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Investment Planning |
Revocable Living Trusts
Upon your death your assets may go through probate, whether or not you have a valid will. Most people want to avoid the probate process. It is costly, it strips you of your privacy, it is time-consuming for your heirs, and it is very slow. Until your estate is probated, your heirs may have difficulty accessing your assets.
A revocable living trust is a way to avoid probate and facilitate a smooth transition of your estate to your heirs. A properly drafted trust replaces a traditional will, but you should have a pour-over-will to facilitate the transfer of any asset left out of the trust. A trust allows you to control all of your affairs during your life and after your death. It also minimizes taxes, fees, probate and administration costs, and thereby preserves your wealth. A trust keeps you and your heirs in control, instead of passing control of your assets temporarily to the state. You may appoint yourself as the trustee (manager of the trust) and you name yourself as lifetime beneficiary, meaning you have the ability to use and enjoy the trust property. Most of your assets, including your home and brokerage accounts, will be re-titled in the name of the trust. As trustee of your own trust, you have 100% control over your assets. You can sell assets, buy assets, add assets to the trust, and remove assets from the trust. Since the trust is revocable, you can make changes to the trust or your estate plan at any time.
Your living trust must be drafted by an attorney. Through the trust you can accomplish the following goals:
- You can provide for your disability by appointing someone to administer your assets while you are disabled in accordance with your detailed instructions on how to care for you.
- You can avoid the public, slow, expensive probate process.
- You can direct the disbursement of your remaining property in a manner tailor-made to the individual needs and capabilities of each of your heirs. For example, you could give your mutual funds and cash to one child and your house to another child, if you wish.
- You can name your heirs as co-trustees. This enables you to retain control and independence while having the advice and counsel of your heirs. Selecting a family member as your co-trustee can provide for a smooth transition in the management of your affairs, in the event of your incapacity or death.
- The trust can protect your beneficiaries from the claims of their creditors. If you are concerned about asset protection, have your attorney insert a special clause into the trust document to protect the trust assets from the claims of the beneficiary's creditors. This type of trust is known as a spendthrift trust.
- No adverse lifetime income tax consequences. No additional tax returns are required; you'll report all taxable income on your own Form 1040.
- The assets will be distributed from the trust on the terms you specify. Consider when the trust's income and assets will be distributed. Note that if the assets are not distributed to your beneficiaries upon your death, the trust will have tax filing requirements.
A living trust estate plan is initially more expensive than a simple will, however the cost of a simple will plus the after-death probate administration costs will likely be more expensive. In addition to the trust, you'll also want a pour-over will. Although it may not be needed if your trust is fully funded, it is an extra layer of insurance in case you fail to put all of your assets into your living trust. The property subject to the pour-over will may have to be probated, but probate is likely to be avoided.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.