There is one thing we all share in
common: our days on this planet will come to an end - probably by
surprise. That is about as basic a 'common denominator' as you can
possibly get. To protect our loved ones from having to endure years of
court procedures and legal fees, the Revocable Living Trust ('RLT') is a
widely-used way to avoid the two related court proceedings known as
Probate and Conservatorship, and to pass our assets on to one's loved
ones with favorable tax planning.
WHAT IS CONSERVATORSHIP?
Conservatorship is court proceeding.
It arises when someone cannot manage their financial affairs and it's
time to have someone 'step in'. Maybe they've suffered a stroke or are
in a coma or some other disabling condition. The court can appoint a
'Conservator' over the person or the estate or both. The conservator's
job is to temporarily manage the financial affairs and property of the
person they have been appointed for. This is often done by someone who's
either a professional (a bank, a CPA, attorney, etc.) but sometimes it
might be a family member who has the experience to warrant a court
appointment. The conservator is given legal powers by the court that
remain in place until the person recovers and is able to regain control
over their financial affairs, or until death, whichever occurs first.
Many times a person who has undergone a conservatorship proceeding may
be placed in a residential treatment facility and the person who has
been appointed as their conservator will manage their finances, bills,
obligations, contracts, housing and other financial decisions on their
behalf.
WHAT IS PROBATE COURT?
Probate is also a legal proceeding.
When a person has died with no will the court supervises the estate,
ordering property distributed according to the deceased person's
instructions, or if there is no will, then according to local state law.
An executor or personal representative is appointed by the court and he
or she has the responsibility to report back to the court as matters
are accomplished. Tax returns are prepared and filed. Bills are paid.
Mortgages are satisfied. When the court is satisfied that all of the
heirs have been identified, the bills, taxes and debts paid off, the
remainder is distributed to the persons entitled under the Will. Dying
without a will is dangerous. It can trigger distribution of assets that
you do not control and may not have wanted.
LIVING TRUSTS AVOID THESE PROBLEMS.
With a Living Trust in place, you
avoid both Probate and Conservatorship proceedings. That's because once
you execute the trust and transfer ownership of your checking account,
savings account, home and other property into the trust's ownership, the
trust is in fact the 'owner' of the property. You of course are both
the trustee (administrator) and the beneficiary during your lifetime.
Under the trust, you decide who will take over as trustee afterward, and
you alone decide who gets what and when. The successor trustees may be
your most responsible child, a grandchild, a trusted fiend or relative
or even a financial institution such as the trust department of a bank.
With the Living Trust in place, you can simply bypass the need for
either Probate or Conservatorship altogether.
If you are concerned about someone
'contesting' the trust, there is a way to avoid that problem. One way is
to specifically disinherit someone by name so they can't later claim to
a judge that you 'forgot them'. Another way is a way that I personally
think is better. You leave that person a much smaller amount (say one
dollar or five dollars) but no more, and you include a provision in the
Living Trust that if any person contests your trust instructions, they
are to be treated as if they died before you and are therefore entitled
to nothing at all. This is an easy way to avoid having someone try to
tie up your estate in litigation and at the same time penalize them
completely if they choose to cause you any problems as to how you wanted
to distribute your estate.
WHAT SHOULD THE LIVING TRUST OWN?
The Living Trust is a separate
'person' under the law and can own various kinds of property. Typically
the kinds of assets that go in to a Living Trust include: your Personal
Residence, Personal (not business) bank accounts, credit union accounts,
certificates of deposit, brokerage or trading accounts, stock of
subchapter 'S' corporations, personal furniture, tools and furnishings,
and collections such as art, sculpture or other kinds of collections
that may be of value. Basically, anything you want to avoid probate.
TAX PLANNING and THE LIVING TRUST.
There are some good opportunities
for tax planning with the Living Trust. Using your Unified Credit, as of
2006 you are able to pass up to $2,000,000 (per person) down to your
children. That's the number for single people. Married persons can each
pass the same thing, so for a couple that means up to $4,000,000.
AVOIDING MISTAKES.
The most common mistake made with a
Living Trust is the failure to properly 'fund' it. That means actually
changing the ownership of your personal residence, personal checking
accounts, etc. over to the legal name of your Trust. Some will establish
a Living Trust, sign the appropriate documents (including the Power of
Attorney for Health Care, the Pour-Over Will, Directive on Artificial
Life Support, etc.) but never actually change legal ownership of their
assets into the Trust.
Funding the trust means that you
will record a new deed on your home in the county where the property is
located. You'll also visit your bank or credit union and sign new
signature cards as the 'trustee' of your Living Trust. If the bank or
credit union needs a copy of your trust, remember that it is a private
legal arrangement. So instead of allowing them to copy all the private
provisions, simply provide them with a photocopy of the 'Abstract'
(sometimes called the 'Certification') which sets forth the powers of
the trustee and indicates who established the trust, etc.
Your Living Trust can literally save
your surviving family members thousands of dollars in legal costs,
probate fees, conservatorship fees, and months and months of
administrative time. With a Living Trust as the owner, assets may be
transferred relatively quickly and with a minimum of involvement by
outsiders who might otherwise disrupt your plans for the loved ones you
wish to benefit.
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