August 19, 2009 > Legal Eyes
By Stephen F. Von Till, Attorney at Law, Fremont, CA
What is a "Living Trust"?
A "Living Trust" is a Will substitute. Anyone owning a house or having minor children should have a Living Trust. The Trust avoids delay and expenses of Probate Court and nominates guardians for children. Your assets remain confidential, not a public court record. Tax savings are often included.
A "Living Trust" is like a corporation. You put all of your assets - home, accounts, etc. - into the Trust. You name yourself as "Trustee." Being your own Trustee is like being president and sole shareholder - and more. You have complete control of your assets. You buy, sell, and use assets without restriction.
The Trust is created in the privacy of your lawyer's office. No formal filing with any agency is required. With your lawyer, you create a "Trust Declaration" - usually 10-25 pages long. This is the governing document. It specifies how the Trust is managed during your lifetime and how assets will be distributed after your death.
After naming yourself as Trustee, the document names "Successor Trustees" -- usually a relative, friend, or adult child. The Successor Trustee takes over if you become disabled or after your death. Because your assets are held in trust, not by you personally, no Probate Court proceedings are required. The trustee manages the assets according to your written directions in the trust document.
The Successor Trustee has access to bank accounts, stocks, and real estate. The Trustee has signing power for management -- similar to a corporation having a new president. But the new Trustee's power is limited by you in the trust document. Typically, you give the new Trustee only the power to gather assets and distribute to the persons named in your Trust (e.g., your children). Then the Trust terminates.
For minor children, the Trust will name your choice for guardian. You may create terms that prohibit your children from having complete access to assets at age 18. Many provide that children receive periodic payments until they reach a certain age of maturity. For example, the Trust may authorize support during college and then lump sums at ages 25 and 30. This allows young adults to learn from financial mistakes.
The Probate Court is not involved if assets are entirely in Trust. Probate is avoided. Delays, attorney's fees, and executor fees vanish. To give an idea of fees avoided, an estate of $1,000,000 will have probate fees of $46,000 (executor's and attorney's fees). Do not be fooled into believing that all Living Trusts are the same. A "Jack-in-the-Box" "one size fits all" Living Trust is a mistake that can lead to future lawsuits. Each Trust must be carefully tailored to meet family needs and legal requirements. Skillful drafting is essential.
A poorly designed Trust may result in law suits among heirs, in-laws, and others. I have seen entire estates liquidated to cover fees and costs, leaving nothing for heirs. The lawsuits "ate up" the assets that a properly drafted trust would have preserved.
Fees for drafting Trusts vary based on complexity and attorney experience. They are based on time involved in counseling, drafting, and advising. Many attorneys give a free consultation. This allows an approximation of the legal work necessary for the clients' particular situation. The savings over Probate fees are considerable. The Trust does not necessarily avoid Estate Taxes, but it gives an opportunity for planning. Tax saving devices may be considered.
There is no Federal Estate Tax in 2009 for an estate at $3,500,000 or less. Above that amount, the rate is 45%. However, this $3,500,000 exemption is repealed for 2010.
What will happen with estate tax in 2010? With our federal deficit, Congress may return to Clinton era rates: a $1,000,000 estate tax exemption with a rate at 55% for excess amounts. And remember, your estate may easily exceed $1,000,000, including real estate holdings, stocks, life insurance, and other assets.
The joke is that the current exemption gives you a financial advantage if you die in 2009. But most people prefer to delay that event regardless of tax consequences.
There will be tax changes for 2010. Proper estate planning can anticipate these. So don't hold your breath in 2009!
The Lesson: Don't put off until 2010 what you should do today. Make a Living Trust now. If you fail to plan your estate, you may not live to regret it.