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The main advantage of a living trust is the avoidance of probate. Probate is the court proceeding in which your property is transferred to your heirs. Attorneys charge about 10% of the GROSS value of the estate to administer the probate and the probate process takes between 9 months to 2 years (absent litigation or contested claims) to complete.
NOTE: All Wills must be probated.
A living trust avoids probate because probate only affects those assets that you own at the time of your death, however, assets placed in a living trust are not owned by you and, therefore, are not subject to the probate process. The trust is a written declaration and contract where you (and your spouse) state you (as "grantor") are transferring your probate assets into the name of the living trust for your sole benefit during your lifetime (lifetime "beneficiary"). You (and your spouse) will be the "trustee(s)" of your living trust which means that during your lifetime, you will have complete control over the living trust's assets. You (and your spouse) will name a "successor trustee" (which is akin to an executor of a last will and testament) who will carry out your wishes as outlined in your trust at the time of your death (or upon the death of the surviving spouse). Your heirs receive benefit of the estate only after the death of the second spouse. Because the trust is REVOCABLE, you will have the power to change, amend or revoke your living trust at any time during your lifetime.
Pour-Over Will
This instrument is necessary when a living trust is created and is used as a safety net for those assets that have not been titled in the name of the living trust. It provides that any assets not held in trust and, therefore may be subject to probate, will be placed ("poured-over") into the living trust after the probate is completed. Generally, a Pour-Over Will makes sure that the living trust provisions will apply to your non-probate assets as well.
WHILE THE PROVISIONS OF THE LIVING TRUST AND POUR-OVER WILL ARE CARRIED OUT AT THE TIME OF YOUR DEATH, THE FOLLOWING ANCILLARY DOCUMENTS ARE ONLY UTILIZED DURING YOUR LIFETIME DURING A STATE OF INCAPASITY:
Durable Power of Attorney
A durable power of attorney takes affect upon the incapacity of the person signing it (the "principal"). The principal appoints an agent to make decisions regarding the property of the principal during the time of incapacity. The durable power of attorney is similar to the general power of attorney except that it only takes effect upon the incapacity of the principal. It is extremely useful in case of an accident or a long, debilitating illness, since absent a durable power of attorney, an application to the probate court for appointment of a conservator must be made.
Power of Attorney for Health Care
A medical power of attorney takes affect upon the incapacity of the person signing it (the "principal"). The principal designates an agent to carry out health care decisions for the principal as outlined in the medical power of attorney and/or any existing Living Will Directive. This power of attorney involves only health care decisions and does not affect decisions regarding the principal's property and/or assets. Generally, an agent may make health care decisions on the principal's behalf only if the principal's attending physician certifies in writing that the principal is incompetent. Absent a medical power of attorney, an application to the probate court for appointment of a guardian must be made.
Living Will Directive
The Living Will Directive is used to make decisions now about your medical care if you are ever in a terminal condition, a persistent vegetative state or an irreversible coma. The Living Will clearly states what choices you would make for yourself if you were able to communicate your wishes. It is your written directions to your health care agent (if you have one) your family, your physician, and any other person who might be in a position to make medical care decisions for you.
The Living Will takes the responsibility for making medical decisions off your loved ones' shoulders by clearly stating your wishes regarding your end-of-life decisions.
A trust occurs when someone (the trustee) holds property on behalf of someone else (a trustor) until something happens that causes the property to pass to another person (the beneficiary). So for example, imagine John Doe (the trustor) owns a house and is on his death bed. He wants to give the house to his son, Timothy Doe (the beneficiary), but Timothy Doe is not old enough to own a house. As a result, John Doe puts the house into a trust. The trust is managed by a friend of John's (the trustee). Thus the friend will take care of the house until Timothy becomes old enough to own it himself.
A living trust is a trust that takes effect while the person that put the property into the trust (the trustor) is still alive. In contrast, a testamentary trust begins when someone dies. There are numerous kinds of trusts that can be formed and many ways to classify them.
There are three primary kinds of living trusts: individual, joint, and AB trusts. Individual trusts are designed to allow a single person to enter into a trust. Joint trusts allow two or more persons (usually married couples) to enter into a trust. AB trusts are designed to help married persons reduce the amount of estate taxes charged against their estate. AB trusts are generally only relevant for persons with estates worth in excess of 2 million dollars (until 2009).
Basically any property you own or have an interest in can be placed into a living trust, however, everything that goes into or out of a trust must be accounted for. Thus, for practical purposes, it's often easier to place only big, hard to transfer items such as real estate or businesses into a trust and leave out things such as checking accounts where money is moving into and out of the account all the time. Generally speaking, if you're not exactly sure if you're going to have the item at the time of your death, you should probably put it into your will instead of your trust.
When you sign and notarize the trust, the trust has been created, however, this does not mean that property has been transferred into the trust. Any time that the title to property is recorded somewhere, you have to actually go to each place where the title would be changed in order to make the trust actually own the property. For example, if you placed your home into a trust, you would need to write a new deed that listed the trust as the owner of the house instead of you and then record the deed with your local recorder's office. This applies to such things as cars, corporations, copyrights, patents, etc. This generally would not apply to such things as computers, handbags, jewelry, etc.
Before doing any tax planning, you should obtain the advice of an accountant or attorney. In general, the answer is usually no. There are, however, certain situations when a married couple can benefit from a trust. Those trusts take advantage of deductions available to married couples.
Yes. If you own only a part of something, you can place your interest in that property into a trust. For example, if you own half of a business, and your partner owns half of the same business, you can place your half interest into the trust.
Generally speaking, no. Because trusts don't usually shield you from liability, many people choose to create businesses such as limited liability companies (which do offer liability protection) that are held by the trust. The companies owned by the trust would in turn own the assets that you want to have in the trust. This allows you a liability shield and an interest that can easily be transferred outside of probate.
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