There is a plethora of information on the internet about estates and trusts. I’m going to answer questions the other sites don’t answer. You’ll get the nitty gritty inside story on living trust information that others often hide.
Living Trusts VS Irrevocable Trusts
There are dozens of different types of trusts, but they all fall into two categories living trusts which are revocable trusts and irrevocable trusts. Obviously, with revocable trusts you can change your mind and get rid of the trust, and with irrevocable trusts, once they go into place you’re stuck.
You’ll chose to use living trusts which are revocable trusts or an irrevocable trusts based on the asset protection you want and the tax treatment you want.
Because irrevocable trusts are “permanent” the courts and the IRS will treat them as an entity separate from you. Assets in irrevocable trusts are not your assets, so they are protected from your creditors and liabilities. Assets in the trust are not yours so they will not be included in your estate for estate tax purposes. Irrevocable trusts become their own taxing entities, so money generated by assets in the trust will not be included in your income.
It is often a good idea to choose living trusts which are revocable trusts. You can “revoke” a revocable trust at any time, the courts and the IRS will consider the assets of the trust as your assets. The revocable living trusts that are popular estate planning tools do NOT give you any asset protection, and they are basically invisible to the IRS. You will use your social security number as the living trust’s tax ID number, and you will file your 1040 form just like you always have.
If there’s no asset protection and no tax advantage, what are living trusts good for? The living trust is primarily good for three things: probate avoidance, estate tax avoidance, and asset management during life and after death.
LIVING TRUSTS DEFINITION
Living trusts can be revocable trusts or irrevocable trusts. The “living” designation simply means that the trust is put into effect or “activated” during your life time. Of course, if you create a trust it will be created during your life, but it may not be activated during your life, so it’s not a living trust.
Lots of people have what is called a testamentary trust. It is written as part of their will. The will describes the trust and lays out all of its terms. After the testator (person making the will) dies, his or her estate goes into probate and the testamentary trust is “activated.”
Technically, a testamentary trust would be considered a “revocable” trust, because the testator could revoke the will and make out a new one. Once it goes into effect, it is an irrevocable trust.
Many people think they are getting living trusts and the attorney actually gives them a testamentary trust or they get a testamentary trust form off the internet. That’s bad, because the most likely reason they went to the attorney or the internet sites was to get a trust in order to avoid probate. A testamentary trust will never avoid probate, although it can have the same estate tax avoidance as a standard living revocable trust.
With a testamentary trust, all of the property of the deceased is probated under the will, and then it is placed or “funded” into the trust for long term administration. Because the testamentary trust is part of the probate process, the courts and the lawyers will be involved with it as long as it exists. The fees will go on forever. Is that really what you want?
The trust you want and the trust you’re going to find first is a living revocable trust. It’s called by a dozen names including: living trust, revocable living trust, AB living trust, CB living trust, loving trust, family trust. It’s all the same trust. Every lawyer has to give the trust a “special” name so you have to go to that lawyer to get the “special trust.”
The latest edition of my book, Protecting Your Financial Future, walks you through living trusts forward and backward. It has been a Time-Warner Book-of-the-Month Club, which means it is fun enough to read that Time-Warner figures book clubs should read it. Get your copy now and also watch the content from my free DVD, Using the Law to Make Money and Protect Your Assets ($19.99 value).
AVOIDING PROBATE WITH A LIVING REVOCABLE TRUST
The favored probate avoidance tool of estates and trusts is the revocable living trust. It actually started in California as a popular probate avoidance tool in the 1970’s and has made its way to the East Coast slowly. There is a legitimate argument among lawyers as to how effective it is.
The problem isn’t with the living trusts; it is with the people who get the trust and their lack of training. Just walking in and getting a stack of papers called a living trust from the attorney or off the internet doesn’t mean you are going to avoid probate.
The “living” in living revocable trust could be interpreted to mean that it is a living document that is constantly changing. Actually, that’s not true. Of course, you can always amend your “revocable living trust,” but usually the trust document remains unchanged. A living trust is “living” because it has to “own” your assets and manage them. Its assets are always changing.
If the living trusts don’t own all of your assets when you die, the assets that the living trusts don’t own and will require your signature to transfer will have to be probated. You’re dead. You can’t sign to transfer the assets anymore. When your house is sold after your death, the only way the title company will accept a signature, other than yours, on the deed is with a court order – a probate order.
Probate is an expensive, time consuming, frustrating, public process most families want to avoid. This website isn’t going to get into the analysis and paralysis of probate, but let’s just say, most families want to avoid probate if possible. Having said that, there are reasons you would want to probate an estate, but those won’t be discussed here. They are discussed in detail in my book, Protecting Your Financial Future.
Living trusts will avoid probate if they are “used.” The problem is the attorneys and websites with living trust forms don’t teach people how to use their trust documents, assuming they get a good living trust document. Fortune Magazine published an article some time ago where the experts estimated that only one (1) percent of American lawyers knew how to draft a good living revocable trust.
I’ll just brag. I have never had a client go through probate after I have drafted a living revocable trust for them. But, it takes me about 4 hours to “teach” them how to use their trust. Three easy steps and ten minutes on the internet or the hustle in and hustle out of the lawyer’s office just don’t cut it.
The living trusts forms you get off the net and the living trusts forms you get from your insurance dude who has an attorney friend just don’t work. They only get you half way there. That’s the legitimate argument going on between the trust lawyers. One side argues that the people get suckered into paying the big bucks for the living trust, either at the lawyer’s office or off the net. Then they go through probate just like the folks who got a cheap will.
I understand the argument. I’m not supposed to be an asset protection, living trusts, tax type lawyer. I never dreamed I would be a counselor to the United States Supreme Court. I’m supposed to be a patent attorney. I have a BS in geology, an MS in analytical nuclear chemistry, and a doctorate in law.
My life didn’t turn out the way it was supposed to. Through tragedy that few people had ever lived through, I became unemployable. I had to start out and establish a law firm by myself. The easiest thing a lawyer can so is write wills. Everybody needs one. (Not a lot of nuclear chemistry patents walk in off the street.)
When I started to write wills and living trusts, I soon leaned that most attorneys couldn’t even answer my simple questions. It was really frustrating, because the practical answers weren’t in the form books either. I remember what I had to learn the hard way, and when I teach my clients, I teach from 30 years of experience.
I became infuriated when I learned how the legal system set up clients to be dependent on the lawyers. I was really ticked when I figured out how easy it was and how the attorneys “hid the ball” from clients and even each other. So I started to write about living trusts and estates. Then I started to speak to large audiences. I have directly helped over a million people protect their estates
Living trusts are only part of the puzzle. Asset protection, income tax planning, business structuring, probate avoidance, estate tax planning, and even identity theft protection all melt together.
In my book, Protecting Your Financial Future, I write about my story and the stories of my neighborhood. I write about a plan for life and a plan for death.
This whole living trusts and estates thing isn’t just about what happens after you die. It’s how you live you life. If you learn to use the “tools of wealth,” as I call the living trusts and other legal tools, than you will live better. You’ll have more money. You’ll have more security. You won’t have to worry about the legal and financial mess when a family member dies.
Lawyers don’t make a lot of guarantees. I can make you an unconditional guarantee. If you hang with me and treat these estates and trusts issues seriously, do it right, learn about it, then it will be worth every effort you make and every dime you spend. You can avoid a lot of the “hell” that life and death dish out.
(Asked on 2011/05/25)
I am caught in the middle of a sibling war. My husband is DPA for dementia father and husband’s sister is trustee of living revocable trust. Mother-in-law passed 2 1/2 years ago probably trust is now irrevocable. Sister wants
to transfer social security benefits, automobile, and pension into trust although father never signed transfer.
Dementia father-in-law lives with us and ss benefits , automobile, and pension is used for his care. Can the sister
legally transfer ss benefits, automobile, and pension into living trust? Living trust states on Trust Name page that
checking accounts and automobiles are excluded from trust. On Assignment of Personal Effects, furniture and furnishings page it states I …do hereby transfer… checking accounts and saving accounts, vehicles…
Which page is the right one to follow? Is this an example of a poorly written trust?
We’ll answer this in a blog column next week. Thanks