ISSUE:
About living trusts
RESOLUTION:
What
The Living Trust Agreement allows a person (the "Grantor") to create a trust that will hold a Grantor's property during their lifetime, and then distribute the property on the Grantor's death. A Living Trust is also sometimes referred to as an "inter-vivos trust" or "revocable trust."
How
Simply answer the interview questions in the Living Trust Interview. These questions concern your life situation and your desires about how you would like your trust estate handled. The application then assembles a Living Trust Agreement based upon your responses.
After completing and signing the Living Trust Agreement, 2 critical steps remain:
- First, you must make sure all of your current and future assets are transferred into the Living Trust. This means that real estate must be conveyed into the trust, and titled accounts and assets transferred. This can be a time-consuming step, but you may lose many of the benefits of your Living Trust unless your assets are put into your trust. For your regular "tangible personal property" (that is, things like furniture, jewelry, and other physical possessions without title documents), the schedule to the Living Trust Agreement provides that this property is assigned to your trust.
- Second, you must create a Pour Over Will. Because you may fail to properly convey some assets to your trust, and to make sure you get some benefits provided by the probate process, you will need this special kind of will. The application includes a Pour Over Will.
Why
A Living Trust is most commonly used as an estate planning alternative to a stand-alone will. A Living Trust is generally more private, less expensive to administer at the grantor's death and, in some cases, may help reduce taxes at death. A Living Trust also has some disadvantages when compared to a stand-alone will. For complete discussion of advantages and disadvantages of Living Trusts, consult the Living Trust section of the Estate Planning and Administration Guide.
When
Any adult may use a Living Trust. Contrary to 1 misconception, Living Trusts are not just for individuals with a large net worth. A Living Trust can be a useful estate planning tool regardless of your life situation - for example whether you're single or married, with or without children.
Before You Proceed
Before proceeding in any estate planning activity, there are some things you must do. First, you should identify and determine the value of all of your assets. Be sure to include any of the following items that you own:
- Real estate
- Stocks and bonds
- Bank accounts
- Tangible personal property (household furnishings and furniture, jewelry, art, and other personal effects)
- Partnership (business) interest
- Individual retirement accounts and qualified employee benefit plans
- Life insurance policies
- Property you own jointly with someone else
Second, you should understand the tax laws. Federal tax laws provide that upon the death of an individual, there is a federal estate tax exemption applied against the value of the deceased person's estate, and if the person owns property valued at less than the exemption amount, no federal estate tax is due. The federal estate tax is applied to amounts above the exemption amount. For a person dying in 2003, that exemption is $1,000,000, and for a person dying in 2004, the exemption is $1,500,000. The amount of the exemption increases until it reaches $3,500,000 in 2009. In 2010, unless the law is changed before that date, the estate tax system is repealed and there are no estate taxes. However, in 2011, the old estate tax system is reinstated, and the exemption goes back to $1,000,000. As your estate approaches in value or exceeds these exemption amounts, the greater your need for professional estate tax planning advice.
In addition, each individual may leave an unlimited amount to their spouse upon death without any federal estate tax liability. This is referred to as the "Marital Deduction". If the recipient spouse is not a U.S. citizen, the deduction is limited to $112,000 in 2003. In structuring a Living Trust and other estate planning tools, one goal is to use the federal estate tax exemption and the Marital Deduction to minimize the amount of federal and state estate tax taxes due upon the death of both the husband and wife.
It's also important to identify assets, because most, if not all of them, will be transferred into the Living Trust. One disadvantage of a Living Trust is that it's not self-operating. That is, when the trust is created, the Grantor must actually change the ownership of their assets to reflect the identity of the new owner: the trust. Over time, as new assets are acquired, those assets must also be titled in the name of the trust. If assets aren't owned by the trust, they aren't subject to the provisions of the trust and also won't pass under the terms of the Living Trust upon death. Instead, those "non trust" assets will be distributed according to the Grantor's will or, if there's no will, according to laws of intestate succession.
Pour Over Will
Establishing a Living Trust doesn't mean that you no longer have a need for a will. You'll likely have assets that you choose not to transfer into your Living Trust, cannot be transferred due to some contractual or other restriction, aren't transferred because they are less valuable, or for other reasons. For example, most Grantors maintain a checking account in their individual name, and leave smaller personal effects and household items outside the Living Trust.
Because these items won't be in your Living Trust, they won't be subject to distribution according to the terms of your Living Trust Agreement upon your death. To make sure that these items are distributed according to your wishes, it's customary to create a Pour Over Will. The Pour Over Will is so named because it takes these remaining assets and "pours them over" into your Living Trust at your death. Consequently all the assets you own directly or through your Living Trust are included in your Living Trust and distributed according to its terms.
If you create a Living Trust, you should also create a Pour Over Will. Also remember when you review the terms of your Living Trust Agreement, you should also review the terms of your Pour Over Will. The application includes a Pour Over Will form suitable for use with this Living Trust Agreement.
Spouse and Family
Every state has laws that guarantee a married person and children of the marriage will receive some portion of the estate when the other spouse dies. It's difficult in some states, and impossible in others, to disinherit a spouse or child. For example, Kansas permits a spouse to consent to a distribution of property that's less than the law guarantees. Just across the state line in Missouri, this kind of consent isn't allowed.
When constructing an estate plan, including a Pour Over Will, Living Trust and other estate planning tools, these laws are important to remember. It's wise to consult with an estate planning attorney in your state to make sure the arrangements made for your spouse and children are proper under your state's law.
Other Tax Matters
Establishing a Living Trust doesn't change your responsibility to pay income taxes on the amounts earned from your job and other sources. If you have stocks, bonds or other income producing assets in your Living Trust, you must continue to pay income taxes on the amount earned from them.
For more information about the important tax rules with Living Trusts, see the Home Legal Topic "Living Trust - Tax Considerations".
Joint Living Trust
In recent years, many married couples have created joint Living Trusts. This means that both the husband and wife signed a single Living Trust Agreement. This arrangement is sometimes viewed as preferable to establishing 2 separate Living Trusts because it enables a married couple to more easily manage assets they own jointly.
However, a joint Living Trust has some disadvantages. In most cases, the husband and wife are co-trustees of their joint Living Trust. This means that often the signatures of both spouses are required to do things with the assets in the joint Living Trust.
An improperly created joint Living Trust may also lead to an increased tax burden as compared to using 2 separate Living Trust agreements or some other estate planning device. For this reason, many estate planning attorneys don't use a joint Living Trust. The application doesn't include a joint Living Trust form. The application suggests that married couples simply each create a separate Living Trust Agreement, rather than establishing a single joint Living Trust. If you would prefer to use a joint Living Trust, consult an attorney.
More Information
The application includes several home legal topics with information about Living Trusts, probate and related matters. It's recommended that you review all of the legal topics discussing Living Trusts to better understand how to create and take advantage of this estate planning tool.
Article ID: 13241
Date Modified: 00:00:00
Software: Home and Business Attorney 2006, WILLPower, Home and Business Attorney, Home and Business Attorney 2007, WILLPower 2006, WILLPower 2007, Home and Business Attorney 2008, WILLPower 2008
