Should you join the 20% of Americans who have a Living Trust?

Living Trusts have gotten popular among estate planners and attorneys. Is a Living Trust for you? Trusts are complicated instruments providing lots of flexibility for you to manage your assets while you are alive and “Rule from the Grave” after you die!

What is a Living Trust?

A Living Trust is an entity set up by you while you are alive for your benefit. You are both the Grantor (person who created the Trust) and the beneficiary of the Trust. The Trustee is also appointed by you, and it may be you, another family member or a professional.   The Grantor transfers property into the Trust to be managed by the Trustee according to the provisions of the Trust. The Trustee is responsible for managing these assets for the benefit of the beneficiaries.

Trusts may hold any kind of real property such as money, real estate, stocks, bonds, vehicles, business interests and personal property such as jewelry, collections, furniture and other belongings. You can fund your trust while you are alive or create a “skeleton” trust and fund it through your Will upon your death.

There are many types of trusts and which ones you need depends on what you want to accomplish with your estate plan. Trusts are one aspect of an estate plan and should be considered as part of your whole estate plan.

Trusts are governed by individual states and there are variations between state laws. Generally, you set up a living trust in the state where you live. However, some states have laws that are advantageous for specific types of trusts. Consult an attorney if you want to set up out of state trusts.

Do I need a Living Trust?

Here are the reasons why you might consider a Living Trust:

  • Privacy
    • A will is a public document and once submitted to the court (which is the law), it is a part of public records. A Trust on the other hand is a private entity not governed by the court, however, if there are any lawsuits against the Trust, the Trust documents may become public.
  • Size of your estate (How to calculate the size of your estate? (See Net Worth article)
    • You have a sizable estate, more than the federal exclusion which is currently over $5 million per estate or $10,000,000+ per married couple.
  • Property in multiple states
    • If you have property in multiple states you may want to set up a Trust and transfer the property into the Trust. This will avoid having to probate property in multiple states.
  • Control of assets
    • You may want to set up different rules for your children from a previous marriage, but, also take care of your current spouse. You may want to set up when to distribute assets to your children, for example, when the youngest child graduates college. You can also specify distributions per month or lump sum payments. You can come up with many variations, but, remember someone has to administer this when you are gone. Keeping some flexibility for the Trustee can help ease squabbles amongst your family members.
  • Risk Management and Protection from creditors for beneficiaries
    • Since the Trust owns the assets in the Trust and not the beneficiaries, creditors cannot get to the assets in the Trust. This is good if one or more of your children are not good at managing money or married someone who’s spending all the money and is in debt.
  • Managing without court supervision
    • The Trustee manages the Trust as it functions essentially as a corporation. The Trustee may be a professional, an institution such as a bank or a family member. Regardless, the Trustee is a fiduciary and responsible for managing your assets with honesty and integrity.
    • Unlike a Trust, the Executor of your Last Will and Testament is responsible to the Court.
  • Providing for minor children
    • If you named a guardian in your Will for minor children- you did, didn’t you? your Trustee can serve as Guardian of Property or Estate for your minor children. You may have one Trust for each child or one single Trust for all your children. You may name the same person for both Guardian of the Person and Guardian of the Property. [link]
  • Providing for children from a previous marriage
    • If you remarried, you may want to be clear about how your assets are distributed between your new spouse, her children, your children, children from the current marriage and previous marriages.
  • Reckless family members – children or spouses
    • If you already know that your children or spouse are reckless with money, you may want to specify the terms by which they can get distributions. You can be flexible in this area, in case a large sum is required for rehab or education, the Trustee can make these decisions on your behalf.
  • A non US citizen spouse
    • If one of the spouses is a non US Citizen, there are several restrictions on how money can be distributed. The exclusion for a non citizen spouse is substantially lower than the $ 5 million+ exclusion for US Citizen spouses. There is a type of Trust called the Qualified Domestic Trust or Q-DOT. These types of Trusts have special requirements from the IRS and need to be setup with care.
  • Your pet
    • You may want to designate who will take care of your pet and any monies you want to set aside for the care of your pet.
  • Can minimize Probate
    • Assets in the Trust do not have to go through the Probate Process [link to Probate article]
  • Minimal tax impact
    • In the case of a Living Trust, since you are the beneficiary of the Trust, the IRS treats the income from the trust as your own. You include any trust income in your personal tax return.
  • Faster access to money for your heirs
    • Your heirs will have faster access to their inheritance, because the assets in the trust does not need to go through probate

What are the disadvantages?

  • If you get a divorce and you have a joint marital trust
    • You will have to revoke the existing trust and create new ones or may have to sell some jointly owned assets
    • You will have to re-title your assets
    • If you have sub-trusts, you’ll have to rearrange them under a new trust
  • You cannot name a guardian for your minor children – You need a Will for that
  • You cannot provide for your funeral – Set up a separate bank account or payable on death account with the Executor or adult child as beneficiary or prepay your funeral expenses
  • You cannot specify who will inherit your grandmother’s or your engagement ring or other personal property
  • It’s costly to set up and rearrange trusts, although the benefits may outweigh the costs

Types of Living Trusts

There are two types of Living Trusts: Revocable and Irrevocable. The major differences between them are noted below.

When most people talk about a Living Trust, they are usually referring to a Revocable Living Trust. Revocable Living Trust is an entity you set up during your lifetime for your benefit. Living Trusts are also called an inter-vivos Trust (means while you are alive).

There are several players involved in the creation and operation of a Trust:

  • Grantor (also called Trustor, Donor and other names – mostly likely you)
  • Trustee (the person who manages the trust – mostly likely you until your death)
  • Successor Trustee (the person who will manage your living trust upon your death)
  • Beneficiaries (you and your heirs who will inherit your assets upon your death)
  • Remaindermen (Beneficiaries other than yourself)

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There are many varieties of Trusts as there are families! If you are contemplating Trusts, such as a Special Needs Trust or Q-DOT or something else, please consult an estate planning attorney in your state.

What is a Grantor Trust?

A Grantor Trust is a Trust where you the Grantor who created the Trust controls or benefits from the Trust as the beneficiary of income from the Trust whether it’s revocable or not. The IRS determines how income from the Trust is taxed based on a determination of whether the Trust is a Grantor Trust.

For more information, see IRS publication https://www.irs.gov/pub/irs-pdf/p1635.pdf titled Employer Identification Number.

Funding your Trust

There are two ways to fund your Trust:

  • Change your assets (accounts and property deeds) to the name of the Trust. When you sign your deeds sign it as ““Jack Smith, trustee of the Jack Smith trust”.
  • Be ready. This will take some time because you’ll need to correspond with banks, real estate attorney’s etc. Your attorney can do some of this for you for a fee.
  • Change the beneficiaries of your accounts to the Trust
    • “Jack Smith, trustee of the Jack Smith Trust”
  • Change the deed to your property to that of the Trust as above
  • You may have to pay fees to some agencies or an attorney to change your property deeds.
  • How do you transfer stocks into the Trust?
    • If you own individual stock certificates you’ll need to assign them to the Trust using a “Securities Assignment” document. This is done by the transfer agent who manages the stock for the company.
    • If your stock is in a brokerage account, you can ask your brokerage company to transfer the shares – you’ll need to fill out some forms and verify your identity.
  • Maintain your Living Trust
    • Any new asset you buy should be titled to the Trust
    • Any new bank account should name the Trust as the beneficiary
  • Create a Trust with a minimum amount of $100 or so. A skeleton Trust.
    1. Create a pour-over Will provision in your Will to move your assets into the Trust upon your death.
    2. A Trust needs to be in place first. It cannot be created after your death.
    3. This is also called a Testamentary Trust where the Trust is funded according to the pour-over provision in your Will.

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Which type of Trust should I choose?

It depends on your objectives. If you have lots of money, above the federal estate tax limits you may want to give away some of your assets to charity to reduce estate taxes. If your goal is to manage the way your assets are inherited you can do this with a Living Trust while retaining complete control during your life.

Or, perhaps a Last Will and Testament might be enough for you.

What are the differences between a Will and a Trust

A Last Will and Testament sets out your desires for inheritance upon your death. You can also name guardianship for your minor children in your Will and specify how your personal property is to be divided up. A Will is a public document and management of your estate and distribution of your assets is subject to Court oversight.   A Trust is a legal entity and functions according to the provisions set forth when the Trust was created. You can make changes to your Revocable Trust at any time during your life, but, the provisions become fixed upon your death. You may be able to make minor changes to your Irrevocable Trust depending on the Trust’s provisions.

[link to will article]

Yes, you still need a Will? What is a pour-over Will?

You still need a Last Will and Testament. Having a Last Will and Testament will allow you to:

  • Need to name a guardian for minor children
  • Limiting claims on the estate
  • Transfer personal property not included in a Trust

 

If you created a Skeleton Trust, you need to include a provision called a Pour-over Will in your Last Will and Testament. This instructs your Executor to fund your Trust with specific assets you specify in your Will upon your death.

It’s very important that you set up a Trust is already before you die. Otherwise, the Executor cannot set up the Trust after your death and your estate will go through the normal Probate process.

Does my estate still need to go through Probate? [link to probate articles]

Your estate still needs to go through Probate. Your executor needs to find your Will and file a petition with the Probate Court. One of the advantages is that the Court can limit timeframe in which your creditors can make claims against your assets. Without this limited notice period, creditors may be able to place claims against your Trust for two or more years!

Do I need a lawyer? What does it cost to set up a trust?

Trusts are complicated estate planning instruments and provide a great deal of flexibility to you as the Grantor and Trustee. Therefore, they should be set up to allow you the flexibility that you are looking for. Trusts can have sub-trusts – especially in the case of minor children.

Also, trusts should be considered as part of an overall estate plan and should include your Will, Advance Directives, Guardianship Agreements, Power of Attorneys and more.

Does a trustee get paid?

It depends. If a family member is trustee, it’s up to you to specify whether they get paid when you create the trust. If a bank or trust company is the trustee, they have a fee structure depending on the amount of assets in your trust. It can be anywhere from 1% to 5% or more.

Taxes or Not – Ways to avoid taxes vs. ways to pay them

As mentioned above, IRS determines whether a Trust is a Grantor Trust or not. If the IRS determines that a Trust is a Grantor Trust, the income from the Trust is treated as personal income. Your attorney or accountant can help you determine this. Typically, most revocable trusts have no tax advantages. Irrevocable Trusts can have significant tax advantages if set up properly. Also, remember that although the Federal Tax ceiling for an estate is $5 million+ per individual, your State estate tax ceilings are lower and you may end up having to pay State Estate taxes.

What is an Insurance Trust or Irrevocable Life Insurance Trust also called an ILIT?

First of all, life insurance policies and beneficiaries can be part of most types of Trusts. However, when you die and the insurance proceeds are paid out, it becomes part of your estate. Your estate will incur taxes on the insurance proceeds if it exceeds the estate tax limits. You can set up an Irrevocable Life Insurance Trust (ILIT) so that if you have a large estate and need to pay income taxes, the money can come from an ILIT which is not subject to estate taxes. You will only need to set up an ILIT if your estate is over $5 million plus. Most of us will not need this coverage.

If you are considering a life insurance to cover your children’s education or taking care of your family in the event of your death, you may be able to get a life insurance policy that meets these needs without the expense of setting up an ILIT.

Does my Trust need an Employer Identification Number (EIN) or Tax Identification Number (TIN)

First of all, it is an Employer Identification Number. That’s what the IRS calls it. However, many people refer to it as a Tax Identification Number or TIN or even Employee Identification Number. It’s basically an Identification Number for any taxable entity such as an Estate or Trust or Corporate Entity, and is similar to a Social Security Number which identifies a person.

Short answer is, it depends. There is considerable confusion around this topic.

If it is a Revocable Living Trust and you are the Grantor, then the IRS does not treat the Trust as a separate entity. The Trust’s income will get reported on your Income Tax return. When you die and your Living Trust is no longer a Grantor Trust, your successor Trustee will need to get an EIN from the IRS.

If it is an Irrevocable Trust, it may or may not be a Grantor Trust. If it is considered a Grantor Trust, if does not need its own EIN. The Trust’s income will get reported on your Income Tax return.

For more information, see IRS publication https://www.irs.gov/pub/irs-pdf/p1635.pdf titled Employer Identification Number.

Ruling from the Grave

Trusts are complicated instruments providing lots of flexibility for you to “Rule from the Grave”. As such you may want to discuss with your spouse and/or children, write down your wishes and then consult an Estate Planning Attorney.

One of the first questions your attorney will ask is about your assets. You can create a simple Net Worth Statement for yourself and your spouse using these templates. [link]

Your attorney may have more questions for you, but, at least you’ll get a head start by being prepared!

Resources:

For more information, see IRS publication https://www.irs.gov/pub/irs-pdf/p1635.pdf titled Employer Identification Number.

For information about Last Will and Testament and Advance Directives, see article here.

Probate

Executor

Power of Attorneys

Guardianship Agreements

Last Wishes Conversation

Final Wishes

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