A Living Trust is a document that consists of three main parties:
- The settlor who has the trust established.
- The trustee, who manages the trust.
- The beneficiaries who benefit from the trust.
If it involves a married couple, a living trust will typically state that trust assets go to the surviving spouse, and then to their children when both pass. For larger estates, there are A/B Trusts where Trust A transfers half of the assets to go to the surviving spouse. The other half goes into the B trust and the surviving spouse gets the investment income from the B trust. When both die, Trust A and Trust B transfer to heirs, doubling the amount that can be transferred estate tax free.
What is a Will?
- The name of an executor who will work with the courts to carry out the will.
- It may name guardians for minor children.
- Instructions how to pay debt and tax bills.
- Provisions for animals
- Can act as a supplement to a living trust
- Unlike a living trust, it is often time-consuming to carry out
- Must be processed through a courtroom
- Time-consuming and expensive probate fees and court costs
- A judge must approve it
Here is how you should not use a will:
- Stipulating conditions on the property transfer (Fred must get a doctorate degree before receiving my savings account)
- Instructions for funeral arrangment
- Leaving assets to pets
- Making arrangements contrary to law
Three Main Living Trust Benefits
Probate is the legal process of distributing property from one who has died to others. During the process, the courts distribute property resolve claims. Most always, there are attorney fees as well as court costs associated with taking a will through probate. In addition, those who are to receive the proceeds of a will are unable to receive those proceeds immediately; not until a probate court has approved the distribution. This process can tie up the proceeds from a few months to several years.
If your heirs bring your will to your bank and attempt to withdraw money after your death the bank will not allow them to touch the funds. The probate court must grant the bank permission. With a properly drafted living trust, on the other hand, it is a different story. Those who you name in the trust can generally go to the bank, bring a copy of your trust along with their identification and your death certificate. Then they can withdraw funds immediately in accordance with the trust agreement.
Lawsuit protection can be given to married people when assets are held between two trusts. Assets in a properly drafted trust for the wife can be insulated from the acts of the husband, for example.
Sheltering your estate
You can to shelter all or a large portion of your estate when you have conformed to sections 2056 and 2041 of the IRS tax code.
Having property or money in your revocable living trust does not require you to change your federal tax filing. It is analogous to you wearing a different colored hat. You simply file your taxes the same way you did before you had your trust.
Living Trust vs. a Will
As stated above, a living trust avoids the expensive and time-consuming probate process. With a living trust, once the settlor dies or the settlors die, beneficiaries can receive trust assets without getting the courts and lawyers involved in the process. This saves time and money; possibly a lot of money.
Some states charge significant probate fees, which is a percentage of the gross worth of the estate. Here is what that means. For example, let’s say a state charges probate fees of two percent (2%) of the gross estate. You inherit a $2 million home. Let’s suppose that home, somehow, has a $2 million mortgage recorded against it. Thus, there is zero equity. Thus, the courts could collect two percent of the gross worth of the estate, or $40,000 in probate fees on that zero equity home. If the home was in a living trust, you (or your heirs) would have saved forty grand.
If someone contests a will, the attorney’s fees can be staggering. It is amazing how often that inheritance battles can turn loving siblings into mortal enemies. We have seen estate battles that have run into the millions of dollars and have been drug through the courts for decades.
In summary, from experience, we have found that living trusts serve our clients much better than wills as the main estate planning tool. It saves them tremendous headaches, time, and yes, money. So, we typically set up a living trust as the main instrument. Then we set up a will as a supplementary tool for those items that were inadvertently not placed into the trust.
How to Put Property Into a Living Trust
- You change the title to the property. For example you go to your bank and bring your trust document. You then ask the banker to transfer your accounts into your trust. For real property, you can fill out a simple “quit claim deed” and transfer your real estate from your name into your trust. Often, people will use another type of trust we all a land trust to own real estate.
- You list the property on a “schedule ‘A.’” A schedule “A” is a piece of paper that is usually attached to the back of your trust. It simply describes the property that you would like to have included in your trust. For example, “The brown china cabinet” or “The red antique clock from Germany” or “My Hewlett Packard printer model # JJ54436.” Each time you change your schedule “A” it is best to also have it notarized. Many people update their schedule “A’s” once a year or when they buy expensive items.
It is often best to do both of the above when possible. For example, ask your banker to change the title to your bank account into the name of your trust. Additionally, you can list “Bank of America account # 00533-01242” on your schedule “A.” This is additionally helpful to guide your heirs to your various bank and investment accounts.
Revocable Living Trust
You can modify your revocable living trust at any time. You can be the trustee. The trustee is the one who manages the trust and holds legal title to the property in the trust for the benefit of another person – or himself/herself. The trustee is also required to follow the directions outlined in the trust document. That is, you can control your trust. You can change the beneficiaries as many times as you like. (Beneficiaries are those who receive the proceeds of your trust— usually upon your death.) If you like, you can have another person or company act as the trustee. Per the trust document, they are generally to perform the duties under your direction. You can also change who the trustee is at any time. You can put money or property into your trust or take it out of your trust.
Many people who have real estate holdings title each property in the name a different trust. Then they have a company who provides trustee services stand in as the trustee. The trust has a name that is not associated with the one who had the trust set up. For example, Companies Incorporated Trust # 24775. So, if anyone does a title search in the public records, the one’s name who holds the beneficial interest in the property does not appear.
Asset Protection and Estate Planning
Owning property in a revocable living trust does not provide you any more actual lawsuit protection than owning the same property in your own name. That is why many use the living trust in combination with an asset protection device. Many people hold title to their limited partnerships or LLCs in their trust. For example, the parents hold their 15% general partnership interest in their trust. Then their children share the remaining 85% limited partnership interest.
A living trust does not provide asset protection from personal lawsuits. A properly structured limited partnership or LLC can (see above). Then, when you pass away, your general partnership / management interest can go to those whom you name, such as your children. And it does so without having to go through expensive and time-consuming probate procedures.
We highly recommend that you review all trusts in detail with a knowledgeable estate-planning specialist. Do so before implementing them into your estate and/or financial plan. Laws vary and change from time to time and your specific needs may vary. You can use the numbers and inquiry form on this page for more information.