Learn how a Trust can help Your Estate Planning

In our last Newsletter on the need for a Will, we promised that this issue would be on the use of Trusts in estate planning. We hope that what follows will help you decide whether a Trust would help you put the finishing touch to your personal estate plan.

Q:  What is a Revocable Living Trust?
A:  A Trust is a legal document that allows you to transfer your valuable property to your heirs and beneficiaries without the cost, delay and hassle of going through the probate process. This, plus the privacy that it affords, are perhaps the most important reasons people choose to use a Trust in their estate plan.

They are called “living” because they are created during one’s lifetime. They are described as“revocable” because they can be changed or cancelled by the trustee while he/she is still living and competent.

Trusts also can be “irrevocable”,  never-to-be-changed or revoked. These types of Trusts, for the most part, are Charitable Remainder Trusts and those creating this type of Trust have already received a tax benefit (deduction) from the IRS.

Q:  Does Everyone Need a Trust?
A:  No. As beneficial and cost-effective as trusts are, not everyone is a candidate for a Trust, despite what you might read or hear. First of all, people don’t have a need to plan probate-avoidance methods when their estate is still relatively small and it wouldn’t be cost-effective. Secondly, other probate-avoidance methods may be more suitable for their circumstances, such as joint tenancy, transfer-on-death (TOD) accounts, and life insurance and IRAs, all of which pass assets to heirs outside of probate.

Q:  What Constitutes a Revocable Living Trust?
A:  When you create a Trust, you are creating a separate legal entity into which you transfer valuable property. Because you are able to control the property – sell it, give it away or simply enjoy its use – you can be its beneficiary and/or name others to reap its benefits now or after your death.

The Trust document specifies:
– The Trustee (yourself or someone you trust) who has the authority to manage the Trust property;
– The successor trustee who will take over for you or the co-trustee when you are no longer able to act as trustee (disability or death);
– The property that is placed into the Trust;
– The beneficiary(ies) of the Trust who will receive the Trust property at your death;
– Other terms of the Trust including your right to amend or revoke the Trust at any time.

Q:  What Are the Benefits of a Revocable Living Trust?
A:  These four C’s cover all the bases:
Control. When you have a fully funded Revocable Living Trust, you are fully in charge of your affairs while avoiding probate and its pitfalls. Most importantly, it allows the Trust maker to keep control of both personal health care and financial affairs in case of a disability.

This is important because people are more likely to experience a long period of disability than they are to die suddenly. A Will takes effect when you die, while a Trust is effective as soon as it is executed by the Trust maker. The people designated by the Trust maker to handle affairs simply follow the directions that are included in the Trust.

Cost. Because valuable property held by the Trust avoids probate, there is no need to retain an attorney to steer the estate through the probate process.  The successor trustee simply follows the directions contained in the Trust document. National surveys show that such Trust administration costs less than 1% of the gross value of the estate. Compare this to the cost of a probated estate: 7% of the gross value of the estate.

Convenience. The probate process is cumbersome and time-consuming in comparison to the process of administering a Trust estate. When the Trust maker dies or becomes disabled, the successor trustee has immediate legal control of the Trust assets without involvement of any court.

Confidentiality. Trusts are private, while Wills and the entire probate process are open for public scrutiny. This in and of itself is a compelling reason for many to go the Revocable Living Trust route. If you die with a Will controlling your affairs, all your finances, everything you own, the value of your assets and your outstanding debts are all filed with the probate court in the county where you resided at the time of death. Anyone at nominal expense can simply contact the court and request copies of all the papers filed in your estate. Trusts are not subject to the rules of the probate court.

Q:  Are There Any Disadvantages?
A:  Possibly, but they are few in number. Even when there are disadvantages, the benefits far outweigh the drawbacks.

Expense. Writing a Will with the aid of an attorney is less expensive upfront than a Trust. The higher cost comes when the Will is processed through the probate court.

Funding. Determining what you own, how you own it and then having to change ownership of the assets can be aggravating. But it has to be done only once! So the choice comes down to this: you “probate” your own estate by creating a Living Trust while you’re still alive and able to answer questions – or your family has to hire an attorney and other officers of the probate court to do it for them after you are gone at far greater expense.

Q:  What Are Charitable Remainder Trusts?
A:  Charitable Remainder Trusts offer the grantor/donor the opportunity to do some really significant things both for his/her family members and also for the charity(ies) that represent his/her lifetime values.

While any Trust can have a charitable feature to it, what we are meaning here are the qualified irrevocable charitable remainder trusts: the
Charitable Remainder Annuity trust (CRAT), the Charitable Remainder Unitrust (CRUT) and the Charitable Remainder unitrust with a make-up
provision (NIMCRUT).

CRTs are “split-interest” trusts, sharing their interest or benefits between non-charitable beneficiaries and charitable beneficiaries for the lifetime of the non-charitable beneficiaries or for a term of years not to exceed 20 years.  When the last income beneficiary dies or the term of years expire, all assets remaining in the trust must be distributed to one or more charities called charitable remaindermen.

The best assets with which to fund a CRT are highly appreciated assets in which the trust maker/donor has a low-cost basis.  This means that the grantor can sell these assets within the trust and pay no long-term capital gains tax because the trust is now a charitable entity.  In this way the donor can often change a valuable low-income producing asset into a high-income producing asset for the lifetime benefit of the trust beneficiaries.

A further explanation of the unique benefits of Charitable Remainder Trusts, and how they differ from each other, will be the focus of the August Janaka newsletter.
Be sure to stay tuned!