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ADDITIONAL INFORMATION ON LIVING TRUSTS

 

DEFINITIONS:  To help you understand the terms used in this booklet, you may want to review the definitions below:

 

1.      Beneficiaries.  These are the people who will receive money from the trust.  Beneficiaries can be the Grantors, Trustees, friends, family, or charities which the Grantor has decided to name as beneficiaries in the trust.

2.      Estate.  The estate is all the property that you have in your possession at any point in time.  This includes real, personal and intangible property.  When you die this property will be taxed by the state with what are called estate taxes.  You can avoid these taxes through the use of a living trust.

3.      Probate.  This is a court procedure which is used to re-title property after someone dies.  A probate action determines who has the title to what property after you die.  Probate is very costly and is to be avoided if possible.  Probate can be avoided by properly preparing a living trust.

4.      Property.  Property is defined in three ways:  1) real property, which is the land and buildings located on the land; 2) personal property, which is the property you have in your house such as the couches, beds, furniture and other items that you can see and touch; 3) intangible property, which is the property which cannot be see or held.  This property is the stocks and bonds that you own, bank accounts, and insurance coverage.

5.      Trust.  This is the document which you will be preparing to avoid estate taxes and probate.  It has possession of your property, and a system for caring for the property, both before and after your death.

6.      Trustor/Grantor.  This is the person that puts his/her property into the trust to avoid estate taxes and probate.

7.      Trustee.  This is the person who will administer the trust.  Generally this will also be the Grantor while the grantor is still alive.

8.      Executor.  This is the person who will distribute your money and property after you die, in the event you do not have a living trust.

 

THE DIFFERENCE BETWEEN A LAST WILL, A LIVING TRUST, A WILL, AND A LIVING WILL.  Many people are not entirely clear about the differences between these three separate, distinct documents.

 

A last will is a statement outlining who gets what property, who will receive no property, and detailing other wishes of the deceased.  There are two basic types of wills and a category for those who die without a will.

 

1.      Holographic Will.  This most basic type of will is simply written by the property owner in his/her own handwriting on a plain piece of paper.  As long as the will is hand written and signed, it does not need to be witnessed.  These wills can cause problems later on if they do not have witnesses.  Imagine how your children would react if they found out after you died that you had cut them off from any of your property.  They would probably contest the will, and they might be successful.

2.      Attested Will.  This is a more formal will that is signed by three or four witnesses.  It is either a pre-printed legal form or a type written document prepared by the individual or by an attorney.

 

When a person dies without a will at all he/she has died intestate.  If this happens, the state will make a will for that person automatically.  Normally, all the property will be given to the surviving spouse, or to the children according to the laws of the state of the deceased.  This process takes a very long time to complete and should be avoided at all costs.

 

All property must be distributed out of the estate, as there is nobody named to hold title to the property (unlike a trust, which lives on after you die).  If a person dies without a will, they will not be able to make special gifts to friends and charities.  There is a much higher chance of family disagreements about who gets what property.  Every adult in the United States must at least have a last will to avoid family and legal problems upon their death.

 

It is definitely better for a person to have a will than to leave their estate to the mercy of the courts.  But for most people, a living trust provides even greater advantages when added to a last will.

 

Don’t confuse a living trust or a last will with a “living will”  The living will is a special kind of will used for giving legally enforceable instructions to terminate your life using passive means.  In essence a living will instructs your doctors regarding your wishes to take you off of life support.  This is a very important document so that your family is not forced with making that decision during a highly stressful and emotional time.

 

LIVING TRUST:  A living trust is a formal, binding contract upheld by the courts which separates the property from the family.  The family still has the use and control of the property, but it is not considered part of their estate.

 

The major difference between a last will and a living trust is in the owner ship of the property.  With the last will, you and your family own the property of your estate, and the court and executor you name will oversee the distribution according to your wishes.  The probate process will prove the ownership is valid.

 

With a living trust all of your property is owned by your trust.  Since you have no property, there is nothing to probate.  Upon the death of a spouse, the property is simply divided according to the terms of the trust just like a private contract. 

 

You control the property in the trust.  Even though your trust owns your property – you control the property.  You may sell, assign, lease, or trade the property just as you do now.  You may add new property to the trust and change the way it is divided on your death – without having to re-write the trust.

A TRUST IS LIKE A CONTRACT AND IS RUN SIMILAR TO A CORPORATION:  A living trust is a legal contract that sets up a legal entity to handle your property under the guidance of a trustee.  The trust actually owns your property which it directs the trustee in handling.  Of course, you will most likely appoint yourself and/or your wife as trustee, so that you can continue to handle the property just as you have been.

 

The legal entity of the trust is similar to a corporation in that the trust can own property and do other things for you and your family.  Like a corporation the trust exists independently of you and the other people involved.  The trust does not die when you die, but lives on to fulfill the wishes of you and your family as long as the trust is necessary.

 

In this contract, you make agreements with family members and other people you choose to involve in the trust.  These agreements specify such things as: what will be done with the property upon the death of a family member, who will take care of minor children, how taxes will be paid (with some limitations), and other actions.

 

Because these agreements are made in advance, there is generally no reason to involve the court system.  Privacy and the avoidance of legal hassles are the biggest advantages of a living trust.  A trust creates peace of mind.  You know that all your affairs are in order and that your family is taken care of.

 

LIMITED LIABILITY:  “Liability”, as used regarding estates, is someone’s exposure to a possible lawsuit.  If a person does something that may bring a suit against him or her, that person has liability. 

 

A trustee who is buying or selling the property of a trust could be worried about liability.  He or she might worry that a creditor, the IRS, or some family member might file a lawsuit if they act according to the trust.  For example, a banker might worry that if he transfers an account from a deceased husband to the wife, the son may file a lawsuit.

To relieve these concerns, a good trust, such as this one has a clause that expressly limits the liability of people acting according to the trust.

PROPERTY TRANSFER DOCUMENTS:  No trust is valid without transferring property into the trust.  Any trust document without the required property transfer documents is worthless.

These transfer documents simply take the property out of your name and put it in the name of the trust.  This is often times called “funding the trust”.  Remember, even though you are transferring the property, you will still have complete control of the property.

POUR OVER WILL:

ECONOMIC RECOVERY ACT OF 1981:

STEPPED-UP VALUATION:  The person receiving the property as an inheritance will have it valued at the market price – at the time of death or within 6 months after death of grantor(s).  Increasing the value of the property to adjust for appreciation and inflation is stepped-up valuation.  This gives a tax advantage to the person receiving the property under a will or a trust.

WHAT THE TRUST DOES UPON YOUR DEATH:  Upon the death of one of the spouses, it is not necessary to inform the probate court of the existence of the living trust.  The trustee can then carry on with the wishes of the deceased grantor as quickly as desired, in privacy. 

It may be necessary to show a copy of the living trust to persons who hold property owned by the trust such as bank officers, stock brokers, etc.  We recommend that you keep a Memorandum of Trust for the trustee to use in this situation.