WILLS OR TRUSTS THE CASE FOR LIVING TRUSTS

WILLS OR TRUSTS THE CASE FOR LIVING TRUSTS

How To Eliminate The Hassles Of:

Probate Lawyers, Delays, Legal System

INTRODUCTION TO LIVING TRUSTS

Simply put, living trusts are an expedient way to transfer

property at your death. A living trust is a legal document

that controls the transfer of property in the trust when you die.

Generally, living trusts are established during an

individual's lifetime and can be modified or changed while

that person is still alive. Circumstances do change and

the option to make alterations in the trust is important.

For this reason, a living trust is set up on a "revocable"

basis. Revocable means you can modify or change the

trust's provisions. Your other option would be to create

an irrevocable trust, but once put in place, you are unable

to change the terms of the trust regardless of the

circumstances.

As you will see, living trusts speed up the process by

which your property moves to your designated beneficiaries

after you die. Today, and into the foreseeable future,

this is vitally important as the United States is

experiencing an unprecedented wealth transfer.

It is estimated, according to "Fortune" magazine, that some

$6.8 trillion worth of assets will soon pass from parents

to children, grandchildren, friends, charities and others.

The questions remains: how will this wealth be transferred?

Will it be the traditional methods of wills and probate or

the new revolution of estate planning that has incorporated

living trusts? Many legal experts believe that living

trusts are the future of wealth transfers.

The concept of living trusts has created controversy simply

because the legal profession seems evenly split on the

issue. Estate planners seem to favor living trusts but

there are enough opposed to the concept to avoid a clear

majority decision.

Living trusts are also called "inter vivos" trusts, a Latin

term preferred by attorneys. The Internal Revenue Service

calls them "grantor" trusts. All mean the same thing.

The Internal Revenue Service, however, recognizes the

living trust as a valid estate planning tool and exhibits

no prejudice against it. There are specific provisions in

the tax laws that deal with living or grantor trusts.

The revocable provision means that while you live, you

still effectively own all of the property that has been

transferred into the trust. You can sell it, spend it,

give it away; in short, anything you wish since the

property is still yours. The trust itself is merely a

document in your lifetime that truly doesn't begin to

function until you die. Then, the trust operates to

transfer your property privately, outside of the reach of

probate, to the specific individuals or organizations to

whom you wish to leave your worldly possessions.

What is probate? Why do people try to avoid it?

Technically speaking, probate is the process by which one

proves the validity of a will in court. If there is no one

contesting the will, this should not take long. If there

are complications, probate can take years. For those of

you familiar with the works of Charles Dickens, recall

"Bleak House" and the never-ending probate case of Jarndyce

vs. Jarndyce.

Probate has come to mean not just proving the validity of

the will but the entire administrative sequence involving

the passing of an owner's title to property after the

owner's death. The deceased's property is inventoried,

creditors are identified and paid following the payment to

the estate's attorney, executor and tax entities.

The term "probate" also identifies the court which has

jurisdiction over the estate probate and administration.

Probate court also has jurisdiction over the guardianship

of minors and mentally incompetent adults. All wills go

through probate.

The average length of the probate process is twelve to

eighteen months. Any estate transactions in that time must

be approved by the probate court.

This can create havoc for beneficiaries. Since a living

trust replaces a will and doesn't need validation from the

probate court, considerable time and hassle can be saved.

This, then, is the purpose behind living trusts. The trust

is simple to establish and, when carried out, easy to

transfer property. The trust is a matter of explicit

instructions as to who gets what property after the owner

dies. Like a will, the trust should cover all expected and

unexpected events that might occur. The details tell the

designated trustee how to use the money and property in the

trust.

A living trust is a capable substitute for a will and a

document that more and more people, disillusioned with the

probate system, are turning to in their estate planning.

TERMS YOU SHOULD KNOW

Before proceeding further, we thought it might be helpful

to define a few terms for you. These terms will occur

often during this text and in the actual living trust

process, so it's important to familiarize yourself with

their definitions.

A/B TRUST: Common term for a "marital life estate trust

generally used by couples whose estates are valued higher

than $600,000.

ACCUMULATION TRUST: A trust that does not pay out all of

its income, until certain circumstances occur.

ADMINISTRATION: Court-supervised distribution of the

probate estate of the deceased. The person who manages

this distribution is called the EXECUTOR if there is a will

or an ADMINISTRATOR if there is not.

BENEFICIARY: The person or organization legally entitled

to receive gifts made under the provisions of a legal

document such as a will or trust.

CODICIL: An amendment to a will. It is a separate, legal

document, properly witnessed and executed.

CORPUS: Property owned by the trust, commonly referred to

as "corpus of the trust".

DEATH TAXES: Amounts levied on the property of the

deceased called estate taxes (federal) and inheritance

(state) taxes.

DURABLE POWER OF ATTORNEY: A general power of attorney

that will continue to be valid after its maker becomes

incapacitated or incompetent.

DURABLE HEALTH CARE POWER OF ATTORNEY: A special

power of attorney in which the maker gives another person authority

to make health care decisions when the maker is unable due

to injury or sickness.

ESTATE: In general, all of the property you own when you die.

ESTATE PLANNING: The legal maneuvering by which one dies

with the smallest taxable and probate estate possible, and

passing on your property to your beneficiaries with the

least amount of hassle and expense.

INTESTATE: To die without a will or other valid estate

transfer device. Estate will go through probate and passed

to heirs who are specified in the applicable state's laws.

IRREVOCABLE TRUST: A trust that cannot be changed once

established except by court action in a proceeding referred

to as REFORMATION.

JOINT TENANCY: A form of property ownership by two or more

people where the death of an owner causes the transfer of

that individual's share directly to the remaining owner(s).

A will has no power to change the joint tenant's

right of survivorship. This is another common tool used to

avoid probate, although there may be gift tax consequences.

LIVING TRUST: Trust established while the maker is alive

and becomes immediately effective. It remains under the

control of the maker until death. It allows property to

pass to beneficiaries free of probate.

LIVING WILL: A document that provides instructions to

physicians, health care providers, family and courts as to

what life-prolonging procedures are desired if a person

should become terminally ill or in a persistent vegetative

state and unable to communicate.

PERSONAL PROPERTY: All property other than land, buildings

attached to the land and certain oil, gas and mineral interests.

PER STIRPES: A legal term meaning that if a person dies,

the inheritance will pass to heirs in equal shares. It means

"by right of representation".

POUR OVER WILL: A will that transfers the decedent's

assets that are subject to the will to a trust that was

already in effect prior to the decedent's death.

POWER OF ATTORNEY: A legal document whereby you authorize

someone else to act for you.

PROBATE: Court proceeding in which the authenticity of a

will is established, an executor or administrator

appointed, debts and taxes are paid, heirs are identified

and property in the probated estate is distributed

according to the wishes of the will.

QUALIFIED TERMINABLE INTEREST PROPERTY TRUST: Also

referred to as a "Q-Tip" trust, it allows a surviving

spouse to postpone, until his or her death, paying estate

taxes that were assessed upon the death of the first

spouse. The surviving spouse is still entitled to all of

the income from the property.

REVOCABLE TRUST: A trust that can be changed by the trust

maker at any time. Living trusts are revocable trusts.

SETTLOR: Another name for a maker of the trust, also

called "trustor", "grantor" or "creator".

TENANCY IN COMMON: A form of joint ownership of property.

Each owner is able to sell or give way his or her share as

well as pass it along separately at death. There is

no right of survivorship.

TESTACY: Dying with a valid will in place. All property

controlled by the will passes through probate.

TESTAMENTARY TRUST: A trust created by a valid will.

TRUST: A legal arrangement under which one person or

institution controls property given by another person for

the benefit of a third party.

TRUSTEE: The person or institution who manages the trust

and its property under specific instruction.

WILL: A legal document that is used to pass property to

heirs following a person's death. A will only becomes

effective at the death of its maker.

TRANSFERS

The purpose of the living trust, as mentioned, is to be

able to transfer property to a designated beneficiary(ies)

without the usual hassles associated with wills and

probates.

But, your living trust can't transfer property it doesn't

own.

Therefore, the first step in making the trust effective is

to transfer ownership, or title, of a property to the

trust's name. It's safer to transfer the title to the

trust's name rather than the trustee since it is more

likely the trust name will continue even if you change

trustees.

For the purposes of transferring title into a trust's name,

there are two classifications of property: that which has

an ownership document and that which doesn't.

Property without ownership documents, include:

- household possessions and furnishings;

- clothing and furs

- jewelry

- tools and most equipment

- antiques

- art work

- electronic and computer equipment

- cash

- precious metals

- bearer bonds

These items are transferred to a trust simply by listing

them on a trust schedule. That's it! Pretty simple, right?

Property that has ownership documents requires a re-

registration of ownership into the trust's name. Once the

trust document has been established, signed and notarized,

this process should begin. The document of the title must

clearly show that the trust is the legal owner of the

property or the trustee will not be able to legally

transfer any of that property.

The type of property owned by the trust which requires this

re-registration of ownership includes:

- real estate

- bank accounts

- stocks and stock accounts

- money market accounts

- mutual funds

- most bonds, including U.S. Government Securities

- safety deposit boxes

- corporations, partnerships and limited partnerships

- cars, boats, motor homes and airplanes

If you set up a trust and fail to re-register ownership of

a specific property, it will remain outside the trust after

you die. If you do not have a will, property will pass

through intestacy and your state's succession law. The

chances of leaving it to the person you wanted it to go to

anyway are reduced and you will not avoid probate of the

property -- which is the purpose of a living will! Do not

fail to re-register property that has a title. You prepare

a new title document for each piece of property,

transferring ownership into your trust's name. With real

estate, for example, you must prepare and sign a deed

listing the trust as the new owner, then have the deed

notarized and properly recorded. For bank accounts, ask

your bank for the proper form. You can usually accomplish

this in one trip.

TRUSTEES

When you establish a living trust, you must name a trustee.

In fact, you should name both an initial trustee and a

successor trustee in the event the initial trustee becomes

incapacitated and cannot serve.

The trustee is the individual or institution who actually

manages the trust assets that you transfer in, according to

the specific instructions you've given. The appointment is

important as this person or entity will have the

responsibility of honoring your wishes after death.

The initial trustee is, most often, YOU! That's why it's

called a living trust. Since it's revocable, you can

change assets in the trust as circumstances dictate. While

you're alive, the trust can conform to your specific whims

and ideas.

It's important to understand something here: a living trust

does not take control of your property from you -- until

you die. You handle it while you're alive. It's merely

tucked away in a convenient legal vehicle that can take

over immediately when you die and pass the property

along to the people you want without publicity and without

the potential lengthy delay and costs of probate.

If you've set up a marital living trust, usually both

spouses are co-trustees. When one spouse dies, the other

spouse continues as the initial trustee.

It is possible to name someone else other than you and/or

your spouse to be the initial trustee. It is uncommon and

unnecessarily complicates your trust arrangements as you

must keep separate records of the trust. You should work

with your attorney to select a capable trustee if you wish.

Because something could happen to the initial trustee, it's

vital to name a successor trustee. This is the individual

who will be distributing your assets according to your

wishes after you die, or become unable to manage the trust

due to injury or illness. For property not held in the

living trust, creation of a durable power of attorney and a

health care durable power of attorney can designate someone

else to carry on with the non-trust assets.

If your trust is a marital one, the successor trustee would

not take over until after the second spouse dies.

The successor trustee could also die or become

incapacitated so it's imperative that you name an

alternative trustee, too, to take over as successor in that

circumstance.

What does the successor trustee do? If your instructions

are explicit as to how you want property transferred at

your death, then the job is somewhat easier. There are

still things to do, however:

- Obtain copies of the death certificate of the initial trustee.

- Present death certificate, copy of the living trust and

proof of successor trustee's identity to the various

financial institutions or organizations that have the

property/assets.

- Prepare documents of title transfer from the trust to the

beneficiary(ies) as appropriate. - Supervise distribution

of trust assets where no title is involved.

- If necessary, the successor trustee may manage a

children's trust if the beneficiary is a child who has not

reached the age at which the initial trustee designated the

property to be transferred. The successor manages the

property for that individual until they reach the specific

age outlined in the original living trust. This may be the

only task the successor trustee is actually paid to do.

- If required, the successor trustee might also file death

tax returns, federal and/or state.

It's important to name a successor trustee, preferably one

whom you feel comfortable will carry out your wishes. It

may even be someone who is also a beneficiary of the trust

assets. If there is any question about whom you should

name, consult with an attorney for suggestions.

WILLS

A will is a written document detailing instructions as to

how you want your assets divided up after your death. You

might also include information as to a child's

guardianship, how (or if) you are to be buried and the

appointment of an executor of your will.

The two main types of wills are:

- attested

- holographic

The attested will is the most common. It's usually

prepared by a lawyer in typewritten form, signed in front

of several witnesses who have no benefit in the will

whatsoever.

The holographic will is made without a lawyer, written on

plain paper in your handwriting, dated and signed. If your

wishes are clear, this should be as effective as the

attested will. It will more likely be disputed than an

attested will and subject to the interpretation of the

courts, where anything could happen. Attested wills are

safer for carrying out your final instructions.

Most people think they should have a will. Many people do

not even have that as estate planning is generally poor

nationwide. There are many fine estate planners around the

country who work with individuals but the average person

doesn't put much thought, time or effort into addressing

this important financial task of preparing for asset

distribution after death.

Attorneys will be glad to help you do an attested will and

may not charge much to do it. They'll get paid later --

when the will goes through probate court. The payors will

be your beneficiaries, who will see assets drain as a

result of legal fees and court costs.

Probate can be lengthy especially if the will and estate is

a complex one. Not only does a will diminish the value of

the property, but it may slow down the time it takes to

actually transfer it to the designated beneficiary.

A will does let you choose your heirs, but the advantages

stop here. You will not avoid probate, estate taxes (if

any), death income taxes, privacy of transfers or

incapacitation. These are the primary reasons to set up a

living trust INSTEAD of a will.

There is a will that is important when establishing a

living trust. It's called the pour-over will. This

document puts any assets you failed to place in your living

trust during your lifetime in there after your death. In

effect, it "pours over" assets from the will to the trust.

This document may also name the guardian for minor or

incapacitated children.

The pour-over will is a "fail-safe" device to ensure that

any property left out of the trust will be placed there. It

is also a back-up to the living trust in case it's

invalidated for some reason due to a variety of

possibilities. The pour-over will can substantiate the

trust simply by reaffirming its terms. It would be

difficult for one or more heirs to challenge successfully

both a living trust and a pour-over will if their

conditions and instructions are similar.

ESTATES

What is an estate? Exactly what are we trying to protect

with a living trust?

An estate is essentially all the property you own (your

assets) minus anything that you owe (liabilities). This

calculation, assets minus liabilities, will yield a net

worth for you. This is the value of your estate at the

time it is calculated.

The size of your estate is important. More important is

the value of your taxable estate. This will equal,

roughly, the value of your estate less property left to

your surviving spouse or to charity.

The other estate calculation of note is the probate

estate. This is the portion of your estate that must go

through probate before it can be distributed. Leaving your

assets via a will puts them through probate.

The difference between the taxable estate and the probate

estate should be considerable if you plan your estate

properly. For example, let's say your estate calculation

is $400,000. By transferring the title of your house,

valued at $250,000 and your Chrysler stocks, valued at

$75,000, to a living trust, you have reduced your PROBATE

estate by $325,000 to $75,000. Your goal should be to try

and reduce the probate estate to -0- if possible.

Living trusts will save probate costs. They do not avoid

death income taxes. There are other things you can do,

planning-wise, to reduce your taxable estate, but a living

trust is not one of those. You can and should, however,

reduce or even eliminate your probate costs.

Proper estate planning, in general, can accomplish all of

the following:

- select your heirs

- choose amount and time of distribution of inheritance to heirs

- avoid probate

- eliminate or reduce federal estate taxes

- eliminate death income taxes

- maintain control over your assets

- maintain both privacy and flexibility

- leave directions and the power to act if you are incapacitated

- leave funeral instructions

- leave organ transplant instructions

- make the administration of your estate as simple and quick to

execute as possible.

These are important goals. A living trust is one example

of addressing these goals in your estate planning. It is by

no means the only thing you should do, but it is a document

that can help you and your heirs out immensely.

OTHER TYPES OF TRUSTS

By now, you should understand what a living trust is and is

main purpose. There are, however, other types of trusts

that should be mentioned that assist in estate planning goals.

Living trusts are only truly functional when the creator of

the trust passes away. It avoids probate costs. Other

types of trusts help you to avoid taxes.

MARITAL ESTATE LIFE TRUST: Commonly referred to as the A-B

Trust, this trust is set up for couples whose combined

estate is in excess of $600,000. $600,000 is the amount of

your estate which is exempt from federal estate taxes. The

marital life estate trust lets BOTH spouses take full

advantage of the $600,000 estate tax exemption.

When a spouse dies, property is left for the use of the

surviving spouse during the balance of his or her lifetime.

However, the survivor never becomes the legal owner of the

property. If legal ownership is never bestowed, then the

property is not included in the survivor's estate and thus

avoids being counted for tax purposes.

The trust is complex and has important ramifications for

the surviving spouse which should be understood before

putting this type of trust into effect.

Q-TIP TRUST: Short for Qualified Terminal Interest

Property, it is a type of marital life estate trust that is

intended to postpone payment of estate taxes when the first

spouse dies. It only postpones them until the death of the

second spouse and the taxes could be higher then since the

amounts would be calculated on the then-current estate, but

it saves the survivor a substantial amount of money while alive.

GENERATION-SKIPPING TRUST: You may have heard of this type

of trust where the bulk of assets are left to the grandchildren, but the

income derived from them is utilized by the trustor's own children. In

essence, the estate "skips" the children, going directly to the

grandchildren, but the use of the income is still there for the direct

heirs; the use of the property is not.

Current laws impose a tax on all generation-skipping

transfers in excess of $1,000,000. If an estate is worth

more than that, the children may want to get this excess

property directly since they will have no access other than

to income from the property that was transferred to the grandchildren.

It all depends on the size and type of estate.

These are examples of other trusts. This isn't meant to

say you should attempt to set up every conceivable type of

trust. The key is what your estate and heirs "picture"

looks like -- this will govern the estate planning devices

you will utilize.

TAKING INVENTORY

To value your estate from both a net worth and living trust

planning standpoint, you must inventory your assets and

calculate your liabilities first.

Assets: This is the first calculation. You should list

each item and describe it, indicating whether you own the

property outright or the percentage of your ownership if

not. Then list the actual value of the portion you own.

Begin with your liquid assets:

- cash

- savings

- checking accounts

- money market accounts

- CDs

- precious metals

Next, list other personal property:

- stocks

- mutual funds

- bonds

- other securities

- automobiles

- jewelry

- furs

- art works

- antiques

- tools

- collectibles

- life insurance

Then, list your real estate holdings including your own

home(s), condominiums, mobile homes, land, etc.

Finally, list any business personal property including

partnership interests, copyrights, patents, trademarks,

stock options, etc.

Add these up and you will have the total amount of your

assets.

Then, list your liabilities by name and the amount you owe,

including:

- personal loans (credit cards, bank)

- mortgage loan(s)

- taxes due, current or past

- life insurance loans

- other personal debts

Add all of these numbers up to arrive at your total

liabilities. Subtract your liabilities from your assets to

arrive at your net worth.

This allows you to place a value on your estate. You can

see how close your estate is to $600,000. You can

inventory property that has to be itemized for the living

trust anyway. You can separate property by titled ownership and non-

titled property.

SUMMARY

Knowing where you are in valuing your estate is an

excellent start to your estate planning program. The use

of a living trust is a clear example of using estate

planning to help you (and your heirs) save money and avoid

the hassles of court and lawyers.