What's the difference between a Will and a living trust?
A Will is a legal document that dictates how your assets are to be distributed after your death. A Will requires probate, which is Latin for "prove the will." Probate is a court process by which the Will is validated. The Will is available for inspection by any interested party. So are the assets (along with their fair market value) and the debts of the estate. When your estate enters the probate process, your executor does not have exclusive control over the estate. The probate court and probate attorneys have some control over it. Also, a simple Will requires the distribution of all assets upon death. If your beneficiaries are minor children, the court may continue to control the estate until the children are adults (age 18) and then they receive all of the estate without any adult oversight.
A living trust avoids probate because your property is owned by the trust, so technically, there's nothing for the probate courts to administer. When you and your spouse die (or become incapacitated), whoever you name as your "successor trustee" controls your assets and handles or distributes them according to your instructions, without the involvement of judges or attorneys. Trusts may be utilized to prolong the distribution of assets to minor beneficiaries after your death and to provide adult supervision over those assets until they are older than 18. You may choose the age at which assets are distributed to them.
If I set up a living trust, can I be my own trustee?
Yes. In fact, most of the people who create living trusts act as their own trustees. If you are married, you and your spouse may act as co-trustees. When one of you dies or becomes incapacitated, the other spouse automatically becomes the sole trustee (without court involvement). You have absolute and complete control over all of the assets in your trust. When both spouses die or become incapacitated, their hand-picked, "successor" trustee assumes control over the trust, without the need to consult attorneys of the court.
Will a living trust avoid income taxes?
No. The purpose of creating a living trust is: (1) to avoid probate during the life of an incapacitated individual; (2) to avoid probate at the individual’s death; (3) to reduce or eliminate federal estate taxes; and (4) to prolong the distribution of assets to beneficiaries beyond the age of 18. It's not a vehicle for reducing income taxes. In fact, if you're the trustee of your living trust, all income generated by the trust will be reported directly on your regular Form 1040 income tax returns, exactly as you filed them before the trust existed. In other words, there are no new returns to file and no new liabilities are created.
Will a living trust provide creditor or judgment protection for me and my children?
The answer to this question depends upon who is in control of the trust. If you control the trust (and, therefore, have unfettered access to all of its assets) it will not provide creditor or judgment protection for you. If someone else controls the trust, it may provide creditor protection for you. Another factor that must be considered is the distribution provisions of the trust itself. Even if the trust is controlled by someone else, it only will provide creditor protection if the distributions from the trust to you are limited to certain “purposes” such as health, education, maintenance and support. Again, an unlimited right to all of the trusts assets may defeat creditor and judgment protection. With respect to your children, the same rules apply. If you are in control of the trust and they do not have an unlimited right to assets from the trust (i.e., presumably because they are your assets and you have access to them during your lifetime), the trust may protect your children’s inheritance.
Can I transfer all of my real estate into my living trust?
Yes. In fact, all real estate that you own should be transferred into your living trust as a means to avoid probate for those assets. If you own real property and you do not transfer it into your trust, you may have a probate in each state where you own property. When all of your real property--and any other type of asset--is owned by your living trust, there is no probate anywhere (i.e., you may avoid probate in all states, regardless of the state in which your property is located). If you have assets in multiple states and they are not transferred to a trust, your estate may go through a probate in each state where there is property.
Is the living trust some kind of loophole the government will eventually close down?
No. The living trust has been recognized under our system of laws for centuries. When you create a living trust, you really are creating another person in the eyes of the law. From a legal perspective, the trust can do anything you can do. It can own property, lend money, have debts, etc. The government really has no interest in making your family endure a probate, if you have a wish to avoid it. A living trust may eliminate probate, during incapacity and, a second time, at death, if utilized properly. It also reduces or eliminates estate taxes and allows you to prolong the distribution of assets to beneficiaries beyond the age of 18.
Isn't a living trust only for the rich?
No. The central issue in estate planning is control. A living trust can help anyone protect his or her family from unnecessary probate fees, attorney's fees, court costs and federal estate taxes. In certain circumstances even individuals with modest estates can derive meaningful benefits from trusts. Estate planning is about control. However, what is beneficial for one person or family may not be so for another. Circumstances (e.g., second marriages with children from prior marriages, special needs children, the “black sheep” of the family, etc.) may dictate that a living trust serves the needs of the family better than a Will. On the other hand, a Will may do the job nicely. In order to determine whether a living trust is right for you, a thorough and objective review of your family circumstances is in order.
I’ve heard about life insurance trusts. What are they? How do they work?
Generally, life insurance is not subject to income taxation upon the death of the insured. However, ownership of the policy results in the inclusion of the insurance proceeds in the insured’s estate and, therefore, may make them subject to estate taxes upon the death of the insured. Life insurance trusts are designed to own and be the beneficiary of life insurance policies. This means that the insured no longer owns the policy and it is not counted as part of his or her estate for the purpose of estate tax calculations. Additionally, the trust may protect the insurance proceeds from creditors. The trust also may be drafted to last for the lifetime of your children and then pass without estate taxes to your grandchildren.