* Avoid probate
• Manage and protect assets through disability
• Eliminate the need for a court-appointed guardian
• Avoid living trusts hype
AVOID THE BALONEY, PUFFERY, AND SNAKE OIL
OR HOW TO BEST UTILIZE LIVING TRUSTS
FOR YOURSELF AND YOUR HEIRS
A properly arranged living trust can be an invaluable estate and financial planning tool that ultimately insures your assets will reach heirs as quickly and cost effectively as possible. Unfortunately, this is more difficult to accomplish than it should be. The misinformation surrounding living trusts is staggering. Many trusts are poorly written, shamefully mismanaged, and improperly used. But even when correctly planned, a
living trust is not necessary or beneficial for everyone. How do you decide if it's the right thing for you? And how do you do it right? Get informed.
In this comprehensive book, attorney Martin M. Shenkman guides you through the confusion to gain an understanding of the process that will help you avoid pitfalls, taxes, liability manipulation, and wasted money. Here are steps to:
• Minimize probate abuse
• Minimize living trust abuse
• Protect yourself from the legal and financial ravages of disability
• Distinguish the hucksters from the real expert advisers
• Use a living trust as part of a complete estate plan to reach all your personal goals
• Avoid the need for a court-appointed guardian
• Save taxes
• Decipher documents
. . . and much more. Using sample checklists, and numerous real-life examples, Shenkman provides a balanced view of living trusts that will clarify what you do and don't need.
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About the Author
MARTIN M. SHENKMAN CPA, MBA, JD, is a practicing attorney specializing in tax laws and investments. He is frequently quoted in the New York Times, the Wall Street Journal, and the Bottom Line. He lives in New Jersey, and is also the author of twenty-five books.
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Note: The figures and/or Tables mentioned in this chapter do not appear on the web.
WHAT IS THE COMPLETE LIVING TRUSTS PROGRAM?
SKIP THE PUFFERY AND SNAKE OIL
A revocable inter vivos trust (sometimes called a living trust or loving trust) can be an effective estate and financial planning tool although too much of what you read is simply baloney, puffery, and snake oil. The cover of a widely used brochure about understanding living trusts screams the following in boldface type: "How You Can Avoid Probate, Save Taxes and More." You can avoid probate without a living trust, and in most states and for many (certainly not all and, maybe, not even most) estates, avoiding probate is just no big deal (that doesn't mean you don't need to protect yourself -- just that avoiding probate isn't how you need to protect yourself). As a consumer, you're in a tough spot. The probate process can abuse your estate. It is not an exaggeration to say that many estates are grossly overcharged and receive inferior service from professionals. Likewise, an unscrupulous living trust industry has burgeoned to capitalize on consumers' fears of the probate process. Most trusts are poorly written, the planning undertaken is inadequate, and the misinformation (often intentional) surrounding them is shocking. In addition, people often pay inflated fees for substandard work.
What can you do? Get informed. If you understand how the probate process can abuse your estate, heirs, and loved ones and how the living trust boiler shops play on these fears -- if you understand what is going on -- you can protect yourself. This book will help you accomplish these goals. With the information in this book, the Law Made Easy Press web site (www.laweasy.com) sample forms, and the books recommended for additional information throughout this book, you can protect your estate from avoidable problems.
Since everyone seems to like short and simple lists of key points (most how-to books are down to single-digit lists of seven to nine steps to accomplish any task!), try the following procedures.
Seven Steps to Minimize Probate Abuse
- Never name a lawyer, accountant, or other professional (except an institution) to be executor or trustee unless you have had a long and close trusting relationship with the person. Anyone you name can always hire an attorney, accountant, or financial planner. If the professional pushes himself, go elsewhere.
- Never pay (nor should your heirs) any lawyer or accountant for probate work except on an hourly basis and only when you receive a detailed bill that lists who performed the work, the date it was performed, the time spent, and the price. Abuse by professionals who have detailed invoices is significantly less than by those who make up bills after the fact based on what the professionals think they can get. If the professional cannot provide itemized bills, go elsewhere.
- You must have a comprehensive estate and personal plan. No one approach, technique, or document can solve every problem. This means for everyone a minimum of powers of attorney, living will, and will, and for many a living trust. It means reviewing the title (ownership) of your assets, insurance coverage, investment decisions, and liability risks. Any professional who takes a narrow view or claims to be able to do everything, without the involvement of other professionals, isn't for you. Go elsewhere.
- Tell your family that they are not legally obligated to use the lawyer who wrote your will. If the lawyer who wrote your will insists on being retained, go elsewhere.
- Much of probate work is routine for someone with backup. Hire professionals who have staff at lower billing rates, or who have either automated their work or will bill at lower rates for work performed at a simple level. If a professional cannot reasonably address these issues, go elsewhere.
- The more administrative matters your heirs handle, the cheaper the professionals' fees should be. If they don't bill this way, don't use them. If any professional discourages you or your heirs from handling routine matters when you are capable of doing so (this doesn't mean court proceedings or complex legal and tax matters), go elsewhere.
- There are no unexplainable mysteries. Probate is not the Twilight Zone. If the attorney starts the Rod Serling routine, fire him! Some of the tax and legal concepts may be complex, but you should always receive general information (via phone calls, copies of letters, etc.) about everything that happens. If you're not being informed, complain and if there is no response after a reasonable time, fire the professionals. If your professional doesn't communicate, go elsewhere.
Seven Steps to Minimize Living Trust Abuse
- Living trusts are not the answer to every problem. Anyone who advocates them as the panacea for all your worries is selling snake oil. Go elsewhere.
- Living trusts don't save taxes (although as explained in detail in later chapters, lots of tax planning can be included in your Comprehensive Living Trust Plan). Any professional or salesperson who tells you they do is wrong. Go elsewhere.
- Estate planning to avoid taxes, to protect yourself in the event of disability, and to help your heirs and loved ones is a way to achieve positive goals. These are steps to take for "life," not just for death. Do not trust anyone who plays into your fears emphasizing the evils of probate while ignoring the overall picture. Go elsewhere.
- What is the background of the person who is telling you about living trusts? Only an attorney whose practice is largely devoted to estate planning (notice that I didn't say living trusts) and who has substantial experience in estate planning can provide the services you need. This doesn't mean that you can't save a lot of money doing much of the work on your own (which is what this book will help you do); it means that when you're buying services, buy from an expert. If the person assuring you that a living trust is critical is an insurance salesperson or a living trust company sales representative, go elsewhere.
- There's no free lunch. You attend a free seminar, eat free doughnuts, get a free pitch on the virtues of living trusts, and then get to have a free consultation with an estate planner. How are these people making their money? They make their money on the small percentage of people who actually retain them. Do you want that to be you? There is only one way to pay for all this "free" stuff. Everyone is simply billed more than the work costs to do to cover the extra expenses. Often, the documents produced are boilerplate -- virtually the same for everyone. The planning is often limited. How else could these people pay for expensive newspaper advertisements, lots of doughnuts, and a hundred free consultations? Unless this is really where you want to be, go elsewhere.
- Anyone recommending a living trust should give you a balanced view. What are the problems with living trusts as they pertain to your personal situation? What alternatives may better achieve your goals? If the perspective isn't balanced, go elsewhere.
- If the person recommending the living trust also wants to serve as trustee, make sure you have had a long, close, and trusting relationship with the person; otherwise, go elsewhere.
Avoiding probate is not likely to be your primary goal. Your true goals probably include assuring that most of your assets reach your intended heirs as quickly and cost-effectively as possible. Avoiding probate is only coincidentally related to accomplishing this goal.
It is not the probate process that you need to avoid, but rather the abuses that can occur.
NOTE: Too many professionals involved with estate planning and probate view your estate plan as their retirement plan. You need to understand how to protect yourself and your loved ones. This book will tell you how.
EXAMPLE: We recently investigated a probate matter handled by another lawyer, a longtime practitioner with what appeared to be a respectable reputation. The attorney had prepared a will that was an instance of complete malpractice. No contingent beneficiary was named (if the one person named to receive assets had died, the estate would have been distributed through intestacy; the will would have been worthless). No tax planning was done, which ultimately would cost the family 50 percent of the money involved (50 percent of what was left after the lawyer finished pillaging the estate, that is). This situation could have been easily avoided through a simple trust, or even by the naming of a successor beneficiary. The attorney did take great care, however, to name his nephew as executor. The nephew then appointed the uncle as attorney to represent the estate. The two of them took fees in excess of 7 percent of the estate, plus extras. The nephew then hired his wife as the broker to sell the decedent's house. All told, the lawyer 's family took 12 plus percent of the estate. Their combined fees were about 20 times what the hourly cost should have been for the little work they did. Sound bad? It was worse. They did almost nothing properly. They withheld distributing estate assets for more than 1 1/2 years. Other than increasing their fees, it was hard to identify any reason for the delay. The decedent's securities were all liquidated and the money placed in CDs at low interest rates for the entire period. During this time period, the country experienced one of the greatest bull markets in history. The family lost out on it all. Bank charges and other avoidable expenses were regularly incurred. The bills for legal services and the listing of services purportedly provided by the executor were so contrived as to be silly. Does this sound bad enough yet? Well, there's more. We went to court to object to what had been done. The court not only didn't care (gotta protect the old boy's club, ya know!), the court permitted the attorney to continue billing the estate for the time supposedly spent in court (which, mind you, was for the sole purpose of objecting to the attorney's family pillaging the decedent's estate). It was also enlightening to watch how this attorney used his time in court. The attorney sat in the court waiting for the case to be called for three hours, all of which he billed to the estate. He couldn't have brought other work to do while waiting, that would have been too fair. So he sat and did nothing while his "clock ticked" at the expense of the family. The cost of challenging these abuses is usually expensive, with no assurance that the court will be any more objective or fair than the abusive attorney, making a challenge generally fruitless. The result -- unethical professionals can pillage your estate if you don't protect your loved ones.
Again, a living trust, contrary to anything living trust hucksters tell you, is absolutely not necessary to save estate taxes. A living trust provides tax savings through including a bypass (applicable exclusion) trust and a marital deduction or marital trust (QTIP or QDOT). These techniques can be more easily accomplished with less expense through your will.
This book explains how to use the living trust technique as part of a comprehensive estate plan to achieve your personal goals. It will show you how to distinguish hucksters from helpful expert advisers.
EXAMPLE: A client came to me for a consultation. Her son in California was concerned about an estate plan for his parents. In good faith and with the best of intentions, he hired a firm specializing in living trusts to help. They prepared a complex package of documents, including a lengthy "A-B" living trust. The "A-B" living trust indicates the bypass (applicable exclusion) marital trust estate planning arrangement (explained at length in Chapter 9). What were the facts in this case? The father had Alzheimer 's disease. The mother was in her 80s. The entire estate was under $400,000. An "A-B" living trust was completely unnecessary. The family needed elder law planning to address their current situation. The basic estate planning documents they had before the "living trust experts" became involved probably would have sufficed. What did this package of worthless documents cost? A cool $5,000. Repeated calls for three weeks to the firm that prepared these documents failed to reach an attorney. This client was one of far too many people scammed by the living trust industry.
EXAMPLE: Another client inquired about a family limited partnership. Why? Only about 18 months before, he had purchased a living trust "plan" for about $2,500 from a firm that advertised on the radio. The fancy leatherette binder with his family name engraved in gold letters was a sure sign of problems to come. A glossy cover is usually a sign of less inside. At age 48, the client did not need a living trust (see the following discussion). What was necessary? What were the assets in this client's estate? Three rental apartment buildings. Why was the client inquiring about a family limited partnership? He had heard it would protect his assets against lawsuits. He had just lost a lawsuit over a tenant injury at one of his buildings. Since he and his wife jointly and personally owned all these properties, their buildings and assets were reachable by the tenant. Instead of having spent money on a living trust, the "lawyers" he hired should have formed a separate limited liability company for each building. This might have succeeded in insulating each property from the others and insulating all the buildings from their other assets (e.g., home, mutual funds). The living trust did no harm, but it failed to address the most important and obvious (to any skilled attorney) needs.
What's the lesson to learn from this example? Whatever you do, don't buy a living trust from anyone who sells living trusts. If you believe, after reviewing the discussions in this book, that a living trust would benefit you, as it likely may, retain a skilled estate planner. Never hire anyone who claims to be a specialist in living trusts. It makes no sense and you will never receive the quality legal work you need. Then again, don't forget the probate horror story discussed earlier. You must still protect your loved ones from abuses of unscrupulous professionals involved in the probate process. You can use the information provided here to substantially reduce the costs of legal fees and improve the quality of your planning by being an informed consumer. That is the goal of this book.
WHY I HAVE A LIVING TRUST
When someone appears to be selling you something, don't you wonder whether the person even uses it? Do those buff models on late-night cable really use those weird abdominal machines?
AUTHOR'S STRATEGY: Do I have a living trust or am I just trying to sell a book? While I've never written about my personal legal arrangements in any book before, all the hype about living trusts made me want to do it here. I hope that providing this information will give additional credibility to this book and enable you to resist overstated confidence in the advertisements, unscrupulous attorneys, living trusts salespeople, and the like. So here it is. I have a living trust, so do many members in my family. But don't jump to conclusions. My family's living trusts are used differently from most living trusts I see in my law practice.
My living trust is only one component of my estate plan. If you have or obtain a living trust -- that's all it should be for you. A living trust can be the centerpiece of your estate plan, with all the other documents and planning coordinated with it. Even so, it is only one of many documents you need, and you can obtain most of the benefits you need from these other documents without a living trust. I have, as should you, a will, a durable power of attorney, and living will/health care proxy (see Chapter 7). I've prepared an emergency medical form for my children (if you have minor children you should, too). My law practice is organized as a professional corporation (although under current law I may have chosen a limited liability company, a form of entity that didn't exist when I started) (see Part Five).
To achieve the most effective and beneficial use of a revocable living trust, you should consolidate as many personal assets as you can with a single major institution. That institution is then named as successor co-trustee (i.e., to serve as trustee after you, along with a family member or close friend). This approach assures a simple, quick, efficient, and safe transition in the event of disability or death. It assures that assets will not be dissipated by a dishonest or careless family member or friend because the institutional trustee will control the finances. It assures that unethical professionals will not be able to pillage your estate since they will be subject to the oversight of the institution. It assures that you don't overly impose on the time of family and friends, all of whom are busy with their own families, lives, and careers. The institution as co-trustee can handle much of the paperwork and administrative burden.
NOTE: If your trust names an institution as a trustee, be sure to have the lawyer include a provision giving the beneficiaries or a specially appointed person (called a "trust protector") the right to change institutions periodically. This will provide the leverage to encourage the institution to act responsively. It also provides the flexibility to appoint another institution if necessary.
AUTHOR'S STRATEGY: I've used the same approach for my living trust. Almost all of my family's bank, brokerage, and other accounts have been consolidated at one institution. This assures that my family and friends can direct their time and effort where it's most important -- to assure the safety and security of myself and my family, and to address the personal issues that an institution can't handle. I'd much rather have family and friends focus on personal issues than waste their limited time on administrative matters which a bank or trust company can do a better job of anyway.
You should understand what living trusts will and will not do and realize what you'll be getting. Unlike my approach, the way most people use living trusts won't achieve more than a properly planned durable power of attorney, living will, and will (all of which you need anyway). Even if you do it right, a living trust is not always worth including in your estate plan. A living trust is an effective and useful estate planning tool. However, unless your estate is substantial or your income large enough to absorb the cost of documentation ($1,000 to $2,000) without concern, the benefits must outweigh the costs. Chapter 2 provides a comprehensive listing of the pros and cons of living trusts. To analyze the benefits, however, you need to understand the contents of this book. So what's the bottom-line answer? Living trusts are a useful estate planning tool. If the cost is not significant to you, use them. If the cost is significant, weigh the pros and cons to determine whether your personal circumstances warrant the expense. For some it will. For many, it will be better to spend the money on a vacation instead of a lawyer 's fee to draft a living trust. Because hype and misinformation abound, everyone should understand what a living trust will and won't do.
AUTHOR'S STRATEGY: There is an obvious difference between my using a living trust and your family using one. I didn't have to pay a legal fee for the trust document, I did it myself. Unless you are a lawyer or someone in your family is a lawyer (but then again your relative would probably charge!), you probably will have to pay. Thus, while living trusts can be a useful part of an overall plan, the benefits need to outweigh the costs. I had no costs. What costs will you incur? I like and use living trusts to protect my own family, but I am not selling you a bill of goods: you must make your own decision. This book will give you the knowledge to do so.
THE COMPLETE LIVING TRUSTS PROGRAM
The Complete Living Trusts Program provides a comprehensive treatment of living trusts with a balanced view of the topic, not the puffery heard in the market, or the "anti-living-trust" view many planners espouse. A revocable living trust can be a useful estate, tax, financial planning, asset management, and personal planning tool. A living trust will only achieve your goals, however, if you use it as a cornerstone of a comprehensive plan, not as the sole, or even primary, solution to your needs, as so many living trust books and seminars suggest. The Complete Living Trusts Program described here integrates a complete range of tax planning, in phases, so that you need only select the level of complexity appropriate for your circumstances. The program also explains, again for circumstances of varying complexity, what additional documents you require and how to integrate them into your living trust plan. For the simplest estates, this may require a will, power, and living will. For larger estates or estates with more complicated circumstances, additional trusts for insurance and minor beneficiaries may be warranted. For extremely large and complex estates, a broad range of sophisticated tax, asset protection, business, and other documents and planning steps may have to be integrated. Again, the objective of the program is to help you select the level of sophistication that best meets your needs with the least cost and least number of documents. To better understand the phases of the Complete Living Trusts Program, an overview of living trusts is first presented.
WHY SET UP A REVOCABLE LIVING TRUST?
The reasons to set up a revocable living trust for yourself include providing for management of your assets in the event you need assistance or are disabled and avoiding probate (or at least ancillary probate in states other than the one in which you permanently reside). Estate tax benefits are generally not a primary goal when you set up a trust for yourself. This is not to say, however, that such a trust will not provide tax benefits.
EXAMPLE: You set up a living (inter vivos) revocable trust for yourself, naming yourself as the trustee during your life and prior to your disability. On your death, the first $650,000 (1999 figure, scheduled to increase to $1 million by 2006) of your assets held in your trust are transferred to an applicable exclusion trust (formerly referred to as a credit shelter trust) for the benefit of your surviving spouse and children. Where the combined estate of you and your spouse exceeds $650,000, this approach can reduce, and perhaps eliminate, any federal estate tax. However, these tax benefits do not require you to use a living trust. They can be provided under a will (see Chapter 2).
WHAT IS A REVOCABLE LIVING TRUST?
A living trust is a trust that you set up during your lifetime. Unless and until you become disabled, you retain complete control over the assets in the trust while you are alive. For tax purposes, the trust is generally ignored and all income and deductions are reported on your own Form 1040 tax return (see Chapter 20). If you become disabled or infirm, a successor (alternate) trustee takes over managing your assets (although it can be preferable to have that additional trustee serve as a co-trustee before you become disabled). On your death, provisions that serve the same purpose as a will apply to govern the disposition of your assets. Since there is no current tax benefit in setting up a living trust, you can use a flexible format to meet a broad range of personal objectives. This section will explore the benefits, as well as possible drawbacks, of using living trusts.
In the appropriate circumstances, living trusts can be an ideal vehicle to accomplish many essential planning goals. In inappropriate circumstances, they can be a waste of time and money, and may create unnecessary hassles and complications in managing your affairs. In the worst-case scenarios, you may use a revocable living trust when another technique would have been more appropriate. The results could be disastrous as one of the case studies above illustrates.
Before deciding whether to use a trust, you should be fully aware of all the benefits and costs of establishing one. The following discussion will summarize these factors and dispel the myth that a living trust can solve all your problems. It won't.
CAUTION: The most important point to remember is that no single estate planning step can solve every problem. Whatever the hot item of the day -- family limited partnership, living trust, charitable remainder trust, or any other technique -- no single step can possibly address all your needs. The only approach to use, no matter how much or little money you have, or how simple your situation may be, is a comprehensive estate, financial, insurance, and tax plan. Nothing less will provide you with the comfort that you have best addressed all the needs of you and your loved ones. A comprehensive plan doesn't have to be a big deal. A single consultation with a skilled estate planner may be all you need to map out your overall plan. If your means are limited, a bit of creativity and good judgment in identifying essentials can limit the costs. If your estate is large or your circumstances complex, you can use this initial meeting to outline a plan that you can then implement in phases with the necessary professionals.
REQUIREMENTS FOR A VALID TRUST
The discussion of revocable living trusts involves the use of the italicized terms in the following sentence. A trust is generally formed when a person called the "grantor" transfers assets, called "trust property" or the "res," to a person who will manage the property in trust, called the "trustee," to hold for the benefit of the beneficiary, the person for whom the income and principal of the trust is to be used, in accordance with the purpose, or "intent," of the trust. These terms refer to basic requirements for such trusts that are described in the subsequent paragraphs.
The person who transfers the trust property to the trust is the grantor, also commonly called the trustor, settlor, or donor. The grantor must generally be the owner of the property that is transferred to the trust. The grantor must also have the proper legal capacity to sign the trust agreement and to transfer assets to the trust. This means that the grantor must be of sound mind and have the intent to form a trust. This intent of the grantor to form a trust must be manifested, generally in the form of a written and signed trust agreement.
In the context of a living trust, you are almost always the grantor. Occasionally spouses may be co-grantors jointly funding one trust. Successor trustees might include your spouse (if not named as an initial co-trustee), a child or other trusted friend or family member, or institution.
AUTHOR'S STRATEGY: I've used a major financial institution as a co-trustee with a list of family members and friends.
This is the principal or subject matter of the trust. It is also called the trust "res." Property is transferred to the revocable living trust on formation when a funded trust is intended. A living trust, in contrast to most irrevocable trusts, is often formed without any assets and with no intent of transferring assets to it for some time. In other cases, you may establish a living trust to receive property at some future date, but none presently. This is called an unfunded or standby trust (see Chapter 6). When you set up a standby trust, you form the trust now but do not transfer the intended assets until some future date, such as your disability (via a durable power of attorney) or on death (via a pour-over will). Chapter 6 includes a discussion of funded trusts versus unfunded trusts.
AUTHOR'S STRATEGY: My living trust is funded with assets now. In the event of an emergency or disability, it is difficult to get the full benefits of a living trust unless you have consolidated your assets and funded it before the crisis occurs.
In most living trusts, a formal legal description of the trust property is attached to the end of the trust as a schedule. Merely listing the asset in a schedule attached to a trust is not really enough to transfer ownership of that asset to the trust. For real estate, a deed must be filed transferring ownership (title) of the property to the trust. For personal property, a bill of sale may be required (see Chapter 6).
The trustee is responsible for managing and administering your trust. As the initial trustee (or co-trustee), you should make a declaration -- often by signing the trust agreement -- that you accept the trust property as trustee. Specify successor trustees should you become unable to serve as a trustee. The choice of trustees is not always simple and obvious and can change at different points of complexity in the trusts being used, to meet certain legal requirements, and so on. The selection of the trustee or trustees (called co-trustees when two or more persons serve simultaneously) is discussed often in this book. In some states, you might need a co-trustee (or beneficiaries other than yourself ) to avoid a legal snag called a merger that could invalidate your trust. Consult with your estate planning attorney to address this possibility.
AUTHOR'S STRATEGY: I'm my own initial trustee. A bank and a list of family members and friends will serve as successor trustees. Thus the bank and one family member or friend will always be serving. Having someone serve as a co-trustee with you, from the beginning can, however, be a better approach for many.
The beneficiary is the person, or persons, designated to receive the benefits and advantages of the property transferred to the trust. In most revocable living trusts, you are the initial beneficiary. However, you may name certain key family members or friends as additional beneficiaries in the event of your disability. This is important. If you are disabled and cannot support these important people and fail to make provisions, how will they be provided for?
Intent of Trust
Every trust has a purpose, or intent, that motivates the grantor to set it up. At minimum, you must intend to create a fiduciary relationship as to certain assets for yourself and other beneficiaries of the trust.
Apart from the obvious requirement that the intent must be legal, there are few restrictions on the grantor's intent. It can relate to:
- Benefiting a particular beneficiary (yourself, your spouse or partner, your child, a cousin, your favorite charity, or some combination of these).
- Providing for the management of certain assets (real estate, mutual funds, stock in a closely held corporation).
- Achieving certain tax benefits such as a bypass trust to preserve your $650,000 (1999) applicable exclusion amount, and a marital trust to utilize the estate tax marital deduction.
You can use a living trust to achieve all of these objectives, as well as others. The intent of the trust is usually spelled out in detail in the trust document. Where the trust document is silent, state laws and court cases may fill in some of the blanks.
Steps That Are Not Necessary to Make Your Trust Effective
A written trust document is required to transfer realty to the trust. Practically speaking, however, a written trust agreement should be used in all instances. Few of the many benefits you want will be achieved without a comprehensive written document.
Although the grantor and trustee must sign the trust, there is no requirement to deliver a copy of the trust agreement to anyone for it to become effective. Practically, however, a copy of the trust, or a memorandum of trust (explained in Chapter 6) must be delivered to those banks and other persons who will work with the trust. Another practical consideration is that if your successor trustee (the person, or persons, serving as trustee in the event of your disability or death) does not have a copy of the trust document, assuming control when necessary will be much more difficult. This lapse could defeat one of the most important benefits of a properly structured living trust, seamless management through your illness and disability. Many people prefer to have successor trustees sign the original trust document agreeing to serve.
AUTHOR'S STRATEGY: I've given organized copies of all my key documents to my bank, accountant, parents, and my closest friend. There is nothing deep, dark, and personal in any of the documents (if only life were so exciting). But I know from experience with clients that when an emergency strikes, the people you are counting on to act, often cannot find the documents and don't know their responsibilities. To avoid this, I've also reviewed with several of the previously named people what the documents do, what their responsibilities are, and so forth. It takes very little time and costs nothing, but it can make a tremendous difference.
There is no requirement to transfer any assets to your living trust. This is called an unfunded trust. However, the responsibility may then fall on a successor trustee to transfer assets in the event of your death or disability. This delay would also defeat the objective of seamless management through your illness, disability, or death (see the discussion of funding in Chapter 6).
FIVE PHASES OF LIVING TRUSTS
The following information will help you select the trust that best suits your goals and circumstances. Table 1.1 is a summary chart illustrating the levels of sophistication in the Complete Living Trusts Program. The following sections explain each phase in greater detail. The later parts of this book then expand this information by describing the steps in each phase, the tax issues to consider, the planning vehicles and entitles you may need, and so forth.
Foundation Living Trust
This is the basic living trust document. Many of the provisions and decisions in this living trust must be addressed for any estate regardless of size or complexity. The living trust agreement used as part of the Foundation Living Trust for smaller or simpler estates, as well as the ancillary documents required (power of attorney, living will/health care proxy, and pour-over will), are used as the building blocks, or foundation, for all other more comprehensive living trusts, hence the title "Foundation Living Trust." The Foundation Living Trust is intended to provide for management of assets in the event of disability, minimization of probate issues, and so forth.
Just-in-Case (Disclaimer) Living Trust
Most living trust programs and estate planning documents generally assume that if your combined estate (i.e., your estate added to that of your spouse) is less than the $650,000 (1999) applicable exclusion amount, tax planning (typically in the form of a bypass trust) is not necessary. This is a potentially costly, and often inappropriate, conclusion. Using this gauge, you might be able to ignore tax planning if your estate is estimated at about $600,000. However, what if you underestimated the value of certain assets? What if you forgot to include a particular asset? What if you inherit assets, win a lottery, or pick a hot stock? What if Congress changes the law and reduces the applicable exclusion amount to raise revenues? Will inflation alone push your estate into a taxable bracket? If your estate then exceeds the applicable exclusion amount, a tax will be due. In some cases, the solution is a disclaimer bypass trust. This distribution scheme provides that all assets are distributed to the surviving spouse outright. If your surviving spouse disclaims (files the required documents with the probate or surrogate's court within nine months of your death), then the assets disclaimed are distributed into a bypass trust. This preserves the benefit of the applicable exclusion and provides the opportunity to save estate taxes just in case it becomes necessary. Hence the title "Just-in-Case Living Trust."
The disclaimer bypass trust is important for more than estate tax planning. If the surviving spouse remarries, assets held in a bypass trust will have a significant measure of protection from the new spouse. The trust will assure that the remaining assets will ultimately be distributed to your heirs, not to the new spouse. If your surviving spouse is disabled, the assets can be managed in the structure of the bypass trust. In the event of a lawsuit or claim against your surviving spouse, the assets may be protected within the trust. For all these reasons, and because a word processor drastically reduces the time it takes to do the work, attorneys rarely, if ever, should prepare a living trust or will without at least a disclaimer bypass trust.
NOTE: If you have an existing trust without a bypass or at least a disclaimer bypass trust, call the lawyer who prepared it and ask why. If the answer isn't satisfactory, it may be a warning about the quality of the rest of your trust and plan. Consider at least having a consultation with another estate planner to determine how well you are protected.
Family Tax Planning Living Trust
If your estate is large enough to warrant estate tax planning then your living trust should be structured to provide for a bypass trust, with the balance of any asset being distributed outright to your surviving spouse or in a marital (QTIP or QDOT) trust. These two trusts (sometimes referred to as "A-B" Trusts) provide a tax plan that enables most otherwise taxable family estates to minimize, or entirely escape, federal estate taxation. Hence, this living trust is referred to as the "Family Tax Planning Living Trust."
If your estate is larger than the applicable exclusion amount, additional tax planning may be necessary. The two most common tax planning techniques are to remove the value of life insurance from the value of your taxable estate by forming a life insurance trust to own your insurance. This separate trust must be independent of your living trust. It is also an irrevocable trust, so unlike your living trust, it cannot be changed once established. The second most common step to reduce taxes is generally to make gifts using the annual gift tax exclusion. This permits you to make gifts of $10,000 (the amount to be indexed for inflation) to anyone you choose. If you plan to make significant or ongoing gifts, especially if the donee is a minor, establishing an irrevocable trust protects the donee by holding the assets. This type of trust is typically a child or minor's trust (although the donee doesn't need to be your child or even a minor).
If you are not married, or have a partner instead of a spouse, then this estate tax planning structure may not be appropriate for you. At minimum, modifications will be necessary.
The Family Tax Planning Living Trust builds on the Foundation Living Trust and the planning contained in the Just-in-Case Living Trust.
Multigenerational (GST) Living Trust
If your estate is large enough to make it likely that your heirs will face a significant estate tax on their death, it may be advisable for you to plan your estate by minimizing the overall transfer tax burden over several generations of people. The basic approach to this type of tax planning is to have assets held in trust for the life of your children or other heirs. You allocate your generation-skipping transfer (GST) tax exemption (about $1 million but scheduled to be increased for inflation) to some portion or all of these trusts. The assets so protected can then be passed by your heirs onto their heirs free of estate tax. The estate tax savings over several generations can be significant, hence the title "Multigenerational Living Trust."
This type of planning has many benefits in addition to merely saving taxes. It can provide a significant level of asset protection from your heirs' claimants and even divorcing spouses. It can control your heirs' access to assets in a manner that encourages them to become and remain productive members of society -- an attribute that a large inheritance received too quickly can destroy. If an heir becomes incapacitated, the trust structure provides an ideal mechanism to protect assets for your heirs. All these benefits mean that you will be providing greater flexibility to your heirs, not necessarily restricting or controlling them. Thus, this type of planning can be appropriate even if your estate is not sufficiently large to warrant GST planning.
Comprehensive Living Trust
This is the final stage or level of living trust planning. If your estate is significantly larger than the applicable exclusion amount, more sophisticated tax planning may be necessary. Since each level or phase of living trust in the Complete Living Trusts Program builds on the prior phases, it is assumed that if life insurance and a life insurance trust, or annual gifts and possibly trusts for children, were warranted, they will have already been addressed. Thus, at this phase of planning you should evaluate additional and more complex tax planning techniques. These will almost always require the formation of entities and/or trusts independent from your living trust.
Even if your estate is not substantial in size, significant risks from malpractice, divorce, or other sources, or unusual personal or business problems may necessitate additional planning. This will often take the form of creating additional entities, such as limited liability companies or family limited partnerships to hold certain assets. These entities can limit liability, secure control, provide income and estate tax savings, and achieve other benefits.
The living trust books and seminars that have proliferated tend to supply at most a footnote to these techniques, or ignore them completely. To properly address all your personal, tax, legal, and financial goals, you must include these techniques. The Comprehensive Living Trust Program does this, and shows you how to integrate these planning measures with your overall living trust program.
SIX STAGES IN THE LIFE OF YOUR LIVING TRUST:
HOW A LIVING TRUST WORKS
The best way to understand how a living trust works is to review the phases in the life cycle of a typical revocable living trust.
Phase 1. Formation
After a complete review of your tax, estate, financial, and personal goals and your current personal circumstances, you should formulate a comprehensive plan with your advisers. Where a revocable living trust is an appropriate component of this plan, you should retain a lawyer to draft the trust. The trust should be signed, witnessed, and notarized. Copies of the trust should be given to your professionals: accountant, financial planner, broker, insurance adviser, and successor trustee. These people will be helpful, if not critical, in assisting you to properly transfer assets to your trust, but remember it's your responsibility to assure assets are transferred. Assets should then be transferred to your trust, as described in detail in Chapter 6. Your accountant should receive a copy of your trust to include in your permanent file of important documents. Also, your accountant will likely be assisting your family in the event of your death or disability, and it will be helpful to have a copy of your trust on file. These scenarios are addressed in Part Three of this book and are common to all living trusts.
Phase 2. Management Prior to Your Disability
Once your living trust is formed and funded, you will continue to manage the assets in your trust as if they were your own, with one formal or technical difference -- transactions affecting trust assets will be completed in the name of the trust. You will sign trust checks and buy stock in your trust's name, in your capacity as trustee (or co-trustee). These scenarios are addressed in Part Three of this book and are common to all living trusts.
NOTE:John Doe sets up the John Doe Revocable Living Trust on January 14, 2001. When John buys assets or signs checks on the trust checking account, the format should be "John Doe, Trustee, of the John Doe Revocable Living Trust dated 1/14/01." Signature lines on contracts must be signed in the following manner:
JOHN DOE REVOCABLE LIVING TRUST
John Doe, Trustee
[You then sign on the above line. This formality is important for all trusts. If the document you are signing has only a single signature line, you should then write in the necessary information and lines using the approach shown here.]
Phase 3. You Become Disabled
If you become disabled and cannot manage your personal affairs, then your successor trustee (or successor co-trustees if you named two persons to serve) will take over the management of your trust assets. If instead you named an initial co-trustee who has served from the beginning with you, that co-trustee, and the next successor co-trustee appointed in the trust document, will then together manage the trust assets on your behalf. At this time, your agent, acting under your durable power of attorney may transfer any assets that you then own in your own name (i.e., which were not previously transferred to the trust) to your living trust. The disability provisions in your living trust will be vitally important for determining when this switch occurs, and when you may resume control of the management of your trust assets if you recover. These are important considerations since disability can frequently be temporary and short term.
Few living trusts contain detailed rules for determining when disability occurs and ends. This is ironic because one of the primary benefits of a living trust is the management of assets without court intervention if you are disabled; yet, a trust document without clear tests may require court involvement. If you have a living trust, review those sections -- if they are not clear and comprehensive, contact the attorney who prepared the document and find out why. It just may be a sign you went to the wrong person.
An important part of the disability provisions of your living trust is detailed instructions for your care in the event of disability. Many "form" trusts do not provide personalized detail. Do you want to avoid placement in a nursing home as long as possible? What type of health care facility do you prefer if placement becomes necessary? If religious or geographic preferences are important to you, you should specify in your living trust that in the event of your disability you want to be placed in a facility located in a certain part of the country (perhaps near your family); if religious preferences are important, you perhaps should specify that the health care facility be near a church, mosque, or synagogue so that you can attend services, or that the facility must meet your religious dietary requirements. Do not assume that your trustees "will know." Specifying such details may be vital depending on who the trustees are. This detail can also enable them to respond to a challenge by your heirs as to the appropriateness of the trustees' decisions and expenditures. These details distinguish a living trust from simple reliance on a durable power of attorney, which almost never includes this level of personalized and detailed instruction. Thus, those who argue that living trusts are never necessary, advocating instead a durable power of attorney, miss the point.
Which of your family and loved ones can the trustee spend money to care for if you are disabled? This is another critical and typically overlooked part of a living will.
EXAMPLE: A young woman had comprehensive estate planning documents prepared by a large law firm at considerable expense. She had almost no immediate family, just herself and her aging and ill mother. Her estate was substantial, and her two primary concerns were care for herself and her mother. In the event of illness, a durable power of attorney enabled her nephew to act as her agent. Would the nephew really do what was best for her, or would he perhaps spend less money on her to preserve his eventual inheritance? Even if the nephew was willing to spend every last penny to care for the mother, consistent with the woman's wishes, could he? The power of attorney did not authorize any expenditures for the mother! The solution is a living trust with an institution to serve as co-trustee with the nephew. Explicit provisions should be included in the trust specifying that the best medical and other care should be provided to both daughter and mother. This approach fills in the gap in the existing documents assuring care for her and her mother if she became disabled.
These scenarios are addressed in the "Foundation Living Trust" in Part Three of this book and are common to all living trusts.
Phase 4. After Your Death
Your trust will no longer be revocable once you die. On your death, the provisions of your living trust will be implemented by the successor trustee named in your trust. These provisions could include the outright distribution of property to intended beneficiaries (such as adult children), or the establishment (or continuation) of one or several trusts, as provided in your revocable living trust. For example, the Family Tax Planning Living Trust will typically include a bypass trust to preserve the tax benefits of the applicable exclusion amount, a marital trust to qualify for the unlimited marital deduction while still protecting and controlling the assets involved, and one or more children or grandchildren trusts. Several of the other types of trust described throughout this book can be incorporated into your living trust to take effect following your death.
EXAMPLE: The only way to know which types of trust are appropriate for inclusion in your living trust is to complete a comprehensive analysis of your overall estate, financial, insurance, and personal planning. The diversity of trusts, and combinations of different trusts, is why it can be so dangerous to rely on "self-help" trust books. No single form that purports to be adaptable by all readers of a book could possibly give everyone the optimal combination of trust arrangements to meet their unique goals. Consider the many planning techniques discussed in Parts Four and Five as examples.
At this point, any assets that were not already transferred to your trust (either by you when you formed the trust, at a later date by you or by someone making a gift to you, or by your agent under your durable power of attorney after your disability) can be transferred under what is known as a pour-over will. The key provision of this will is that any assets you may have owned at your death which were not already in your trust should be transferred (or poured over into) your trust. Most pour-over wills are inadequate to protect your heirs. They are a few pages long and provide little more than a few statements appointing an executor and guardian (if you have minor children) and pouring assets into your trust. If all goes as planned, this simplistic approach may work. But you wouldn't be reading this book or going through the trouble of planning your estate for contingencies, or buying insurance, if you knew everything would go as planned. You're taking precautions because you know that often life's events unfold in unexpected ways. The "Safe-Keeper Will" recommended in this book includes a pour-over provision similar to those included in most pour-over wills. However, it has a complete listing of all the dispositive provisions in your living trust (the statements as to how your assets are to be distributed). This is essential if for any reason your living trust is found to be invalid or you revoke it (see Chapter 7). The Safe-Keeper Will also includes a full range of powers granted to your executor. If there are any issues facing your estate, these powers may be important. For example, significant or unusual assets, claims, or litigation may affect your estate. Your executor will be helped by having a broad and detailed list of powers. The simplistic pour-over wills most people use with living trusts will not suffice. These scenarios are addressed in the "Foundation Living Trust" in Part Two of this book.
If your estate is large enough, on your death assets from your Foundation Living Trust will be distributed further into a bypass trust and perhaps a marital QTIP trust. These scenarios are addressed in the "Family Tax Planning Living Trust" in Part Three of this book and are common to many living trusts.
If asset protection, divorce protection, asset management, or other goals warrant further planning, the techniques described in Part Four of this book for the "Comprehensive Living Trust Program" should be considered.
Phase 5. After Your Spouse's Death
If you are married, assets will typically be distributed to children or other residuary (secondary) heirs after the death of your spouse. If your estate was large enough to warrant the use of a bypass trust and a marital (QTIP) trust (both explained in detail in Chapter 9, these trusts may terminate. In many estates, on the death of the last of you and your spouse, the trust assets are distributed from the bypass and marital trusts outright to the children, free of any further trust. If the children are too young, the assets may stay in trust until the children (or grandchildren, or other minor heirs) attain a specified age, say 35. Thereupon, the assets would be distributed to the beneficiary outright. These scenarios are addressed in the "Family Tax Planning Living Trust" in Part Three of this book.
Phase 6. After Your Children's Deaths
In larger estates, or for those opting for more sophisticated estate plans (to secure better asset protection benefits), the assets may be held in trust for the lives of your children (or other secondary beneficiaries) or even for the lives of your grandchildren, or longer (i.e., forever, in a dynasty trust). If you have decided that providing further asset protection for your children and future heirs, and that saving your children and perhaps later heirs their estate taxes is worthwhile, assets will continue in trust for the lives of your children, and perhaps longer. The tax and legal benefits of this approach are substantial, but the planning is more complex and costly. This type of planning is discussed in the "Multigenerational Living Trust" discussed in Part Four of this book.
BUILDING BLOCKS OF THE COMPLETE LIVING TRUSTS PROGRAM OVER TIME
Table 1.2 illustrates how the different ancillary documents and subsidiary trusts of the Complete Living Trusts Program relate, when they become effective.
Living trusts are an important and flexible estate and financial planning tool that can provide substantial benefits. Much of what you read and hear about living trusts is simply inaccurate. The "experts" love lining up on one side of the fence or the other: living trusts are either the answer to all your problems or a waste of money. Neither extreme is correct. As explained in this chapter, living trusts -- if properly drafted, implemented, and managed (which most are not)-- are a powerful estate planning tool.
However, if you want to use a living trust, you should carefully consider whether the benefits to you now outweigh the costs and bother of setting one up. For many people, they will not. Further, if you use a living trust, it should only be one part of an overall estate plan that includes a durable power of attorney with authority to make gifts and transfer assets to the living trust, a living will/health care proxy with guardian appointment, and a Safe-Keeper Will. This plan should also address any other tax and asset protection techniques discussed in Parts Four and Five of this book that are appropriate to your situation. Anything less will not give you the peace of mind that a proper plan should provide.
Table of Contents
What is the Complete Living Trusts Program?
Pros and Cons of Revocable Living Trusts.
Probate Avoidance Without Living Trusts.
FOUNDATION LIVING TRUST.
Organize Your Finances to Plan and Implement Your Living Trust.
Drafting The Foundation Living Trust.
Operating Your Foundation Living Trust.
Additional Documents Essential to Every Plan.
TAX PLANNING AND YOUR COMPLETE LIVING TRUSTS PROGRAM.
The Just-in-Case (Disclaimer) Living Trust.
The Family Tax Planning Living Trust.
Operating Your Family Tax Planning Living Trust.
Insurance and Children's Trusts Supplement Your Family Tax Planning Living Trust.
THE MULTIGENERATIONAL (GST) LIVING TRUST.
The Generation-Skipping Transfer (GST) Tax.
Drafting the Multigenerational Living Trust.
Operating Your Multigenerational Living Trust.
THE COMPREHENSIVE LIVING TRUST PROGRAM.
What is the Comprehensive Living Trust Program?
Drafting the Comprehensive Living Trust.
Integrating Additional Sophisticated Tax Planning and Asset Protection Techniques Into Your Comprehensive Living Trust Program.
Operating Your Comprehensive Living Trust Program.
Living Trusts for Special Circumstances and Assets.
Additional Tax Issues.
Additional Legal Issues.