Wills Or Trusts
The Case For Living Trusts
How To Eliminate The Hassles Of:
Probate Lawyers, Delays, Legal System
INTRODUCTION TO LIVING TRUSTS
Simply put, living trusts are an expedient way to transfer
property at your death. A living trust is a legal document
that controls the transfer of property in the trust when
Generally, living trusts are established during an
individual’s lifetime and can be modified or changed while
that person is still alive. Circumstances do change and
the option to make alterations in the trust is important.
For this reason, a living trust is set up on a “revocable”
basis. Revocable means you can modify or change the
trust’s provisions. Your other option would be to create
an irrevocable trust, but once put in place, you are unable
to change the terms of the trust regardless of the
As you will see, living trusts speed up the process by
which your property moves to your designated beneficiaries
after you die. Today, and into the foreseeable future,
this is vitally important as the United States is
experiencing an unprecedented wealth transfer.
It is estimated, according to “Fortune” magazine, that some
$6.8 trillion worth of assets will soon pass from parents
to children, grandchildren, friends, charities and others.
The questions remains: how will this wealth be transferred?
Will it be the traditional methods of wills and probate or
the new revolution of estate planning that has incorporated
living trusts? Many legal experts believe that living
trusts are the future of wealth transfers.
The concept of living trusts has created controversy simply
because the legal profession seems evenly split on the
issue. Estate planners seem to favor living trusts but
there are enough opposed to the concept to avoid a clear
Living trusts are also called “inter vivos” trusts, a Latin
term preferred by attorneys. The Internal Revenue Service
calls them “grantor” trusts. All mean the same thing.
The Internal Revenue Service, however, recognizes the
living trust as a valid estate planning tool and exhibits
no prejudice against it. There are specific provisions in
the tax laws that deal with living or grantor trusts.
The revocable provision means that while you live, you
still effectively own all of the property that has been
transferred into the trust. You can sell it, spend it,
give it away; in short, anything you wish since the
property is still yours. The trust itself is merely a
document in your lifetime that truly doesn’t begin to
function until you die. Then, the trust operates to
transfer your property privately, outside of the reach of
probate, to the specific individuals or organizations to
whom you wish to leave your worldly possessions.
What is probate? Why do people try to avoid it?
Technically speaking, probate is the process by which one
proves the validity of a will in court. If there is no one
contesting the will, this should not take long. If there
are complications, probate can take years. For those of
you familiar with the works of Charles Dickens, recall
“Bleak House” and the never-ending probate case of Jarndyce
Probate has come to mean not just proving the validity of
the will but the entire administrative sequence involving
the passing of an owner’s title to property after the
owner’s death. The deceased’s property is inventoried,
creditors are identified and paid following the payment to
the estate’s attorney, executor and tax entities.
The term “probate” also identifies the court which has
jurisdiction over the estate probate and administration.
Probate court also has jurisdiction over the guardianship
of minors and mentally incompetent adults. All wills go
The average length of the probate process is twelve to
eighteen months. Any estate transactions in that time must
be approved by the probate court.
This can create havoc for beneficiaries. Since a living
trust replaces a will and doesn’t need validation from the
probate court, considerable time and hassle can be saved.
This, then, is the purpose behind living trusts. The trust
is simple to establish and, when carried out, easy to
transfer property. The trust is a matter of explicit
instructions as to who gets what property after the owner
dies. Like a will, the trust should cover all expected and
unexpected events that might occur. The details tell the
designated trustee how to use the money and property in the
A living trust is a capable substitute for a will and a
document that more and more people, disillusioned with the
probate system, are turning to in their estate planning.
TERMS YOU SHOULD KNOW
Before proceeding further, we thought it might be helpful
to define a few terms for you. These terms will occur
often during this text and in the actual living trust
process, so it’s important to familiarize yourself with
A/B TRUST: Common term for a “marital life estate trust
generally used by couples whose estates are valued higher
ACCUMULATION TRUST: A trust that does not pay out all of
its income, until certain circumstances occur.
ADMINISTRATION: Court-supervised distribution of the
probate estate of the deceased. The person who manages
this distribution is called the EXECUTOR if there is a will
or an ADMINISTRATOR if there is not.
BENEFICIARY: The person or organization legally entitled
to receive gifts made under the provisions of a legal
document such as a will or trust.
CODICIL: An amendment to a will. It is a separate, legal
document, properly witnessed and executed.
CORPUS: Property owned by the trust, commonly referred to
as “corpus of the trust”.
DEATH TAXES: Amounts levied on the property of the
deceased called estate taxes (federal) and inheritance
DURABLE POWER OF ATTORNEY: A general power of attorney
that will continue to be valid after its maker becomes
incapacitated or incompetent.
DURABLE HEALTH CARE POWER OF ATTORNEY: A special power of
attorney in which the maker gives another person authority
to make health care decisions when the maker is unable due
to injury or sickness.
ESTATE: In general, all of the property you own when you
ESTATE PLANNING: The legal maneuvering by which one dies
with the smallest taxable and probate estate possible, and
passing on your property to your beneficiaries with the
least amount of hassle and expense.
INTESTATE: To die without a will or other valid estate
transfer device. Estate will go through probate and passed
to heirs who are specified in the applicable state’s laws.
IRREVOCABLE TRUST: A trust that cannot be changed once
established except by court action in a proceeding referred
to as REFORMATION.
JOINT TENANCY: A form of property ownership by two or more
people where the death of an owner causes the transfer of
that individual’s share directly to the remaining owner(s).
A will has no power to change the joint tenant’s
right of survivorship. This is another common tool used to
avoid probate, although there may be gift tax consequences.
LIVING TRUST: Trust established while the maker is alive
and becomes immediately effective. It remains under the
control of the maker until death. It allows property to
pass to beneficiaries free of probate.
LIVING WILL: A document that provides instructions to
physicians, health care providers, family and courts as to
what life-prolonging procedures are desired if a person
should become terminally ill or in a persistent vegetative
state and unable to communicate.
PERSONAL PROPERTY: All property other than land, buildings
attached to the land and certain oil, gas and mineral
PER STIRPES: A legal term meaning that if a person dies,
the inheritance will pass to heirs in equal shares. It
means “by right of representation”.
POUR OVER WILL: A will that transfers the decedent’s
assets that are subject to the will to a trust that was
already in effect prior to the decedent’s death.
POWER OF ATTORNEY: A legal document whereby you authorize
someone else to act for you.
PROBATE: Court proceeding in which the authenticity of a
will is established, an executor or administrator
appointed, debts and taxes are paid, heirs are identified
and property in the probated estate is distributed
according to the wishes of the will.
QUALIFIED TERMINABLE INTEREST PROPERTY TRUST: Also
referred to as a “Q-Tip” trust, it allows a surviving
spouse to postpone, until his or her death, paying estate
taxes that were assessed upon the death of the first
spouse. The surviving spouse is still entitled to all of
the income from the property.
REVOCABLE TRUST: A trust that can be changed by the trust
maker at any time. Living trusts are revocable trusts.
SETTLOR: Another name for a maker of the trust, also
called “trustor”, “grantor” or “creator”.
TENANCY IN COMMON: A form of joint ownership of property.
Each owner is able to sell or give way his or her share as
well as pass it along separately at death. There is
no right of survivorship.
TESTACY: Dying with a valid will in place. All property
controlled by the will passes through probate.
TESTAMENTARY TRUST: A trust created by a valid will.
TRUST: A legal arrangement under which one person or
institution controls property given by another person for
the benefit of a third party.
TRUSTEE: The person or institution who manages the trust
and its property under specific instruction.
WILL: A legal document that is used to pass property to
heirs following a person’s death. A will only becomes
effective at the death of its maker.
The purpose of the living trust, as mentioned, is to be
able to transfer property to a designated beneficiary(ies)
without the usual hassles associated with wills and
But, your living trust can’t transfer property it doesn’t
Therefore, the first step in making the trust effective is
to transfer ownership, or title, of a property to the
trust’s name. It’s safer to transfer the title to the
trust’s name rather than the trustee since it is more
likely the trust name will continue even if you change
For the purposes of transferring title into a trust’s name,
there are two classifications of property: that which has
an ownership document and that which doesn’t.
Property without ownership documents, include:
– household possessions and furnishings;
– clothing and furs
– tools and most equipment
– art work
– electronic and computer equipment
– precious metals
– bearer bonds
These items are transferred to a trust simply by listing
them on a trust schedule. That’s it! Pretty simple,
Property that has ownership documents requires a re-
registration of ownership into the trust’s name. Once the
trust document has been established, signed and notarized,
this process should begin. The document of the title must
clearly show that the trust is the legal owner of the
property or the trustee will not be able to legally
transfer any of that property.
The type of property owned by the trust which requires this
re-registration of ownership includes:
– real estate
– bank accounts
– stocks and stock accounts
– money market accounts
– mutual funds
– most bonds, including U.S. Government Securities
– safety deposit boxes
– corporations, partnerships and limited partnerships
– cars, boats, motor homes and airplanes
If you set up a trust and fail to re-register ownership of
a specific property, it will remain outside the trust after
you die. If you do not have a will, property will pass
through intestacy and your state’s succession law. The
chances of leaving it to the person you wanted it to go to
anyway are reduced and you will not avoid probate of the
property — which is the purpose of a living will! Do not
fail to re-register property that has a title. You prepare
a new title document for each piece of property,
transferring ownership into your trust’s name. With real
estate, for example, you must prepare and sign a deed
listing the trust as the new owner, then have the deed
notarized and properly recorded. For bank accounts, ask
your bank for the proper form. You can usually accomplish
this in one trip.
When you establish a living trust, you must name a trustee.
In fact, you should name both an initial trustee and a
successor trustee in the event the initial trustee becomes
incapacitated and cannot serve.
The trustee is the individual or institution who actually
manages the trust assets that you transfer in, according to
the specific instructions you’ve given. The appointment is
important as this person or entity will have the
responsibility of honoring your wishes after death.
The initial trustee is, most often, YOU! That’s why it’s
called a living trust. Since it’s revocable, you can
change assets in the trust as circumstances dictate. While
you’re alive, the trust can conform to your specific whims
It’s important to understand something here: a living trust
does not take control of your property from you — until
you die. You handle it while you’re alive. It’s merely
tucked away in a convenient legal vehicle that can take
over immediately when you die and pass the property
along to the people you want without publicity and without
the potential lengthy delay and costs of probate.
If you’ve set up a marital living trust, usually both
spouses are co-trustees. When one spouse dies, the other
spouse continues as the initial trustee.
It is possible to name someone else other than you and/or
your spouse to be the initial trustee. It is uncommon and
unnecessarily complicates your trust arrangements as you
must keep separate records of the trust. You should work
with your attorney to select a capable trustee if you wish.
Because something could happen to the initial trustee, it’s
vital to name a successor trustee. This is the individual
who will be distributing your assets according to your
wishes after you die, or become unable to manage the trust
due to injury or illness. For property not held in the
living trust, creation of a durable power of attorney and a
health care durable power of attorney can designate someone
else to carry on with the non-trust assets.
If your trust is a marital one, the successor trustee would
not take over until after the second spouse dies.
The successor trustee could also die or become
incapacitated so it’s imperative that you name an
alternative trustee, too, to take over as successor in that
What does the successor trustee do? If your instructions
are explicit as to how you want property transferred at
your death, then the job is somewhat easier. There are
still things to do, however:
– Obtain copies of the death certificate of the initial
– Present death certificate, copy of the living trust and
proof of successor trustee’s identity to the various
financial institutions or organizations that have the
– Prepare documents of title transfer from the trust to the
beneficiary(ies) as appropriate. – Supervise distribution
of trust assets where no title is involved.
– If necessary, the successor trustee may manage a
children’s trust if the beneficiary is a child who has not
reached the age at which the initial trustee designated the
property to be transferred. The successor manages the
property for that individual until they reach the specific
age outlined in the original living trust. This may be the
only task the successor trustee is actually paid to do.
– If required, the successor trustee might also file death
tax returns, federal and/or state.
It’s important to name a successor trustee, preferably one
whom you feel comfortable will carry out your wishes. It
may even be someone who is also a beneficiary of the trust
assets. If there is any question about whom you should
name, consult with an attorney for suggestions.
A will is a written document detailing instructions as to
how you want your assets divided up after your death. You
might also include information as to a child’s
guardianship, how (or if) you are to be buried and the
appointment of an executor of your will.
The two main types of wills are:
The attested will is the most common. It’s usually
prepared by a lawyer in typewritten form, signed in front
of several witnesses who have no benefit in the will
The holographic will is made without a lawyer, written on
plain paper in your handwriting, dated and signed. If your
wishes are clear, this should be as effective as the
attested will. It will more likely be disputed than an
attested will and subject to the interpretation of the
courts, where anything could happen. Attested wills are
safer for carrying out your final instructions.
Most people think they should have a will. Many people do
not even have that as estate planning is generally poor
nationwide. There are many fine estate planners around the
country who work with individuals but the average person
doesn’t put much thought, time or effort into addressing
this important financial task of preparing for asset
distribution after death.
Attorneys will be glad to help you do an attested will and
may not charge much to do it. They’ll get paid later —
when the will goes through probate court. The payors will
be your beneficiaries, who will see assets drain as a
result of legal fees and court costs.
Probate can be lengthy especially if the will and estate is
a complex one. Not only does a will diminish the value of
the property, but it may slow down the time it takes to
actually transfer it to the designated beneficiary.
A will does let you choose your heirs, but the advantages
stop here. You will not avoid probate, estate taxes (if
any), death income taxes, privacy of transfers or
incapacitation. These are the primary reasons to set up a
living trust INSTEAD of a will.
There is a will that is important when establishing a
living trust. It’s called the pour-over will. This
document puts any assets you failed to place in your living
trust during your lifetime in there after your death. In
effect, it “pours over” assets from the will to the trust.
This document may also name the guardian for minor or
The pour-over will is a “fail-safe” device to ensure that
any property left out of the trust will be placed there. It
is also a back-up to the living trust in case it’s
invalidated for some reason due to a variety of
possibilities. The pour-over will can substantiate the
trust simply by reaffirming its terms. It would be
difficult for one or more heirs to challenge successfully
both a living trust and a pour-over will if their
conditions and instructions are similar.
What is an estate? Exactly what are we trying to protect
with a living trust?
An estate is essentially all the property you own (your
assets) minus anything that you owe (liabilities). This
calculation, assets minus liabilities, will yield a net
worth for you. This is the value of your estate at the
time it is calculated.
The size of your estate is important. More important is
the value of your taxable estate. This will equal,
roughly, the value of your estate less property left to
your surviving spouse or to charity.
The other estate calculation of note is the probate
estate. This is the portion of your estate that must go
through probate before it can be distributed. Leaving your
assets via a will puts them through probate.
The difference between the taxable estate and the probate
estate should be considerable if you plan your estate
properly. For example, let’s say your estate calculation
is $400,000. By transferring the title of your house,
valued at $250,000 and your Chrysler stocks, valued at
$75,000, to a living trust, you have reduced your PROBATE
estate by $325,000 to $75,000. Your goal should be to try
and reduce the probate estate to -0- if possible.
Living trusts will save probate costs. They do not avoid
death income taxes. There are other things you can do,
planning-wise, to reduce your taxable estate, but a living
trust is not one of those. You can and should, however,
reduce or even eliminate your probate costs.
Proper estate planning, in general, can accomplish all of
– select your heirs
– choose amount and time of distribution of inheritance to
– avoid probate
– eliminate or reduce federal estate taxes
– eliminate death income taxes
– maintain control over your assets
– maintain both privacy and flexibility
– leave directions and the power to act if you are
– leave funeral instructions
– leave organ transplant instructions
– make the administration of your estate as simple and
quick to execute as possible.
These are important goals. A living trust is one example
of addressing these goals in your estate planning. It is by
no means the only thing you should do, but it is a document
that can help you and your heirs out immensely.
OTHER TYPES OF TRUSTS
By now, you should understand what a living trust is and is
main purpose. There are, however, other types of trusts
that should be mentioned that assist in estate planning
Living trusts are only truly functional when the creator of
the trust passes away. It avoids probate costs. Other
types of trusts help you to avoid taxes.
MARITAL ESTATE LIFE TRUST: Commonly referred to as the A-B
Trust, this trust is set up for couples whose combined
estate is in excess of $600,000. $600,000 is the amount of
your estate which is exempt from federal estate taxes. The
marital life estate trust lets BOTH spouses take full
advantage of the $600,000 estate tax exemption.
When a spouse dies, property is left for the use of the
surviving spouse during the balance of his or her lifetime.
However, the survivor never becomes the legal owner of the
property. If legal ownership is never bestowed, then the
property is not included in the survivor’s estate and thus
avoids being counted for tax purposes.
The trust is complex and has important ramifications for
the surviving spouse which should be understood before
putting this type of trust into effect.
Q-TIP TRUST: Short for Qualified Terminal Interest
Property, it is a type of marital life estate trust that is
intended to postpone payment of estate taxes when the first
spouse dies. It only postpones them until the death of the
second spouse and the taxes could be higher then since the
amounts would be calculated on the then-current estate, but
it saves the survivor a substantial amount of money while
GENERATION-SKIPPING TRUST: You may have heard of this type
of trust where the bulk of assets are left to the
grandchildren, but the income derived from them is utilized
by the trustor’s own children. In essence, the estate
“skips” the children, going directly to the grandchildren,
but the use of the income is still there for the direct
heirs; the use of the property is not.
Current laws impose a tax on all generation-skipping
transfers in excess of $1,000,000. If an estate is worth
more than that, the children may want to get this excess
property directly since they will have no access other than
to income from the property that was transferred to the
It all depends on the size and type of estate.
These are examples of other trusts. This isn’t meant to
say you should attempt to set up every conceivable type of
trust. The key is what your estate and heirs “picture”
looks like — this will govern the estate planning devices
you will utilize.
To value your estate from both a net worth and living trust
planning standpoint, you must inventory your assets and
calculate your liabilities first.
Assets: This is the first calculation. You should list
each item and describe it, indicating whether you own the
property outright or the percentage of your ownership if
not. Then list the actual value of the portion you own.
Begin with your liquid assets:
– checking accounts
– money market accounts
– precious metals
Next, list other personal property:
– mutual funds
– other securities
– art works
– life insurance
Then, list your real estate holdings including your own
home(s), condominiums, mobile homes, land, etc.
Finally, list any business personal property including
partnership interests, copyrights, patents, trademarks,
stock options, etc.
Add these up and you will have the total amount of your
Then, list your liabilities by name and the amount you owe,
– personal loans (credit cards, bank)
– mortgage loan(s)
– taxes due, current or past
– life insurance loans
– other personal debts
Add all of these numbers up to arrive at your total
liabilities. Subtract your liabilities from your assets to
arrive at your net worth.
This allows you to place a value on your estate. You can
see how close your estate is to $600,000. You can
inventory property that has to be itemized for the living
trust anyway. You can separate property by titled
ownership and non-titled property.
Knowing where you are in valuing your estate is an
excellent start to your estate planning program. The use
of a living trust is a clear example of using estate
planning to help you (and your heirs) save money and avoid
the hassles of court and lawyers.
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