Estate Planning Education Courses

CREATING A LIVING TRUST

Creating a living trust entails two simple steps. First, you create the document which describes your trust, names its trustees, and establishes the rules for its existence. This document is referred to as the trust. The second and all-important step is to transfer ownership of all your property now owned in your own name as an individual into the name of your trust, for which you serve as trustee. When you set up your living trust, you transfer the title of all your major assets (real estate, stocks, bonds, etc.) from your name to the name of the trust.

Why is this so important? Because if you own your assets in your name at death, then your estate will be subject to probate. But if your trust owns your assets, probate won't be necessary.

But if you don't own your assets outright, don't you lose control? Absolutely not, and that's the beauty of the living trust. It allows you complete freedom to manage, spend, buy and sell assets just as before. In fact, you'll experience virtually no difference in your day to day activities, except for one simple fact: while you have complete control, you have no ownership. And with no ownership, there's no probate. That's the second principle of this program: Don't own any property. Just use and control it.

Let's take a closer look at each of these two steps.

CREATING TRUST DOCUMENTS

Before we go on, let's get some important definitions out of the way. These definitions describe the "players" in the trust process and what their roles are.

First, the trustor is the person who creates the trust. Next is the trustee, who is the person who manages the trust. With a living trust, the trustor and the trustee are very often the same people. Who will benefit from the trust now and in the future, after the trustors have died? Those who have the right to enjoy the benefits of the trust are the beneficiaries. With a living trust, the trustors themselves are the beneficiaries of the trust while they live. For that time in the future when both trustors have died, the trustors designate new beneficiaries. The portion of the trust documents that name the ultimate beneficiaries is very similar to the language in a Last Will and Testament, and is often called a Will substitute.

Let's look at one last important definition: the successor trustee. One of the indispensable benefits of a living trust is that it allows you to designate someone to manage your financial affairs if you are so incapacitated, as a result of illness or injury, that you can't make decisions for yourself. This person of your choosing is called your successor trustee. Parents will often name their children as their successor trustees in the event of a serious illness or injury, or in the event of their death, when the trust may need to continue on until the death of the remaining spouse.

FUNDING THE TRUST

The living trust works best if it is fully funded, that is, if all property owned by a Trustor is transferred to the living trust. All bank and brokerage accounts, certificates of deposit, and securities not held in a brokerage account should be transferred to the living trust (for example, Jim and Rita Dunlap Living Trust, Trustees, or their successors as trustees). Homestead property and other real estate (including mineral interests and working interests in oil and gas properties) should be transferred to the living trust.

Except as otherwise noted, you will need to personally transfer all of the following property to the living trust:

• Bank, Savings and Money Market Accounts, Certificates of Deposit
• Brokerage Accounts
• Promissory Notes, Accounts Receivable
• Real Estate
• Closely Held Securities in Corporations, Limited Liability Companies, Partnerships, Proprietorships, Joint Ventures

For two trustees, title should be registered as Jim and Rita Dunlap Living Trust by Jim Dunlap and Rita Dunlap, trustees or their successors as trustees.

For one trustee, title should be registered as Terri Cooke Living Trust by Terri Cooke, Trustee, or her successor as trustees.

The funding of a living trust is a lot more trouble and expense than the preparation of a Last Will and Testament. But, the expense is minimal compared to the cost and inconvenience of making transfers after death has occurred, especially if the person who knows what is owned and where the titles are kept is no longer around to provide assistance.

In a revocable "living" trust, which we recommend in most cases, the trust must be properly funded as soon as possible. That is, assets must be transferred to the trust. If this is not done, you will have wasted your money and your assets will have to be probated through the Will. Find out if the attorney's office will do the funding or you will be left to do it yourself.

How much should you expect to pay for a quality plan? Fees vary significantly, depending upon the size of the estate, the amount of tax planning needed, the complexity of the plan and its distribution scheme, whether or not the family involves children or grandchildren of different marriages, the expertise of the attorney, the amount of counseling and guidance given by the attorney, whether or not the attorneys' office will do the trust funding, as well as the geographical area. I am always hesitant about mentioning fees in articles, because it is like saying what it will cost to cure an illness before the doctor has seen the patient. On the other hand, I think that it is important for people to have a realistic expectation of what good planning involves. In very general terms, you should anticipate that fees for an estate that does not require estate tax planning will be in the range of $1,500-$2,500. If tax planning is required, the range may be $1,500-$3,000 for estates up to $3 million. Those ranges do not include life insurance trusts, Family Limited Partnerships, charitable trusts or planning for generation skipping. For large estates, it is difficult to give a range, because of the varying complexities of each situation, but the fees will be considerably more. It is true that you can have off-the-shelf plans for less money, and for a very few people that may be all right. But don't expect much in the way of counseling, funding, or a plan designed to fit your particular need.

Funding the trust, or transferring ownership of your property into the trust's name, is critical to your generating benefits from your living trust. So, once your trust has been created, your next step will be to change the title of all your assets such as your home, bank accounts, stocks, bonds and other assets into the name of your living trust. Remember: you can still have complete control over an asset even if you don't own it in your name. As the trustor, trustee and beneficiary of your living trust, you have all the same rights to buy, sell, spend, reinvest and otherwise manage your assets, just as before. But since the assets are owned in the name of your trust, they are no longer in your probate estate, and thus out of the reach of the probate courts.

Further, your living trust is revocable, so you can move assets in and out of it, should you have a change of heart. We don't recommend that you keep assets outside your living trust, however, as you'll lose the benefits of having it.

THE PROS AND CONS OF A LIVING TRUST

We want to present as thorough and objective a presentation of the living trust as possible, and that includes both its advantages and disadvantages.

ADVANTAGES

The first and probably most important benefit of the living trust is that it helps you avoid court interference (probate) in either the management or distribution of your assets if you become disabled or die.

• A Living Trust can reduce or eliminate Federal Estate Taxes.
• A Living Trust can protect children from earlier marriage.
• A Living Trust can insure that your wishes are carried out and are not
  subject to attack.

If you become disabled, for example, your successor trustee can step in to ensure that your financial affairs are managed just as you've directed in your trust documents. That avoids the need for a process called a living probate, when your loved ones go to court and have a guardian appointed on your behalf to handle your financial matters.

Then, when you die, court interference is once again avoided, because your assets will pass on to your beneficiaries, just as you've directed, without the need for probate. So, you spare your loved ones delays, expenses and publicity.

DISADVANTAGES

To be fair, of course, there are disadvantages to the living trust. First, is the establishment cost. Compared to low-cost alternatives, such as a simple Will, the living trust can cost much more to create. That's because trust documents are often more detailed than last Wills and Testaments, and because the funding process takes a bit more effort. Of course, if you add in the cost of probate, both a living probate should you become disabled and a death probate, then the total cost of a living trust compared to the total cost of a last Will and Testament is probably substantially less.

Another disadvantage to the living trust is the nuisance factor. Remember that to get the benefits from the living trust you've got to transfer all your property to it at the beginning, and you've got to continue adding to the trust the new assets you acquire in the future. Because it requires a bit more of your effort at the start, and because it needs maintenance throughout your life to ensure it serves its purpose, the living trust places more of a burden on you than a Last Will and Testament. But on the other hand, it lightens the burden on your loved ones. So, you've got to be willing to make this small sacrifice on their behalf.

Finally, with the living trust, there is the opportunity for the mismanagement of your funds by the successor trustee. Because the successor trustee isn't subject to court supervision, the potential for your successor trustee to make mistakes or act improperly is increased. You can minimize this risk, however, by selecting your successor trustee wisely. You may even appoint co-trustees who will work together and help ensure that each acts properly on your behalf. Finally, you can even appoint an entity such as the trust department of a bank or a trust company to serve as your successor trustee.