A Brief explanation of the Revocable Living Trust and supporting documents provided in an estate plan.
The Revocable Living Trust
1. What is it? A Revocable Living Trust is an entity [a Trust] established to hold title to all the assets of Settlor(s) (the individual or spouses who set up the trust) to be administered by Trustee(s) for the benefit of the named Beneficiaries. One person or two spouses can be at the same time the Settlors, Co-Trustees and the Beneficiaries of the trust. The trust names the beneficiaries who are to inherit the trust assets upon the death of the Settlors. Successor Trustees are named who will administer the trust upon the death of the Settlors. Generally, at the death of the Settlors, the trust assets are distributed to the children of the Settlors or other beneficiary, unless they are still minors or as otherwise directed by the Settlors.
The Living Trust is revocable; meaning that at any time, the Settlor(s), can withdraw from the Trust all or any portion of the assets transferred to the Trust. Since this is so, the IRS has determined that all income that is generated by Trust assets is to be reported on the Settlors own individual Form 1040 income tax return; just as they did prior to setting up the trust.
2. How is it Established? The Settlors execute the instrument setting up the Living Trust and then “fund” the trust by transferring assets to the trust by signing deeds and/or assignment of personal assets. Title to checking accounts, brokerage accounts, etc is re-titled in the name of the Trust.
Once the trust is “funded”, meaning all assets are re-titled or transferred into the Trust, daily life for the Settlors goes on just as it did before. The Trustees (i.e. the Settlors) write checks for utilities, food, house payments and all other expenses of the Beneficiaries (i.e. the Settlors) using the same checking accounts (now retitled in the name of the Trust); just as the Settlors did for themselves prior to setting up the trust. Major items are thereafter purchased in the name of the trust.
3. Advantages of a Living Trust over a Will? There are many advantages to a Living Trust. Briefly, some of them are: avoid probate and attorney fees [a will must be probated to be effective]; private rather than public handling and knowledge of assets [an inventory and appraisement of all estate assets must be filed in a probate matter]; provisions for easily handling the business affairs of deceased, disabled or incompetent Settlors or beneficiaries without court intervention or guardianship [a will cannot do this]; vastly increased protection from lawsuit by an heir or someone trying to challenge the trust, as opposed to what can happen in a will contest over a will; receive benefit of estate planning documents while still alive [will takes effect only after death]; and, easy succession of trustees [successor executors are approved only after court hearing].
The Pourover Will
The Will is called a Pourover Will because assets owned by the decedent at death [that is, those assets by choice, neglect or acquired after the trust was established and which were not placed in the Trust] are “poured over” into the Trust. This means, of course, that then the assets become a part of the trust and are administered as a part of the Trust. The Trust and not one’s spouse or family is named as the beneficiary of the will. One for each spouse.
Living Will or “Directive to Physicians”
A directive to Physicians to “pull the plug” on a terminal illness, so as to not artificially prolong the moment of death and run up wasteful hospital bills. One for each spouse.
General Durable Power of Attorney
A Power of Attorney is needed if you become incapacitated, disabled, in a coma, etc. and cannot act for yourself; and have assets which were not owned by Trust. Appoints individual(s) to act for you as your “Attorney-in-Fact” to deal with your property. One for each spouse.
Durable Power of Attorney for Health Care
Appoints others to act as an agent to make health care decisions; when an individual cannot make them on his or her own. Usually children are appointed but can be anybody. One for each spouse.
Through proper planning and drafting a Living Trust can shelter at least $10,000,000 of net assets for a husband and wife to be passed on to their heirs tax free. Additionally, a farm or ranch (or other real property used in a business) can potentially have it’s market value reduced by up to $750,000, through the use of a special valuation method if certain conditions can be met. Proper tax planning can be important because once the exemption amount ($5,500,000 per individual) is passed, the estate tax rate starts at 37% and goes up to 55% of all value that exceeds the exemption amount.
All documents are individualized to fit the particular fact and potential tax situation of each person/family.
I will be happy to answer any questions that may arise.