Last episode was about who gets what. In that piece, I mentioned you may want to know more.
A living trust is called that because it’s created by a living person or persons, as opposed to a testamentary trust, one created by the will of a deceased person.
This is not the area of planning in life where you should do it yourself, hire some out-of-town salesperson whose name you get off a flyer, or download some form off the internet. You need a bright, local attorney who includes estate matters in her/his list of specialties to do your trust. There are several in our town, just ask around.
Because a living trust is a private document, estates that transfer by trust are not subject to probate. No public record, no delay, no court, no fees. Sure, you pay for it now, but much less than what probate is likely to be. The privacy and speed of settlement are what most people like the most.
As we proceed through the process of getting to know our clients, their goals, and current level of planning, we ask about wills and trusts. We ask about the details, like does you trust include any tax-saving provisions. Many people haven’t reviewed their documents recently, and think maybe so, but can’t be sure.
Often, I’d read client trusts to check, and to make sure their whole binder is up to date. Trusts tend to come in binders. They are thick on their own and come with even more legal papers; letter of instruction, wills, power-of-attorney, and health care directives. Add it all up, you’ve got a good two- or three-inch binder on your shelf.
There are three parties to trusts. The creators of the trust, the trustors. Let’s call them George and Martha. As trustors, they make the rules of their trust. The rules say: all the holdings of the trust in whatever form are for the use of George and Martha together into the future.
They name someone to follow the rules of their trust, the trustee. At the time they create the trust, George and Martha appoint themselves as trustees. They are doing fine both mentally and physically, they want to be the trustees, and all is good with that for now.
They also name a successor. Maybe a family member? Many a trusted friend? Maybe a professional trustee?
The final person on the trust is the beneficiary, the person that gets from the trust. In the beginning, and while one of them is living, George and Martha are the beneficiaries. They get the full use and have full control over the trust assets.
The trust and its rules can be modified by George and Martha during their lifetimes. The rules of the trust provide that the successor trustee will take over in the event of death or disability.
This is one of the areas trusts differ from wills. Wills only have effect at death. Trusts provide for the ongoing management at physical or mental incapacity. Who knows, we may need that one day.
Another rule of the trust is that George and Martha retain the right to remove a trustee. This rule allows George and Martha to retain full control even if they have passed administrative responsibility to their successor. They have the power to fire the successor.
Most of us have trusts or wills that carry on our “I love you” promises — everything to a surviving spouse; if none, divided equally among our kids. Of course, as with wills, you can give some to whoever and however you may choose. More on this next time.
The tax-saving question we ask about is to see if there were bypass or marital trusts named in the document. These provisions have been used to allow families to segregate what was the property of the first to pass from the property of the second to pass.
This is different from leaving it all to the surviving spouse directly, it creates a separate entity, and is done to maximize the availability of each person’s exemption from estate taxes. If George has died, his half is held in trust for Martha to use and passes to the heirs after she goes.
Many of the trust documents of our neighbors have these tax-planning provisions. Many were drafted when the estate tax exemption was $600,000. Own a house, have saved for retirement, have maybe some business, a farm; it all adds up.
Now, the exemption has been increased to $11.58 million, and the final to pass can use any unused exemption of their spouse’s estate. That means that many families will not need the bypass idea because the exemption is more than it all will ever amount to be.
Here’s the action point of this. If you have a trust binder sitting on a shelf and haven’t had a recent review, it a great time for one.
The provisions that are in your document when you die are the provisions your successor will be compelled to follow. The separate entity created by the tax-saving provisions must be created. Happily, the survivor has full control and gets all the income from these assets. But it must be accounted for and even file its own tax return for as long as it exists — the remaining lifetime of the survivor, most likely Martha. And it is not optional.
It also has basis as of the date of death of the first spouse to pass. If Martha lives a good while — many women do — the basis stays fixed at George’s date of death. That means when Martha later passes, these holdings do not get the basis step-up her holdings will.
Eliminating the tax-planning provisions or making them optional can save the heirs unnecessary work and tax disadvantage. So, dust off your binder, call your attorney and let them help you do a thorough review.
If you have a family member or friend that deals with this issue, their spouse has passed and they now have a bypass trust in place, it’s good to know that a family can modify this arrangement, if all the heirs agree. Here again you need that good, local attorney that has estate issues in her/his list of specialties.
Hey, thanks for the read, if the tax planning part of this doesn’t apply to you, at least you can see that there may be other good reasons for giving that attorney a call and getting your trust reviewed. And if you haven’t gotten around to having one prepared, now’s a great time to get that done. Have a great week.
Phil Lenser is a Retired Lodi Financial Advisor with over 40 years experience now sharing investing ideas and insights