Estate Planning and Probate: Part Four

Estate Planning and Probate:  Part Four

Although I am dismayed as to why my parent's attorney has not recommended a living trust to them, I have determined that dealing with their will, probate and the estate will be manageable.  However, almost any estate will benefit from using a trust in the distribution of assets following death reducing the burden on the executor.  To put it simply, the trust is used to incorporate a person's wealth for use during their life and to provide for adequate management (usually distribution) upon death.  Since the trust is considered as a person, for legal purposes such as making payments, owning assets, and buying or selling property, it goes on after death of the original owner by naming a trustee executor, the equivalent of a CEO, to continue with its management.  We will now discuss how that is done.

What is a Living Trust?

A Revocable Living Trust aka Living Trust aka Family Trust is a way to turning over assets to legal independent entity that is considered separate from you as an individual.  In other words it is a legal document that holds title or ownership to the property and assets you give it.  You are transferring your assets from yourself or family and titling them in the name of the trust.  This is much like how setting up a corporation creates a separate legal entity from the people who run or manage it.  People can sue the corporation and perhaps put them out of business but the employees or managers of the corporation personal assets are protected.

By definition a corporation is, "A body that is granted a charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members."  A living trust is similar to a corporation in that it is a separate entity that requires management, typically you, who retains unlimited access to and full control of the assets during your lifetime even though the trust holds title.  Of course, depending on size, you can manage the trust with any size of a management team you feel is justified, and people often employ lawyers and financial advisers in that capacity.

A revocable living trust looks very much like a will as its purpose is detailing and instructing how your estate is to be handled at your death.  The difference between a will and living trust is how they are handled legally at the time of death.  Note that a living trust can also be non-revokable.  In which case it would go on with continued management and other purpose, like charitable or political foundations, or cease if all assets are lost, as in a bankruptcy.  Suffice to say that trusts come in various sizes and shapes to suit a wide variety of causes.

Why do we want at Living Trust?

Just as with a corporation a trust has to own title to any property or asset.  This means that you have to have legally transferred the title of your assets into the trust name which is called "Funding the Trust".  For example, you would change the owners name on your trust assets such as your home, IRA, 401K, life insurance policies, bank accounts from, say, John and Jane Doe to the trust name of "John and Jane Doe, Trustees of the Doe Family Trust".

The trust avoids probate because you have designated trustees and laid out in detail who will manage the assets.  If a spouse dies the surviving spouse as the surviving trustee receives full control to buy, sell, borrow or transfer assets titled in the trusts name.

Who should you have a Living Trust?

A living trust should be created by persons with two minimum desires.  First are those with significant assets for distribution who wish to avoid distribution arguments or challenges.  Although a mere will can be detailed to a great extent, wills are not as legally binding as are trusts, since they are not regarded as legal entities in and of themselves.  Hence they can be contested.

Second, as has been stated many times, it is for those with a reason to minimize probate and related costs to probate.  The trust, as a legal entity, takes the place of probate as legal method to oversee the distribution of the estate as defined in the document.  There are other reasons people might wish to fund a living trust, but these are the primary ones.

Referring back to the story about when my brother died in an auto accident you'll understand the need for a living trust.  When a loved one passes there is often a knee jerk reaction to get the pain over with as soon as possible from the people who loved the decedent.  Unless our dying wishes and estate distribution are spelled out as succinctly and in an uncontroversial manner, we may hurt the ones we love and have governments and lawyers, not loved ones, benefit from our passing.

The U.S. legal system views a living trust as a very sound legal document that manages passing assets on to whomever you designate without contention.  This is possible because your name has been taken off of the assets thus upon your death there is no need for the courts to remove your name from the assets for legal transfer.  A will on the other hand can be contested as it is considered just an expression of your wishes and will need to be vetted by the courts before assets can be passed on to your heirs.  Take, for example, a house.  When a trust owns a house, the trust executor can use trust assets to continue paying mortgages and taxes.  As the deceased, you can no longer do this from a personal (non-joint with no survivor) account.  In a trust the house can be sold and the proceeds go into the trust for disposition.

Another example might be of a family car that you want to give to one of your children.  If you keep the car in your name you have legal and liability obligations that tie you to that asset.  If you are gone you cannot sign and date any transfer.  Thus, it costs money and paperwork for the court to retitle the car in your child's name before terminating other legal ties to that property.

A living trust is very important because it:

 

• Unlike a will assets titled in the name of trust do not have go through probate.  This can eliminate the need for surety bonds or co-executor representation required in some states for out-of-state executors.
• It will prevent the courts from controlling your assets due to incapacity, where you may still be living but otherwise unable to manage your assets.
• It gives you very specific control over how you leave the assets such as to your children, grandchildren, family, friends, church and charities.

When there are five or fewer beneficiaries the Federal Deposit Insurance Corp. insures each beneficiary up to $250,000.  A trust naming four beneficiaries for example would be insured for $1,00,000.

The living trust is a written legal document that allows you, as the trustee(s), unlimited access to and full control of your assets during your lifetime.  It also enables you to name a successor trustee/executor to pass property on after your death to family, friends and/or loved ones.  In allowing you to appoint someone you make certain your property goes to the ones you choose after your death.

Summary

Just as governments and corporations have a defined line of succession set out when they are created, in the trust you set out a defined set out of successor trustees to act for the trust.  The successor trustee is tasked with managing the trust assets in manner detailed in your trust document.  This is much as the executor of a will would operate, but more specific, legally binding and thus easier for the trustee to assume control.  Note too, that one may assign major assets to a living trust and have a will for minor assets.  When heirs are listed in co-joined documents like this, it lends great credence to the legality of the will, ensuring the court will not alter or allow a successful challenge of the will.

This is very important and really simplifies the handling of the estate for the trustee.  For example, in Virginia this executor/will process is supervised through Commissioners of Accounts, and usually takes about a year.  In many cases, it is desirable to avoid some of the procedures and costs of probate which a living trust helps avoid.

How does a Living Trust work?

ust as with a corporation a trust has to own title to the property or asset.  This means that you have to have legally transferred the title of your assets into the trust name which is called "Funding the Trust".  For example, you would change the owners name on your trust assets such as you home, IRA, 401K, life insurance policies, bank accounts from the name of John and Jane Doe to the trust name of "John and Jane Doe, Trustees of the Doe Family Trust".

The trust avoids probate because you have designated who the trustees of the trust are and laid out in detail who will manage the assets.  If a spouse dies the surviving spouse as the surviving trustee receives full control to buy, sell, borrow or transfer assets titled in the trusts name.  Just as governments and corporations have a defined line of succession set out when they are created, in the trust you set out a defined set out a clearly defined set of successors trustees to act for the trust.  The successor trustee is tasked with managing the trust assets in manner detailed or made know in your trust document.  This is much like the executor of a will but much more specific, legally binding and easy for the trustee.  This is very important and really simplifies the handling of the estate for the trustee.  For example, in Virginia this executor/will process is supervised through Commissioners of Accounts, and usually takes about a year.  In many cases, it is desirable to avoid some of the procedures and costs of probate which a living trust will avoid.