How You Can Avoid Probate, Save Taxes and More
1.
I have a will. Why would I want a living trust?
2. What is probate?
3. What's so bad about probate?
4. Doesn't joint ownership avoid probate?
5. Why would the court get involved at incapacity?
6. Does a durable power of attorney prevent the court's involvement
at incapacity?
7. What is a living trust?
8. How does a living trust avoid probate and prevent court
control of assets at incapacity?
9. Do I lose control of the assets in my trust?
10. Is it hard to transfer assets into my trust?
11. Doesn't this take a lot of time?
12. Should I consider a corporate trustee?
13. If something happens to me, who has control?
14. What does a successor trustee do?
15. Who can be successor trustees?
16. Does my trust end when I die?
17. How can a living trust save on estate taxes?
18. Doesn't a trust in a will do the same thing?
19. Is a living trust expensive?
20. How long does it take to get a living trust?
21. Should I have an attorney do my trust?
22. If I have a living trust, do I still need a will?
23. Is a "living will" the same as a living trust?
24. Are living trusts new?
25. Who should have a living trust?
26. Summary of Living Trust Benefits
1. I have a will. Why would I want a living trust?
Contrary to what you've probably heard, a will may not be the best plan
for you and your family--primarily because a will does not avoid probate
when you die. A will must be verified by the probate court before it can
be enforced.
Also,
because a will can only go into effect after you die, it provides no protection
if you become physically or mentally incapacitated. So the court could
easily take control of your assets before you die--a concern of millions
of older Americans and their families.
Fortunately,
there is a simple and proven alternative to a will--the revocable living
trust. It avoids probate, and lets you keep control of your assets while
you are living--even if you become incapacitated--and after you die.
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2. What is probate?
Probate is the legal process through which the court sees that when you
die, your debts are paid and your assets are distributed according to
your will. If you don't have a valid will, your assets are distributed
according to state law.
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3. What about probate?
It can be expensive. Legal/executor fees and other costs must be paid
before your assets can be fully distributed to your heirs. If you own
property in other states, your family could face multiple probates, each
one according to the laws in that state. Because these costs can vary
widely, be sure to get an estimate.
It
takes time, usually 9 months to a year or more. During part of this time,
assets are usually frozen so an accurate inventory can be taken. Nothing
can be distributed or sold without court and/or executor approval. If
your family needs money to live on, they must request a living allowance.
Your
family has no privacy. Probate is a public process, so any "interested
party" can see what you owned and who you owed. The process "invites"
disgruntled heirs to contest your will and can expose your family to unscrupulous
solicitors.
Your
family has no control. The probate process determines how much it will
cost, how long it will take, and what information is made public.
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4. Doesn't joint ownership avoid probate?
Not really – it usually just postpones it. With most jointly owned
assets, when one owner dies, full ownership does transfer to the surviving
owner without probate. But if that owner dies without adding a new joint
owner, or if both owners die at the same time, the asset must be probated
before it can go to the heirs.
Watch out for
other problems. When you add a co-owner, you lose control. Your chances
of being named in a lawsuit and of losing the asset to a creditor are
increased. There could be gift and/or income tax problems. And since a
will does not control most jointly owned assets, you could unintentionally
disinherit your family.
With
some assets, especially real estate, all owners must sign to sell or refinance.
So if a co-owner becomes incapacitated, you could find yourself with a
new "co-owner" -- the court--even if the ill owner is your spouse.
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5. Why would the court
get involved at incapacity?
If you can't conduct business due to mental or physical incapacity (Alzheimer's,
stroke, heart attack, serious accident or illness, etc.), only a court
appointee can sign for you – even if you have a will. (Remember,
a will only goes into effect after you die.)
Once
the court gets involved, it usually stays involved until you recover or
die. The court, not your family, controls how your assets are used to
care for you. This public process can be expensive, embarrassing, annoying,
time consuming and difficult to end if you recover. And it does not replace
probate at death – your family could have to go through the court
system twice.
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6. Does a durable power of attorney prevent the court's
involvement at incapacity?
A durable power of attorney lets you name someone to manage your financial
affairs if you are unable to do so. However, many financial institutions
won’t honor one unless it's on their form. And, if accepted, it
may work too well -- giving someone a "blank check" to do whatever
he/she wants with your assets. It can be very effective when used with
a living trust, but risky when used alone.
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7. What is a living trust?
A living trust is a legal document that, just like a will, contains your
instructions for what you want to happen to your assets when you die.
But, unlike a will, a living trust avoids probate at death, can control
all of your assets, and prevents the court from controlling your assets
during incapacity.
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8. How does a living
trust avoid probate and prevent court control of assets at incapacity?
When you set up a living trust, you transfer assets from your name to
the name of your trust, which you control -- such as from "Bob and
Sue Smith, husband and wife" to "Bob and Sue Smith, trustees
under trust dated (date of trust)."
Legally
you no longer own anything (don't panic: everything now belongs to your
trust), so there is nothing for the courts to control when you die or
become incapacitated. The concept is very simple, but this is what keeps
you and your family out of the courts.
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9. Do I lose control
of the assets in my trust?
Absolutely not. You keep full control. As trustee of your trust, you can
do anything you could do before -- buy/sell assets, change or even cancel
your trust (that's why it's called a revocable living trust). You even
file the same tax returns. Nothing changes but the names on the titles.
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10. Is it hard to transfer
assets into my trust?
No, and your attorney, trust officer, financial adviser and insurance
agent can help. You need to change titles on real estate (in- and out-of-state)
and other titled assets (stocks, CDs, bank accounts, other investments,
insurance, etc.). Most living trusts also hold your jewelry, clothes,
art, furniture, and other assets that do not have titles.
Also,
beneficiary designations on some assets (like insurance) should be changed
to your trust so the court can't control them if a beneficiary is incapacitated
or no longer living when you die. (IRA, 401(k), etc. can be exceptions.)
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11. Doesn't this take
a lot of time?
It will take some time -- but you can do it yourself now, very efficiently,
or you can pay the courts and attorneys to do it for you later, likely
at a greater cost. One of the benefits of a living trust is that all your
assets are brought together under one plan. Properly "funding"
your trust protects the assets that have been transferred into it.
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12. Should I consider
a corporate trustee?
You may decide to be the trustee of your trust. However, some people select
a corporate trustee (bank or trust company) to act as trustee or co-trustee
now, especially if they don't have the time, ability or desire to manage
their trusts, or if one or both spouses are ill. Corporate trustees are
experienced investment managers that are objective and reliable, and their
fees are usually reasonable.
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13. If something happens
to me, who has control?
If you and your spouse are co-trustees, either of you can act and have
instant control if one of you becomes incapacitated or dies. If something
happens to both of you, or if you are the only trustee, your handpicked
successor trustee will step in. If a corporate trustee is already your
trustee or co-trustee, they will continue to manage your trust for you.
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14. What does a successor
trustee do?
If you become incapacitated, your successor trustee looks after your care
and manages your financial affairs for your benefit as long as needed,
using your assets to pay your expenses. If you recover, you automatically
resume control. When you die, your successor trustee pays your debts and
distributes your assets. All this is done quickly and privately, according
to instructions in your trust, without court interference.
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15. Who can be successor
trustees?
Successor trustees can be individuals (adult children, other relatives,
or trusted friends) and/or a corporate trustee. If you choose an individual,
you should name several in succession in case your first choice is unable
to act.
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16. Does my trust end
when I die?
Unlike a will, a trust doesn't have to die with you. Assets can stay in
your trust, managed by the person or corporate trustee you have chosen
– until your beneficiaries (including minor children) reach the
age(s) you want them to inherit, or to provide for a loved one with special
needs.
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17. How can a living trust save on estate taxes?
If you die in 2003 and the net value of your estate (assets less debts)
is more than $1,000,000 ($1.5 million in 2004), federal estate taxes (starting
at 41%) must be paid. If you are married, your living trust can include
a provision that will let you and your spouse leave up to $2 million estate
tax-free to your loved ones, saving $435,000 ($3 million in 2004).
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18. Doesn't a trust
in a will do the same thing?
Not quite. A will can contain wording to create a testamentary trust to
save estate taxes, care for minors, etc. But, because it's part of your
will, this trust cannot go into effect after you die until the will is
probated. So it does not avoid probate and provides no protection at incapacity.
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19. Is a living trust
expensive?
Not when compared to all the costs of court interference at incapacity
and death. How much you pay will depend on how complicated your plan is.
Be sure to get an estimate.
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20. How long does it take to get a living trust?
It should only take a few weeks to prepare the legal documents after you
make the basic decisions.
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21. Should I have an
attorney do my trust?
Yes, but you need the right attorney. A local attorney who has considerable
experience in living trusts will be able to give you valuable guidance
and peace of mind that your trust is prepared properly. In some states,
qualified paralegals can now also prepare trust documents; however, they
cannot give you legal advice.
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22. If I have a living
trust, do I still need a will?
Yes, you need a "pour-over" will that acts as a safety net if
you forget to transfer an asset to your trust. When you die, the will
“catches" the forgotten asset and sends it into your trust.
The asset may have to go through probate first, but it can then be distributed
as part of your living trust plan.
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23. Is a "living
will" the same as a living trust?
No. A living trust is for financial affairs. A living will is for medical
affairs—it lets others know how you feel about life support in terminal
situations.
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24. Are living trusts
new?
No, they've been used successfully for hundreds of years.
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25. Who should have
a living trust?
Age, marital status and wealth don't really matter. If you own titled
assets and want your loved ones (spouse, children or parents) to avoid
court interference at your death or incapacity, consider a living trust.
You may also want to encourage other family members to have one so you
won't have to deal with the courts at their incapacities or deaths.
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26. Summary of Living
Trust Benefits:
• Avoids probate at death, including multiple probates if you own
property in other states.
• Prevents court control of assets at incapacity.
• Brings all your assets together under one plan.
• Provides maximum privacy.
• Quicker distribution of assets to beneficiaries.
• Assets can remain in trust until you want beneficiaries to inherit.
• Can reduce or eliminate estate taxes.
• Inexpensive, easy to set up and maintain.
• Can be changed or cancelled at any time.
• Difficult to contest.
• Prevents court control of minors' inheritances.
• Can protect dependents with special needs.
• Prevents unintentional disinheriting and other problems of joint
ownership.
• Professional management with corporate trustee.
• Peace of mind.
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NOTE:
This information is designed to provide a general overview with regard
to the subject matter covered and is not state-specific. The authors,
publisher and host are not providing legal, accounting or any other advice
which purports to be specific to your situation. The contents of this
website are believed to be completely reliable. Nevertheless, some material
may be affected by changes in the laws or interpretations of such changes
since the material was entered on the website. If legal advice or other
expert guidance is required, the services of a competent professional
in the field of law, accounting, insurance or investments should be sought.
Price
& Farrington, PLLC - Attorneys and Counselors
at Law
12501 Bellevue-Redmond Road, Suite 215 ....Bellevue,
Washington 98005
Phone: 425.451.3583.. Fax: 425.452.0153 ..E-mail: contact@pricefarrington.com
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