LIVING TRUSTS
Ten Points to Consider 1. Estimate the market value of your home. (Ignore any loans or debt on the home or on any other asset, as you're estimating what the selling price of the home would be rather than how much equity you have.) If the market value (selling price) is more than $20,000 (twenty thousand dollars), a Living Trust will make economic sense, as the cost of probate on a home can exceed 5% of the home's market value. 2. If you do not own a home, but have other assets whose combined value exceeds $100,000, a Living Trust may make economic sense in this situation also, as the cost of the probate will consume 4% to 5% of the total estate. 3. If you were to become mentally incompetent or incapacitated, a Living Trust would avoid the expense and embarrassment of a Conservatorship proceeding. 4. As a general rule, if an estate requires a probate, the process is both timeconsuming and expensive, and can consume 4% to 5% of the total market value of the estate. A Living Trust avoids both the time problem and the expense problem. 5. Placing an asset in Joint Tenancy with someone other than your spouse exposes the asset to the other Joint Tenant's legal liabilities. Placing the asset in a Living Trust maintains control and eliminates this exposure. 6. For married couples, a Living Trust is the ONLY way to use the estate tax exemption for both the husband and the wife. Without a Living Trust, you lose one of the exemptions. In other words, with a properly drafted trust you can double the estate tax-free amount that you can leave your heirs. 7. If the trust is drafted properly, it can eliminate unnecessary capital gains taxes for your loved ones. 8. If Medicaid qualification is desired and necessary, properly drafted estate plan documents will facilitate the acceptance procedure. 9. A properly drafted Living Trust does not need updating every time you buy or sell assets. 10. Sanders Welch, LLC has over 40 of experience in the exclusive practice of design, implementation and administration of business plans, estate plans and retirement plans, developing considerable expertise in this area of estate planning. You can be assured that your Sanders Welch-designed plan will be comprehensive, complete and correct.
FAQ’s: This glossary and list of commonly asked questions has been prepared as a reference that new clients can keep on file with their Estate Plan documents. We think it is a helpful tool and guide in grasping the concept of a Living Trust and the purpose of the related documents that comprise a personal Estate Plan. Can I Change a Living Trust? Yes. You will find language in your trust that gives you the power to amend, revise and even cancel it while you are alive and legally competent, but it is NOT necessary to change your trust when you buy and sell assets. Why Have a Living Trust? The two main reasons are for the avoidance of Probate and Conservatorship. A third reason applies to married couples. For them, only by using a properly drafted Living Trust can two estates be created for estate tax purposes. Without a Living Trust, a married couple has only one estate for estate tax purposes. With a Living Trust, a married couple can double their estate tax exemption. What Causes Probate and Conservatorships? The need for a signature. Certain types of assets can be transferred only after the owner signs documents at the time the transfer or loan is made. A home is an example of this type asset. A person is unable to sign the necessary documents after his or her death or after becoming incompetent. The solution to this is a court proceeding called Probate if the person has died or Conservatorship if the person is alive but legally incompetent. The court proceeding results in a court order that takes the place of the needed signature. However, in a Living Trust, signature authority is held by the Trustee of the Trust. If the original Trustee dies or becomes incompetent, there is a pre-designated Successor Trustee available to provide the needed signatures, thus avoiding the need to have a Probate or Conservatorship proceeding. Who’s Who, and When? Your Living Trust is created at the moment you sign and date it. At that instant you are the Trustor (Trust Maker), Trustee (Trust Manager) and Beneficiary, all in one. If you become incompetent, you can no longer serve as the Trustee but you remain the Beneficiary, and the Successor Trustee manages the trust for your benefit. When you die, you are no longer the Beneficiary, and your Successor Trustee is legally required to follow the instructions you, the Trustor, documented in your Living Trust as pertains to distributing the trust assets to the beneficiaries you named in it. What is “Funding” a Trust? “Funding” your trust describes the process of changing the title of each asset from yourself as an individual to yourself as Trustee of your trust. Most of your major assets have some sort of paperwork that gives evidence as to who owns them. An example would be a real estate deed. Another would be a bank account. After you sign and date your trust, you need to change the title of each asset of this type. THIS
IS A BIG DEAL!! This is the secret trick that is the key to avoiding Probate and Conservatorship. After you have changed the title, then the asset may be transferred or encumbered by the signature of the TRUSTEE, which will either be yourself when you are alive and competent, or your Successor Trustee when you are either incompetent or deceased. In either case, the probate court is NOT involved. Funding Instructions. In most cases you will have us prepare the documentation to change the title on your California real estate. We will give you a set of Funding Instructions to follow in changing the title of your other assets. Why Do I Also Need a Will? Your Living Trust will own only your titled assets. Personal property such as your stamp collection will still be owned by you as a person. Your Will gives you the means of leaving specific instructions about who is to inherit your stamp collection, for example. Personal property for which you have no specific distribution instructions is defined by your Will as “residue” and distributed in accordance with the instructions in your trust. For this reason your Will is known as a “Pour-Over Will”, in that it “pours over into the trust” anything not distributed by the Will. You will see language in your Will that references your trust, and this is what makes it a “Pour-Over Will”. Why Is the Trust So Wordy? Trusts have lots of words because no one knows what will happen to you in the future. The trust tries to cover as many situations as possible so you will not be lacking anything when the time for whatever, comes. Most of the words are there for a good reason and reflect the highest professional standards in the drafting of legal documents. Many of the words may never apply to you, but the important point is, they could. Where Do I Store It? The only safe place for your Estate Plan documents is in a commercial safe deposit box. Keep the original signed documents there and use photocopies in your home files and for doing business. Troublesome Terms: Issue: Your lineal descendants, unless otherwise noted, as in a statement including “stepchildren” or other non-blood relatives. “Issue” proceeds from children to grandchildren to great-great grandchildren, down the line. Attorney in Fact: The “attorney in fact” or “agent” can be any person who is legally competent. The person does not have to be a lawyer. When the documents refer to an “attorney in fact”, they are not referring to “lawyers”. Durable: As in “Durable Power of Attorney”, meaning that the document is in effect as long as the person who has signed it is alive, even through a period when the person has become legally incompetent.
Living Trust Checklist: 1. Make certain that the document is a Living Trust, not a Testamentary Trust. A Testamentary Trust is one created by will and does not avoid probate. Of the two, only the Living Trust avoids probate. 2. Be sure you know whether the trust is Revocable or Irrevocable. One is changeable, one is not. Neither one is right or wrong, the question is "which is appropriate for your situation?" Most people start with a Revocable Trust and then if the size of the estate, or the type of assets justify, an Irrevocable Trust might be appropriate, in addition to the Revocable Trust. 3. Be certain that you have the right type of trust: Simple, AB, ABC, Disclaimer, etc. The best trust for you depends on the type of assets that you have, the size of the estate and the ultimate beneficiary of the trust. It is common for the discounted estate plan to offer the "one size fits all" AB Trust. If the size of your estate doesn't justify this type of trust, you will end up paying unnecessary settlement fees to solve an estate tax problem you don't have, while triggering income tax problems that would not have existed but for the Trust. If you're not sure whether the AB will be necessary, use a Disclaimer Trust and let the survivor decide. 4. Be sure that your trust contains the assets it should - not all assets should be owned by the trust! Traditional assets that trigger probate, such as: real property, stocks, bonds, securities and bank accounts typically should be placed in the name of the trust. Qualified Retirement Accounts where income taxes are being deferred should not be placed in the trust. Make sure you have written instruction clarifying the difference for your particular estate plan. 5. Is your life insurance payable to the trust? Remember, life insurance proceeds are estate tax includable. This means that careful planning needs to be done with regard to the life insurance, depending on the size of the estate and the face amount of the life insurance policy. In most cases, life insurance should not be payable to a spouse, but rather payable to a trust and/or owned by an Irrevocable Trust, depending on the size of the estate. 6. Be certain that the removal of Trustee process is understood. When one Trustee cannot act, the other one typically takes over. This is usually a spouse, a son or daughter, or many times, an independent fiduciary, such as a bank or commercial Trust Company. The process for removing a Trustee is one of three
things. One - death; two - resignation; and three - incompetence. It is in the incompetence area that we run into problems. How is it defined? If the document is left without a standard of incompetence, the traditional approach is to have a Conservatorship appointed for the Trustee. The problem with this is a Conservatorship proceeding is one of the elements we are trying to avoid in the creation of a trust. A more appropriate method might be to have some standard less than that, such as the Trustee is no longer able to sign their name or doesn't know what they are signing. This does not necessarily mean the person is incompetent, it simply means that they cannot sign their name. The next question is who is the individual who decides that the Trustee is no longer capable of signing and knowing what they're signing. One of the options is having the alternate Trustee make that decision. That might be appropriate depending on who the alternate Trustee is. However, it may be a conflict of interest. Another alternative might be having family members all vote when the Trustee is no longer able to act. Make sure you have a good relationship with your family members. Another alternative would be to have two independent licensed physicians make the decision. Not the decision that you should be placed under Conservatorship, but rather you are unable to sign your name and/or you don't know what you're signing. 7. Be careful that the Trustee has the ability, if necessary, to qualify your estate for State assistance. Trying to qualify for State assistance is difficult if you don't have the right assets. The State typically ignores some assets and others have a maximum amount of which you cannot exceed. The goal, if we're trying to qualify for assistance from the State, is to own those assets that are excluded, either by retention or by acquisition, and try to reduce the value of those assets that are not excluded. Unfortunately, if the Trustee of a trust is required by its terms to liquidate assets within the trust in order to facilitate payment of bills (such as long-term nursing care), it will work in direct opposition of what we want to actually do. In other words, if the Trustee is required to liquidate the estate, this will create cash. Cash is not ignored in the qualification process. Hence the trustee's instruction may cause depletion of the estate due to the excess cash position. The solution is to include a catastrophic illness provision in the trust, allowing the trustee to acquire those assets which are ignored for qualification. (There is a maximum amount of liquid assets you can have and qualify for assistance) and the goal is to require assets which are excluded, the Trustee's instructions may mandate that the estate be liquidated and lost. 8. Make sure that the purpose of the Revocable Living Trust is not asset protection. Because the trust is revocable and you have access to all of your assets, your creditors likewise can access the assets also. If the goal is to put the assets out of the reach of creditors, then other methods of protection should be considered, such as a Qualified Personal Residence Trust (this will also reduce the estate tax consequence at the death of the Trustor), a Family Limited Partnership (this is a very popular method of not only protecting the estate from law suits, but reducing the
estate tax consequences while maintaining control for the creator or General Partner), and/or some type of a corporation ("S" Corporation, Limited Liability Corporation, or a "C" Corporation). 9. Be certain that you have not only a power of attorney, but the correct power of attorney. There are basically two types of powers of attorney. One is for health care and one is for financial care. The Financial Power of Attorney can be general or durable and either one of those can either be current or springing. Basically the durable is preferable because is endures beyond the incompetence of the principal, (the one who gave the power to the agent). The springing power of attorney becomes effective when the principal becomes incompetent. The immediate power of attorney is effective immediately upon signature of the principal. Which is appropriate for you depends on your circumstances. However, because of its tremendous potential impact, the type of power of attorney and choice of agents should be closely monitored. 10. Make sure that your Health Care Powers of Attorney was not signed prior to 1992. The second kind of Power of Attorney is the Health Care Power of Attorney. This is an important part of your estate planning documents, but be sure the one you have is not dated before 1992. Prior to that date all powers of attorney had an expiration of seven years or less. Obviously, they have all expired now and need to be reissued. The new Health Care Powers of Attorney do not need to have an expiration provision in them. A common companion to the Health Care Power of Attorney is a document called a Directive to Physician, commonly called a Living Will. These documents, if signed prior to 1992, also had an expiration clause of five years in them. Again, the new version does not have an expiration clause. Consequently, if updated and properly signed, will last your lifetime. 11. Make sure that the individuals that you have appointed to serve in various capacities in your documents are still willing, able, and your choice. The person that you choose to be in charge in a trust is called a Trustee. Often times, people will choose Trustees who made sense at the time, but some years later, those Trustees may have moved away, your relationship with them may have deteriorated and/or it might be more appropriate simply to choose somebody else as the Trustee. When you choose the new Trustee, make certain that the companion Will to your document, wherein you name Executors, is consistent with the Trustees. If you have young children, Guardians for these minors should also be nominated in the Will and these need to be reviewed possibly more often than other representatives as these are the people who will be raising your children. As we all know, children's needs change and so does the willingness of people to serve as Guardians. In addition, the agents under your Health Care Power of Attorney and Financial Power of Attorney
should be reviewed and analyzed. Make sure that the person that is making life and death decisions at the hospital is on good terms with you! 12. Analyze the distribution schedule to see if it's still appropriate with your circumstances. Sometimes it makes sense to distribute the assets outright free of further trust and sometimes it doesn't. If you have younger children, it wouldn't be appropriate to deliver the assets to these minors or to young inexperienced children. Assets can be held in a trust for a number of years until the desired age is attained with discretionary distribution for emergency needs such as health or education. Sometimes the purpose for placing the assets in the trust for the benefit of your children is to avoid their creditors. This can be done so that the children have access to the funds but nobody else does, (i.e. lawsuits, divorce situations, creditors, I.R.S., etc.). Then again the appropriate provisions were placed in the trust to hold the assets until the child or children got older and they are older now. This section should be monitored very closely. 13. Protect your estate by obtaining qualified legal advice! The last and most serious mistake (This is a bonus, I only promised thirteen) is assuming that you can readily understand all of this without the assistance of a qualified experienced attorney. Not a paralegal or a financial planner. These are wonderful professionals, but they cannot give legal advice. Whether you already have a trust that needs to be corrected or whether you're just putting your plan together, it doesn't have to be expensive. We can do an estate plan package for as little as $595. And that includes the expense of a law firm that for over twenty years has done nothing but estate planning.