Entrusting Your Estate to a Trust
What is a Living Trust?
A trust is an arrangement wherein one person (the trustee) holds legal title to property for another person (the beneficiary). It’s called a living trust because you create the trust while you are alive. (The alternative is a trust created at your death under the terms of your will).Why Do You Make a Trust?
The main reasons to create a living trust are to avoid probate, reduce estate taxes or set up long-term property management. For many people, a will is sufficient to avoid probate because the will already names the people who will inherit the decedent’s property. The advantage of holding your valuable property in trust is that, after your death, the trust property is not part of your estate for probate purposes (although it is counted as part of your estate for federal estate tax purposes).
How Does A Living Trust Work?
Upon your death, the successor trustee (the person you have appointed to handle the trust after your death) transfers ownership to the beneficiaries you named in the trust. In many cases, this process takes only a few weeks, and there are no lawyer or court fees to pay. When all the property has been transferred to the beneficiaries, the living trust ceases to exist.
Is There a Difference Between a Will and a Living Trust in Terms of Privacy?
Yes. It might be important for you to know that, while a will becomes a matter of public record when it is submitted to a probate court, the terms of a living trust need not be made public.
If You Have a Living Trust, Do You Still Need to Make A Will?
Yes. A will is necessary for any property that doesn’t transfer to yourself as trustee of the living trust. For example, if you acquire property shortly before you die (such as a summer cabin), you may not think to transfer ownership of it to your trust, especially since it isn’t your primary residence. Your trust document will not include the cabin under the terms. However, in your will, you can include a clause that names person(s) to get any property that you have not left to a particular person or entity.
Additionally, if you don’t have a will, any property that isn’t transferred by your living trust will go to your closest relatives in an order determined by state law. These laws may not distribute property in the way you would have chosen.
What About Federal Estate Taxes?
The federal government has drastically changed the ruling on taxable estates; currently the first one million dollars is tax-exempt. (This will be raised to $1.5 million this year or next year, then $2 million, then $3.5 million. In 2010, there will be no estate tax at all at the federal level.)
What About Estate Taxes Imposed by the State?
In the past, most states did not impose their own estate tax but took a share of the federal estate tax paid by large estates. However, since the federal government is not charging tax on any estate less than one million dollars, the states looked for ways to get back some of their former revenues. Therefore, some states are collecting tax from estates that aren’t big enough to owe any federal tax. For example, three states charge state estate tax on estates worth more than $675,000. (Nonetheless, property left to a surviving spouse is exempt from state estate tax, just as it is exempt from federal estate tax.)
What Might You Consider If You Have Children?
If you have a Will, it is likely that everything is set to go to the surviving spouse. That assumes, however, that your spouse survives you. In most cases, the children are named as secondary beneficiaries, upon the death of the second parent or in the event of a simultaneous death. If parents die while the children are minor, a guardian must be appointed over the children’s inherited assets. Guardianship usually ends at age 18 and assets must then be distributed outright.
A Trust, on the other hand, might provide for distributions only at a later age, once your children have developed more maturity and financial responsibility. Until then, you can set it up so that the trust takes the approach most parents do while they’re alive: there is flexibility so that the situation of each child is dealt with appropriately (i.e. orthodontia, private music lessons, etc.), without requiring a fixed amount of spending over the years. |
