QUESTIONS & ANSWERS
WHAT ARE THE BASIC INGREDIENTS IN A TRUST?
* Trusts, entities created to own property, can be used by people of minor or moderate means, as well as by the rich.
* When creating a trust, you need to carefully spell out the identities of the parties, their roles and the assets you mean to transfer to the trust.
* Control can be retained, especially when first getting comfortable with the concept and use of trusts.
* Although you could give up control of assets, to gain tax advantages and asset protection, you still can continue to exert considerable influence over trust property.
* Trusts generally have one or more beneficiaries and one or more trustees. Someone can function as both trustee and beneficiary.
* The trustee, as asset manager, is the controller, so considerable care should be taken in selecting trustees, co-trustees, and successor trustees.
* Trustees have a fiduciary responsibility to invest the trust assets prudently and CANNOT legally convert assets to others not named as beneficiaries.
* When drawing up a trust, get professional advice from many sources; even if that means you end up spending substantial amounts.
* Trusts set up while you are alive are living trusts, which may be revocable or irrevocable. They only become active upon your death, but then automatically protect the beneficiaries without requiring probate.
* Testamentary trusts, which take effect at your death, are irrevocable.
* Irrevocable trusts are much more powerful planning and asset-protection tools than revocable trusts. And... you can have irrevocable trusts in addition to your revocable trust. Absolutely the best way to go.
* When a trust is established, specific language should be should be included on how and when the trust can be terminated.
WHAT DO WE DO FIRST?
The Will is the most important document now. FIRST; make a few copies of all of the forms to practice on! You can fill it out, right or wrong, in only a few minutes. Then, after you have had that experience and practice, do it again until you feel you accomplished all things you feel are necessary. Wills can be changed as often as wanted. The Will is a complimentary document to a Trust. Keep in mind that a Will does not guarantee anything. There can be disputes and many wasted dollars (and time) negotiating or settling with outsiders, as well as family.
The SECOND Document to fill out.
The Trust is the second most important document to complete. AGAIN!; make a few copies of all of the forms to practice on! Most items you were concerned with you selected and determined in the Will. If you have not yet created a Will by this point; stop now and do the Will! If you have completed a Will, the Trust is your next step.
Although you now have a Will in place, the Trust is designed to supercede and be activated now. The Will is only to cover items that you may not have properly protected or had titled to the Trust. In other words, the Trust will be your Supreme Commander and Assistant; while the Will is standing by to be your cleanup crew. In fact, the word "Custodian" is associated with documents often.
Keep in mind that any of the documents can be changed whenever you make the effort to do so.
WHY SHOULD WE MAKE IT IRREVOCABLE?
A trust that is created while you're alive is called a Living Revocable Family Trust (or a combination using some of these
words). Lawyers sometimes call it an Intervivos Trust ("during life trust"). Trusts created in your will are called Testamentary Trusts; that "testify" to creation of a trust to take effect upon death.
Trusts primarily are classified as revocable or irrevocable. A revocable trust can be changed or terminated by the creator. An irrevocable trust, on the other hand, can't be cancelled by the creator. Usually, the irrevocable type does not allow changes either.
Testamentary trusts are always irrevocable: They can never be annulled or substantially altered. Living trusts may be
irrevocable or revocable. In most states, a trust that is not specifically revocable is considered an irrevocable trust.
Because of their permanence, irrevocable trusts are powerful tools. Assets transferred into such trusts may be outside your
taxable estate. Since a revocable trust is "temporary", it is ignored in most legal situations until it becomes permanent" (usually at the death of the creator). Perhaps just as important because of the popularity of lawsuits, assets transferred into an irrevocable trust may be protected from creditors and other claimants. The primary requirement here is that the assets must be transferred to the irrevocable trust prior to the existence of a problem.
Revocable living trusts, as the name implies, are not as cast-in-stone as irrevocable trusts, nor do they offer the same degree of tax use and creditor protection. Instead, they're commonly used to avoid probate and to protect assets in case of the owner's incapacity. Again, usually, at the asset owner's death, a revocable living trust becomes irrevocable.
BUT, if you put in the proper provisions, you can make the trust(s) irrevocable, yet still able to modify the important parts, like the choices of Trustees and Beneficiaries, or the conditions of benefits.
HOW DO WE ACTIVATE THE TRUST AFTER IT IS CREATED?
TRANSFERING TITLE AND OWNERSHIP TO THE TRUST
After your trust is in place, the hard part begins. It's easy enough to say, "Transfer your assets into trust." In practice, it means going through a formal process of changing the written legal title to all the relevant assets so that they are officially owned by the trust. If your brokerage account is held by "John and Joan Smith," for example, you need to formally change ownership to, say, the "John and Joan Smith Trust Agreement dated April 2, 1994," with John and Joan Smith acting as co-trustees. This is tedious, but you must do it if you want your assets to avoid probate. A good lawyer can help you deal with the paperwork at additional costs.
Observation: Mortgaged property calls for special treatment. Most mortgage holders require you to get their consent before re-titling the property. You may have to sign a statement acknowledging that the mortgagor still has a lien on it. Depending on state law, you may also have to have a new deed drawn up--what's called a conforming deed. You may pay a $20 or $30 fee for filing the deed, but there is no title search or transfer tax to worry about. Handle a second mortgage or home equity loan in the same way.
Asset sales must be made by the trust, not by you. Similarly, new acquisitions must be titled to the trust. If you don't push the right papers, assets will be excluded from your trust and subject to probate, exactly the result you wanted to avoid.
As hard as you try, you won't be able to re-title everything you own. Thus, a revocable trust should be supplemented by a (backup) "pour-over will." This document should state that assets not already in your revocable trust shall be included in the trust at your death. Keep in mind, though, that assets transferred into a trust via a pour-over will are subject to probate.
WHAT DO WE DO IF THE TRUSTEE DIES OR IS SICK?
Once your revocable trust is set up, ongoing costs are minimal. No tax preparation is necessary because all income flows through to the beneficiaries--usually you or you and your spouse. If you need to modify your trust for any reason, you can do so with a trust amendment, signed only by you or you and your spouse, without witnesses. If you move from one state to another, you may need a modification but you won't have to pay for a complete rewrite.
When setting up a revocable trust, the most important thing you need to do is to name a successor trustee or trustees. Assuming you're the original trustee, your successor will take over at your death, when your revocable trust becomes an irrevocable trust. Then the successor trustee will distribute trust assets to your heirs, as per your wishes. There's no delayed income and no disputes over managing your real estate or your company. If you should become incapacitated as you grow older, thus unable to control your own affairs, your successor trustee can take over.
Who should you name as successor trustee? In most cases, your spouse or grown child is an appropriate choice. You want to be confident your successor is a diligent, detail-oriented person who is likely to outlive you. You also want to be confident that your successor is trustworthy--someone who will carry out your wishes and also be a prudent fiduciary should you become incapacitated or have minor heirs when you die. If that person is familiar with your affairs, so much the better.
As we have seen, a successor trustee can help smooth the transition in case you're still alive but unable to handle your own affairs. Unfortunately, we're living longer these days but not always living better. It's not a pleasant subject, but you never know whether you'll become seriously ill or otherwise disabled at some time in your life. With a living trust in place, your successor trustee can step in and take over management of trust assets, without a court appointing a conservator.
Most importantly, your successor trustee will take over in private. You and your family won't have to go through the public
humiliation of a court hearing in which all the intimate details of your life are revealed. That happened to Groucho Marx, who was declared incompetent by a Los Angeles court while he was in his eighties. He was living with a woman named Erin Fleming, who wanted to be named guardian; that touched off a public battle with Marx's family, winding up with a relative being named as guardian. If Marx had set up a revocable trust, the public circus could have been avoided.
Recommendation: To fully protect yourself, have either a "springing" or a durable power of attorney in place. This
authorizes someone you trust to manage your business and financial affairs in case of your disability or incompetence. A springing or durable power of attorney also can enable additional assets to be transferred into your trust even should you become incompetent.
HOW OR WHEN DO WE END THE TRUST?
The best question is "Why would you want to end the protection?"
Of course, when the assets are gone or spent, the trust is ended.
You can make specific situations or time when the trust will end in the trust document itself. When you create a trust, you need to give some thought to how it will end. Generally, that's not a problem with a revocable trust. Just make sure there's a specific revocability clause in the trust. Depending on the clause, you'll be able to revoke the trust by giving written notice to the trustee.
With an irrevocable trust, you should establish definite criteria for the trust to terminate:
* You can set a definite term (e.g., 10 years) for the trust.
* You can peg the trust to the age of a beneficiary--most state laws require that trusts be terminated within 21 years after the death of the last named beneficiary to die.
* You might give the trustee the power to distribute all the assets, thereby terminating the trust.
* You can give the trustee flexibility. For example, a trust for the benefit of a child might be set to terminate at age 35 but the trustee can have the discretion to terminate the trust if the assets shrink and it becomes impractical to continue.
There are circumstances in which an irrevocable trust can be terminated prematurely. If everyone who has an interest in the trust signs a release, the trust may terminate. Then again, it may not, depending on state law and the circumstances involved. Rather than rely on a premature termination, take care to spell out termination procedures when you establish the trust.
COMMON QUESTIONS ONLY YOU CAN ANSWER:
That poses some difficult questions for both would-be trustees and trust creators.
* Should you keep the income in the trust? If so, a substantial amount of the earnings will be lost to taxes.
* Should you distribute trust earnings to beneficiaries? If the beneficiaries are in a lower tax bracket, that will save income tax. However, that might defeat the purpose of the trust, because those distributions might be squandered, lost to a creditor and fall victim to similar calamities.
Caution: If trust income is distributed and spent, the benefit of compounding will be lost.
Trust distributions are considered unearned income. Therefore, if trust income is distributed to a beneficiary under age 14, you run into the "kiddie tax"--unearned income over $1,200 per year is taxed on the parent's marginal rate.
* Should you set up several trusts instead of one? That could decrease taxes, but could increase administrative expenses and tax preparation fees. Also, trusts with the same control and beneficiaries could be merged for tax purposes.
Recommendation: Set up separate trusts for each of your children.
Recommendation: Include each beneficiary's children.
Recommendation: Put a different Trustee control for each trust.
Recommendation: Put each significant asset in a separate trust.