Savvy Families Plan Ahead 5 Years,Because, It's Not What You Earn,But What You Keep!
What is a living trust used
for?A revocable "living"
trust is a vehicle that is very helpful in avoiding probate and
privacy. During your lifetime, you can transfer ownership of your
assets to the revocable trust so that it is owned by the trust
at the time of your death, and thus not subject to probate or
open to public view. What is a living trust?A trust is an arrangement under which one
or more person(s), called a trustee, holds legal title to property
for another person, called a beneficiary. You can be the trustee(s)
of your own living trust, keeping full control over all property
held in trust.
A "living trust" (also called
an "inter vivos" trust by lawyers who can't give up
Latin) is simply a trust you create while you're alive, rather
than one that is created at your death under the terms of your
will.
Different kinds of living trusts
can help you avoid probate, reduce estate taxes, avoid the need
of a conservator of the estate or person or set up long-term property
management. A married couple can use one basic living
trust to handle both co-owned property and the separate property
of either spouse.
To create a basic living trust, you make
a document called a Declaration of Trust, which is similar to
a will. You name yourself(s) as trustee(s) -- the person in charge
of the trust property. Then you transfer ownership of some or
all of your property to yourself(s) in your capacity as trustee(s).
For example, you might sign a deed transferring your house from
yourself(s) to yourself(s) "as trustee(s) of the " Doe
Family Trust " or "John Doe and Jane Doe of The Doe
Family Trust" Frequently
you may not want to state your family name to protect your privacy.
For example, "The XYZ Family Trust.")
Because you're the trustee, you don't give
up any control over the property you put in trust. If you and
your spouse create a trust together, you will be co-trustees.
In the Declaration of Trust document, you name the people or organizations
you want to inherit trust property after your death. You can change
those choices if you wish; you can also revoke the trust at any
time.
When you die, the person you named in the
trust document to take over -- called the successor trustee --
transfers ownership of trust property to the people you want to
get it. In most cases, the successor trustee can handle the whole
thing in a few weeks with some simple paperwork. No probate court
proceedings are required. A-B Trust--Also called a "by-pass trust". The purpose of an A-B Trust is to keep certain assets
out of the surviving spouse's estate so that they would not be
subject to Federal Estate Taxes upon the survivor's death. Typically
up to $1,000,000.00 is placed in this type of trust on the first
spouse's death. That amount will increase through 2010 if not
changed by congress. The surviving spouse receives the income
earned on the assets for life. The trustee is also directed to
pay principal to meet the surviving spouse's need for "health,
education, support and maintenance" during the surviving
spouse's lifetime. On the surviving spouse's death, the remaining
assets are distributed to the beneficiaries selected by the Trust
Maker, typically his or her children. If the combined estates
are $2,000,000.00 million, this technique saves thousands of dollars
in Federal Estate Taxes on the second death. You can pass all your property - in whatever
form or amount - to your spouse (as long as that spouse is a U.S.
citizen), free of any estate tax. This is called the "unlimited
marital deduction." However, the property that has passed
must still be included in the decedent's gross estate in order
for the deduction to apply. If the gross estate does not include
the transfers to the spouse, no marital deduction applies. Although
this seems to be a tempting planning strategy, it can be a double-edged
sword, so watch out for the trap: 1.The assets you have left tax-free to your
spouse are all taxed when your spouse later dies -at higher brackets.
Your surviving spouse would have to remarry and give his/her entire
estate to the new spouse in order to get another unlimited marital
deduction. Most people would rather their children or other
relatives benefit from the estate, rather than a new spouse and
his/her family.
2.You waste your exemption by leaving all to your spouse. To
avoid this result, consider: (1) giving the exempt amount
to your children and the balance to your spouse or (2) placing
up to the current exemption amount in a trust for the benefit
of the surviving spouse. (In estate-planning lingo, this trust
is often called a by-pass trust, a family trust, a credit shelter
trust, or an A/ B trust as set forth above. This type of arrangement
can provide for the health and support of your survivor, but its
assets are not included in the survivor's federal estate when
she or he dies later.)
How does a living trust avoid
probate?
Property you transfer into a living trust
before your death doesn't go through probate. The successor trustee
-- the person you appoint to handle the trust after your death
-- simply transfers ownership to the beneficiaries you named in
the trust. In many cases, the whole process takes only a few weeks,
and there are no lawyer or court fees to pay. When all of the
property has been transferred to the beneficiaries, the living
trust ceases to exist.
Why is it important that I
fund my trust?One of the most important steps for creating
your Trust, is to make sure that you have the property transferred
into the name of the trust, otherwise it will be outside your
trust, and it may require court orders to have the property transferred
into the trust, or worse yet, your estate may have to be probated! Is it a hassle to own property
in a trust?
No. Once the trust is set up and the property
is transferred to the trust, you can make all of the same decisions
that you did before, except you act in your capacity as Trustee
of your Family Trust.
Is a living trust document
ever made public, like a will?
No. A will becomes a matter of public record
when it is submitted to a probate court, as do all the other documents
associated with probate -- inventories of the deceased person's
assets and debts, for example. The terms of a living trust, however,
need not be made public.
Does a living trust protect
property from creditors?
Holding assets in a revocable trust doesn't
shelter them from your creditors, however it can protect your
beneficiaries, such as your children etc. from their creditors,
spouse, government or from their own foolish acts. A creditor
who wins a lawsuit against you can go after the trust property
just as if you still owned it in your own name. Therefore, you
may want to use the Family Limited Partnership along with your
trust. You will also find in the trust documents,
the "Minors or Specified Age Trust Provisions." This provision is used to control when your children, grand children,
or anyone designated in this group would receive the principle
of the assets. This allows you to protect them from themselves
when they are young and foolish, as well as against their creditors
or first spouse, etc. These "Spendthrift Provisions" prevent the creditors from forcing the trust to pay the judgments
rendered against the beneficiary, including even if they filed
for Bankruptcy under the current laws. For example, 1/3 at
age 21, 1/3 at age 25, and the balance at age 30. You will also find in the trust documents,
the "Special Needs Trust " provisions. This provision
is used to think a head for your family. For example, if they
are on Government assisted programs, you don't want to cause their
disqualification for the program, and you don't want your money
going to the Government as well. Therefore, the proceeds from
your trust at time of distribution will be subject to the provisions
of this trust!
If I make a living trust,
do I still need a will?
Yes, you do, however, it is called a Pour-over
Will, which were prepare along with the Living Trust,-- and here's
why:
A will is an essential back-up device for
property that you don't transfer to yourself as trustee. For example,
if you acquire property shortly before you die, you may not think
to transfer ownership of it to your trust -- which means that
it won't pass under the terms of the trust document, or if you revoke the trust, or a spouse repudiates the trust, and accepts
his/her community property share. But in your back-up will, you can include
a clause that names someone to get any property that you haven't
left to a particular person or entity.
If you don't have a will, any property that
isn't transferred by your living trust or other probate-avoidance
device will go to your closest relatives in an order determined
by state law. These laws may not distribute property in the way
you would have chosen.
Can a living trust reduce
estate taxes?
Yes. Especially for large estates can greatly
reduce the federal estate tax bill for people who own a lot of
valuable assets.
One tax-saving living trust is designed
primarily for married couples with children. It's commonly called
an AB trust, though it goes by many other names, including "credit
shelter trust," "exemption trust," "marital
life estate trust," and "marital bypass trust."
Each spouse leaves property, in trust, to the other for life,
and then to the children. This type of trust can save up to hundreds
of thousands of dollars in estate taxes, money that will be passed
on to the couple's final inheritors. You need to understand when an estate becomes
taxable and that all of your estate is included in the calculation
in order to play the game. The IRS
starts by tallying up your gross estate, which includes the value
of your probate estate - the property owned by you at the time
of your death-and the property passing outside probate on your
death. The types of property included are: personal property,
your home, business interests, life insurance death benefits,
deferred compensation, stock options, IRAs, retirement plans,
pensions, 401(k)s and profit sharing, investments, real estate,
bank accounts, jewelry, works of art, jointly-owned assets, promissory
notes, 50% of your community property, mortgages, and cash. Your
gross estate also includes any taxable gifts given away before
your death. (However, gifts under $10,000 per year per recipient
are not counted in the calculation of estate taxes.) Then, the IRS subtracts your liabilities, such
as loans, funeral expenses, debts owed at the time of death, legal
and other estate administration costs and any charitable contributions
made. Subtracted are those assets passing outright to a surviving
spouse because of the rule which permits an unlimited amount to
pass to a spouse with no estate tax burden. What assets are included in your gross estate
and how much each item is worth is closely scrutinized by the
IRS and often is the source of irritating squabbles between the
estate and the IRS. You will also learn how these domestic structures
can be used with any off shore structures that you may choose
to create for advanced asset protection strategies and wealth
creation. There are circumstances in which a sophisticated
estate planning attorney will recommend that a person make large
gifts that require the payment of Gift Tax during one's lifetime.
In these circumstances the impact of making the large gift and
paying Gift Tax earlier results in a significantly lower Estate
Tax later. In appropriate circumstances, the combined total of
both the earlier Gift Tax and the later Estate Tax would be lower
than the Estate Tax alone would have been, with the net effect
that the person can pass on significantly higher values to his
chosen beneficiaries.
What name can I use for
my trust?
You can call your trust any name. Frequently
you may not want to state your family name to protect your privacy.
For example, "The XYZ Family Trust.") Who Will Inherit my Estate
Upon my Death?In determining who
you want to inherit your estate , consider the following legal
definitions: Issue-- Refers to a person's descendents--children,
grandchildren, great-grandchildren, great-great-grandchildren,
etc. Per Capita--A means by which a grantor can
distribute his/her estate so that each of the surviving descendants
will share equally, regardless of generation. Compare with Per
Stirpes. Per Stirpes--A method of dividing an estate
among one's surviving descendants. Each survivor receives only
the amount that his/her immediate ancestor would have received
if that ancestor had been alive at the time of the grantor's death.
The following example may make this clearer: Assume a person has
4 children -- 3 sons and one daughter -- each of whom survive,
and leaves everything to "the children or their survivors,
per stirpes". In that case, each of the 4 children would
receive 25% of the estate and the grandchildren receive nothing..
If one of the 3 sons and the daughter have died, that leaves only
2 of the sons alive. If there is also 1 child of the deceased
son (a grandchild) and 2 grandchildren from the deceased daughter.
Under a per stirpes distribution, the 2 sons each get 25%, the
1 grandchild of the deceased son gets his/her father's share of
25%, and the 2 children of the deceased daughter split her 25%
share and receive 12.5% each. Compare with Per Capita. How do I protect my separate
property status in a living trust ?The law in California requires that a married
couple prepare a property declaration. Therefore, you must state
the nature of the property, and in the event of divorce you will
be able to have your property returned to it's original status.
You can also maintain your own separate trust as well. As a general rule, everything derived from
the earnings of either spouse is shared equally by a husband and
wife. Each spouse owns only one-half of the community property
because the other half belongs to the other spouse. Community
property rules can be modified by pre-marital and post-marital
agreements made by the spouses. See also separate property, commingle,
quasi-community property, and commingle. Moreover, Quasi-Community Property-- is
property acquired during a marriage while not living in one of
the 9 community property states that would have been community
property if the couple were living in a community property state.
As a general rule, everything derived from the earnings of either
spouse in one of the non-community property states will be quasi-community
property. Property. Quasi-community property rules can be modified
by pre- marital and post-marital agreements made by the spouses. In addition, Separate Property-- is property
acquired by either husband or wife before a marriage or after
the termination of a marriage. In addition, property acquired
during a marriage by gift or inheritance by one spouse that is
kept separate and distinct from community property remains separate
property. See also Commingle, Community Property, Quasi-Community
Property and Transmute. Should I keep my trust updated?
It is also very important to keep the trust
current, and this is very simple as far as updating the property,
or adding additional beneficiaries to your trust by way of amendment. DO I NEED A SEPARATE TAX ID
NUMBER FOR MY TRUST?You will generally won't need to obtain
a separate Tax ID number for the "Trust" until it becomes
irrevocable. Savvy Families Plan
Ahead 5 Years,Because, It's Not What
You Earn,But What You Keep! | 
