is not subject to future claims from the creditor.||Some states, including California, allow a trustee to use the same creditor notification and creditor release process available with a will.|
Cost to create vs staying our of court savings
|A Will||A Living Trust|
|If you visit a lawyer, you will find it usually costs more to create a living trust than a will.||If you die with a will, the costs of probate may offset the cost to create the living trust.If you have minor children, the costs of a guardian of the estate probate procedure may offset the cost to create the living trust.If you become incapacitated, the cost of a conservatorship process may offset the cost to create the living trust.|