Living Trusts

After A While

After a while you learn that subtle difference

between holding and sharing a life

and you learn that love doesn't mean security

and loneliness is universal.

And you learn that kisses aren't contracts

and presents aren't promises

and you begin to accept your defeats

with your head up and your eyes open

with the grace of an adult,

not the grief of a child.

And you learn to build your hope on today

as the future has a way of falling apart in mid-flight

because tomorrow's ground can be too uncertain for plans

yet each step taken in a new direction creates a path

toward the promise of a brighter dawn.

And you learn that even sunshine burns

if you get too much

so you plant your own garden

and nourish your own soul

instead of waiting for someone to bring you flowers.

And you learn that love, true love,

always has joys and sorrows

seems ever present, yet is never quite the same

becoming more than love and less than love

so difficult to define.

And you learn that through it all

you really can endure

that you really are strong

that you do have value

and you learn and grow

with every good-by you learn.

By Veronica Shoffstall

An Estate Planning Tool

A revocable or irrevocable living trust, often simply referred to as a living trust, is a very flexible estate-planning tool. The most common type of trust instrument is the revocable living trust, since most people want to maintain control over their assets. It is typically created by married couples who also serve as co-trustees. Generally, the trust document allows them to direct and control income and principle within the trust, moving assets in and out of the trust as they desire. They may typically amend (if allowed within the trust document) or revoke the trust in part or in whole. A trust is so flexible that the choices available are virtually endless.

In recent years, it has become increasingly popular for insurance agents to become the front man or woman for living trusts. Caution should be exercised since the insurance agent is certainly open to lawsuits as a result. There has been concern expressed from many groups regarding this. Even those agents who carry Errors and Omissions insurance will likely find that their liability policies will not cover claims relating to living trusts since these trusts are not insurance products.

Disagreement Regarding the Use of Living Trusts

Many people, including insurance agents, are finding conflicting information when it comes to living trusts. While researching this course, we noted that some texts even capitalized the words "Living Trusts" while others did not. One authority stated that virtually everyone could benefit from a trust while another noted authority felt small estates would not benefit. Certainly, some points will depend upon individual state laws. Most points, however, seem to depend more upon the source giving the information. While the basic set of facts may be constant from source to source, how they are applied varies widely. We know that the main goal of a trust is generally to provide for the surviving spouse and secondly to provide for the surviving children. Some sources appear to be promoting a specific point of view for a financial reason: making money. Some sources sincerely believe, it appeared, in their point of view for non-financial reasons. The chore of each individual (including insurance agents) is to sort through the validity of the information available. Each viewpoint has its worth, but no one should accept anything at face value unless some research has been involved.

More and more living trusts are being utilized by people approaching or already in retirement. There is much faulty information floating around regarding trusts. On one side are the advocates of living trusts who urge everyone, regardless of financial circumstances, to create a trust. On the other side are those who seem to be totally against the living trust for any use. As with most things, the prudent person will be considering the views that fall somewhere in the middle of both extremes. While virtually anyone can create a trust, not everyone needs to. There is no doubt that a living trust (both revocable and irrevocable) can be most valuable in estate planning. It simply must be used appropriately.

A Trust Simply Defined

Simply defined, a trust exists where one entity (the testator or grantor) transfers legal title of property to a second entity (the trust) for the benefit of a third entity (the beneficiaries).

Testator . . . gives to

Trust . . . gives to

Beneficiary . . . keeps.

Also Called a Grantor Trust

A living trust (also called a grantor trust) is created during the grantor's lifetime. There are several reasons why a living trust can be beneficial. A living trust:

1) avoids probate and the resulting settlement fees,

2) is a private document whereas a will is a public document,

3) is extremely difficult (though not impossible) to break whereas a will is more easily challenged,

4) can provide estate management (perhaps the best reason of all to utilize a living trust), and

5) may minimize immediate taxation if the trust is irrevocable.

Grantor May Be Sole Trustee, if Desired

In the past, it was often necessary to have three different parties (persons) in order to set up a trust. That is no longer true in most cases since most states have now passed laws allowing the grantor of a revocable trust to be the sole trustee and beneficiary. Therefore, the grantor may place his or her property in a trust, keep total control of the property as the trustee and still be the beneficiary if and when the trust ends (the ending of the trust does not signify the death of the grantor).

As a result of the control afforded the grantor, all income will be taxed to the grantor. The property will also be included in his or her estate even though that property will not go through the probate process. While some say it is possible to minimize taxation through a revocable trust, experience shows that only irrevocable trusts are able to affect the amount of taxes paid. The IRS has a history of gathering taxes where taxes are due. In other words, the IRS is not likely to allow an easy escape from taxation and a trust is often presented as just such an escape. A trust may sometimes affect who pays the taxes, but one way or another taxes will be paid. A revocable living trust does nothing to prevent or reduce estate taxes in those states that impose such taxation. Since the grantor maintains control over the property in the trust, the value will be included in the gross estate for taxation purposes.

The Most Common Reason a Revocable Trust is Used

The most common reason cited for setting up a living trust is the avoidance of probate and the associated costs of settlement. The word probate means: "to prove the will." It is the court-supervised transfer of assets to one's heirs and creditors. For processing this transfer, various fees are charged to the estate. The amount of those fees will and do vary from state to state. Many people wish to avoid the payment of these fees. Many people also wish to avoid the hassle they believe comes from probate.

Mere asset size is not a deciding factor in whether or not to create a living trust although it is part of the decision. Many situations make trusts a favorable option for modest sized estates.

Most people spend their lifetimes putting assets together and yet only spend minutes considering how their estates will be settled. It is surprising how many people do not even own a simple will. It cannot be stressed enough that everyone of legal age should have a will - even if a trust is in place.

Establishing a Trust

The initial cost of setting up a living trust is more expensive than having a will drawn up. A living trust will run between $500 and $2,000 per person. Experts recommend that the creator work directly with the attorney. Working with any other person (a middleman) cannot result in anything more than a "generic" trust. Using the "do-it-yourself" kits are not generally recommended because, again, it is nothing more than a "generic" approach to estate planning. By generic we mean that it cannot represent each person individually and handle individual needs. A living trust requires someone who is well educated on individual state requirements. Relying on anyone other than an attorney is probably not wise. It should also be pointed out that not all attorneys are well versed in living trusts. While any attorney CAN legally draw up a will or a living trust only a minority of attorneys actually specialize in estate planning. The specialist in the field is more likely to do the job desired. Will a specialist cost more? Of course they will, just as a heart specialist costs more than a general practitioner. Would you want a general practitioner to do your heart surgery? Probably not. With this in mind, why would anyone want less than a legal specialist to draw up their life's financial plan?

Who is a Specialist?

There is much debate among professionals as to who should and who should not have a trust document. The main goal of a living trust is generally to provide for the surviving spouse first and secondly the children. Past that point, it all depends upon individual situations. Usually difference of opinion seems to revolve around the size of the estate. Each individual should certainly take into consideration individual state laws when looking at the use of a trust. However, even when state laws are considered, much difference of opinion exists. There are many, many factors involved. Therefore, only professionals in the estate-planning field should be consulted. Along this line, there is a major point to be considered: how does one determine who is a professional? In many states, anyone can call themselves an estate planner. Little or no special education or practical experience may be involved.

Insurance agents often call themselves specialists in estate planning or elude to special knowledge. Sometimes this is done simply by how they have their business cards printed up. Only a foolish person would make such claims unless experience or training actually makes it true. While it may be legal to call oneself a specialist, actually possessing such education or experience is necessary before actually claiming it. Why? Because every state has attorneys who are willing to sue the agent that falsely claimed the title. It only takes one client or one client's family to take an agent from financial security to poverty.

What determines a financial planning specialist? Educational training and a measure of practical experience are generally considered to be necessary.

Agents must realize that they are also the targets of sales practices. The agent is the client of the agency or organization who is recruiting them to sell their products or services. The agent who is considering selling living trusts would be wise to check out the agency or organization behind them. Who draws up the trust document? Is the home office in your state or working from another state? Are you, as the agent, able to speak face-to-face with the attorney who will be signing off on the trust? Will the trust be signed off at all? Will the people you sell the trusts to be getting a fair, quality product for the money they are spending? Does the price seem competitive? Will the trust document be individually designed or is it a repetitive computer generated product? The agent who wishes to avoid future lawsuits will be asking these questions.

Attorneys Will Sue the Inexperienced Agent

There are now classes available to attorneys that instruct them how to sue insurance agents and insurance agencies. An insurance agent who promotes themselves as an estate planner is wise to actually have received specialized training in the field. Business cards or other printed material stating or implying more training or expertise than actually exists will certainly brighten the day of a suing attorney.

Trusts Have History

The living trust is not a new concept by any means. It goes as far back as AD 800 to the days of the Roman Empire. The trust was the preferred method of holding property in Europe during the Middle Ages.

As early as the 12th century, the English people adopted the trust from Roman law to preserve their property from the crown. Since a landowner was subject to numerous forms of taxation, protection was important. Accusing an individual of a crime was a common means used by a lord to acquire the peasant's land. The peasants found that a trust could protect their land from wrongful acquisition. Such use of the trust became an ordinary practice.

By 1535, the king and his nobles challenged the use of the trust and attempted to prohibit its use. The challenge of the trust came before the common law judges of England in the chancery court, which was the highest court in the land. The King and his court argued that the trust was evil because it permitted privacy of transfer, avoidance of taxes, preservation of the estates of accused criminals and the loss of revenue to the King and his lords. The court upheld the validity of the trust. Within five years of this decision, the trust was securely part of England's common law.

The Trust Came to America

Not surprisingly, the colonists brought the trust to America. Patrick Henry is given credit for drafting the first trust in America. Therefore, a trust was drafted in America two decades before the adoption of the US Constitution.

Occasionally, one will hear or read of the fear that the benefits of living trusts will be taken away by Congress. Most experts feel that this will not happen. If the King of England could not accomplish such a feat, it is doubtful that Congress would take away such a tradition. This is especially true since the living trust is not a tax shelter. It should also be pointed out that a majority of the senators and representatives make use of the trust document personally.

Creating Another Entity

The creation of the living trust, in effect, creates another entity who is given the ownership of specifically named assets. An empty or non-funded trust is a trust that has been legally created, but has not received any assets (has not been funded). This often happens in the "do-it-yourself" trust kits that are available through the mail. Some organizations also put out what could easily be considered a "do-it-yourself" kit although their price is much higher than the mail order version. The only difference between the mail-order kit and the product promoted by these organizations is that the creator's name has been printed into the appropriate places within the trust document. However, no assets are moved (unless the creator has done so) and often no attorney has signed off. The ability of these trusts to be legally upheld is being questioned. Some professionals feel that intent is sufficient, but others argue that "intent" cannot actually be determined once the individual has died. When beneficiaries find themselves compromised by these non-funded trusts, lawsuits are sure to follow. Just as wills that were created without thought can delay probate closure, so trusts that are non-funded can cause the same difficulties.

When the creator of the trust dies, the trust is not affected because the trust lives on. Since the trust has not died, probate is avoided on the assets that have been properly and legally transferred to the trust. Of course, with non-funded trusts there are no assets that avoid probate.

Assets Held in Trust by the Trust Entity

From a legal standpoint, establishing a living trust means that an individual does not hold title to any of their assets which have been placed in the trust. The trust holds the asset titles. These living trusts will not protect the assets from any creditors because the person who created it still has control of the assets. He or she may use the assets in any manner they so choose. It is important to note that the individual has this control when utilizing revocable living trusts. As the trustee, the individual continues to have the same power to buy, sell, transfer, borrow and so forth. The amount of control does not change once the assets are transferred to a revocable living trust. They are called "revocable" for good reason - change is always possible.

Revocable living trusts are called revocable for good reason -

Change is always possible.

Once death occurs, there is virtually nothing to probate since the assets belong to the trust, not to the individual directly. If there is a surviving spouse, he or she will then become the controlling trustee, assuming that is how the trust was set up. It is important to note that the trust does not die just because the grantor has. While the trust could be constructed to end at this point, it is not necessary to do so. The trust can live as long as it continues to be a viable document.

Trusts can outlive their usefulness. For example:

Sally Saunders has a trust set up by her deceased mother. Because her mother was concerned about Sally's ability to control her spending, she appointed a bank as the lifetime trustee of the trust. The bank does not provide this service for free; it charges the trust a monthly fee for their services. The bank kept the money in a low paying vehicle, so the trust has continually diminished in size. It is now at a point where the amount that Sally receives each month is no more, or even less than the cost the bank charges for administering the trust. Obviously, it is no longer a sensible financial arrangement, but since the trust was set up to continue until all funds have been paid out, there is nothing that Sally can do about it.

Depending upon the provisions of the trust, it is possible that Sally could challenge the trustee appointment. By this point, however, the legal fees involved do not justify doing so.

Funding the Trust

It cannot be stressed enough that a trust, if it is to be effective, must be funded at some point. In other words, the individual must transfer assets into the trust. While it is sometimes legally binding to simply list the assets in the trust papers, this is not the accepted procedure and will place the trust in a risky situation. Just as a will may be legally challenged, so may a trust. While it is normally very difficult to "break" a trust, not having property properly transferred will allow that possibility a greater chance of success. That is because it may be argued that the creator had not made a definite decision as to the distribution of his or her assets as witnessed by his or her failure to actually make the legal transfer of the assets into the trust. If the grantor also failed to draft a will, the beneficiaries may be in for a long and costly court proceeding.

When a trust is not funded it typically acts as a testamentary trust. Since there are no assets in the trust, the estate must go through probate. If a will was not drafted as a back-up document (which should always be done), the state will simply apply its own version of a will. When the revocable living trust is not funded and acts as a testamentary trust, the assets go through probate and THEN pour into the trust. Again, as stated, an un-funded trust is more easily challenged. The legal challenge has a valid point of view: if the trust was never funded, then the owner of the trust may not have fully completed their desires. Therefore, had he or she lived, they would have possibly changed their distribution of assets. Maybe the individual did not want the assets put into the trust at all, which is why it was never fully funded. Such arguments weaken trusts and delay distribution of assets.

Trust Provisions

Although there is not a set trust format, there are provisions which most professionals feel should be included. These provisions are:

1) a living will

2) durable power of attorney

3) competency clause

4) catastrophic illness provision

5) assignment of personal effects and special items

6) appointment of guardians, where applicable

7) appointment of a conservator

8) anatomical gifts, if desired

9) separate property agreement

Other Legal Documents

The Living Will or Right-to-Die Clause

There are often other documents prepared along with the will and a living trust. One of the most common is called the living will. The living will is often called the "right-to-die" clause. In the past, this was easily challenged by family and friends. In more recent years, the courts have begun to uphold the competent choices made. There is no question that today the living will is a legally accepted document. However, to be viewed as such, the living will must be drafted BEFORE the onset of a terminal or serious medical condition and while the person is fully competent and not under mental stress. Otherwise, a court may wonder if the beneficiaries pushed the creator to put the document into effect in order to preserve financial assets.

Even though the highest courts have now recognized the legal ability of a person to choose their course of medical treatment (or the lack of it), there is still continued conflict regarding this issue. This conflict is the result of two opposing forces:

The right-to-life forces

and

The right-to-die forces.

Therefore, a person must properly document their competency when drawing up a living will. Most people assume that everyone will simply follow their wishes, but that cannot be taken for granted.

The Durable Power of Attorney

The durable power of attorney is specifically designed to allow an individual to name another person to act on their behalf should they become incapacitated. This document allows that named person to step in only if the individual becomes incompetent. The durable power of attorney must be created while the individual is competent.

Power of Attorney

The durable power of attorney should not be confused with the more commonly used power of attorney. A power of attorney gives the named individual the right to act on behalf of another only while the individual is competent.

This difference between the two documents is significant. To recap:

A durable power of attorney begins when a person becomes incompetent.

A power of attorney ends when a person becomes incompetent.

Both items are usually part of estate planning, but the difference between the two are often confused.

A durable power of attorney may be different from state to state. Therefore, if residence is changed, the durable power of attorney should be redrafted in the new state of residency.

Competency Clauses

Competency clauses allow a specified individual (usually a family member) to continue to handle the day-to-day activities, such as buying, selling or transferring assets and the writing of monthly checks. Without such a clause, a family member would eventually be forced to go to court to establish control. The competency clause requires two doctors to agree that the person has become incompetent before the clause would actually go into effect. The two doctors who are to make this decision may actually be named in the competency clause, if so desired. Many individuals like to name the doctors because they want individuals that they know and trust.

Catastrophic Illness Provision

The catastrophic illness provision applies specifically to married couples with an A-B Living Trust. This provision is used to preserve a couple's assets should one of the two become seriously ill and need prolong care, such as a nursing home confinement. At the onset of such an illness, the couple's assets would be divided in half so that only that half would be depleted. The other half would remain untouched by the illness and the related costs.

Because the cost of a prolonged nursing home stay can cost the individual states money, it is important to know the individual state's laws regarding this. Therefore, it is important to use an attorney who would be familiar with these things. Such attorneys are often referred to as Elder Care Attorneys or attorneys who specialize in elder care.

Giving Away Personal Items to Special People

Assignment of personal effects and special items is often very important to an individual. These are often items that do not have a written title, such as a car or house would have. These items typically include such things as jewelry, glassware, pieces of furniture or sentimental items. By specifically designating who these items go to, special desires may be carried out by the creator.

Appointment of Guardians

Appointment of guardians generally applies when minor children or handicapped individuals are involved. This may be done through either a will or living trust. When naming guardians, it is important to realize that circumstances may change. Therefore, it is important to keep current on this portion of a legal document.

For example:

Carl and Connie Jones named Carl's brother and sister-in-law as guardians of their small children. As time passed, Carl's brother and sister-in-law divorced and his brother began to drink heavily. It would probably be safe to say that this couple would no longer be the desired guardians of Carl and Connie's children.

Conservator Documents

The appointment of a conservator document names the person who would be responsible physically for the creator should in-competency occur. Do not confuse this with the competency clause, which names an administrator of the assets when in-competency occurs. One controls the physical safety and well-being of the creator and the other controls the financial safety and well-being of the creator. The conservator is usually a close friend or family member who shares a loving relationship with the creator.

The person named for physical guardianship is typically not the same person that would control the creator's financial assets. This has nothing to do with trusting one person more than another. Rather it has to do with practical matters. The one who loves the creator, and would therefore be a practical person to decide physical matters, may not necessarily be a financial genius. Obviously, it is important to put finances with someone who understands financial matters.

Anatomical Gifts

Anatomical gifts allow vital organs to be used to save other's lives or to provide sight to another person. This has become more widely used in recent years, although there is still a shortage of donated organs and eyes.

Separate Property Agreements

Separate property agreements are typically used when either or both husband and wife have been married previously and have children from those previous marriages. This agreement allows assets from each person, at some point, to pass on only to their own children. This keeps family assets within the original family.

Using Trusts Appropriately

As the public has become increasingly aware of the uses and, therefore, the benefits of the revocable living trust a proliferation of poor quality revocable trusts have emerged. In other words, many people are using this estate planning tool in ways that do not benefit the consumer, but rather tends to benefit those who are selling them.

Part of the problem is the lack of easily recognized specialists in the field. Years ago, medical professionals recognized the need for identifying specialization. Unfortunately, the legal field either has not recognized this need or, if they have recognized it, have failed to openly specialize. Legally, any attorney can generally do any legal document they wish. That does not, of course, mean that he or she is skilled at it.

Over ten years ago Henry W. Abts, author of "The Living Trust," stated that the majority of attorneys simply do not have enough training or education in writing trusts. Many trusts have been written in a disorganized manner and were poorly understood by the clients the trusts are meant to represent. The price of the trust is certainly no sign of quality. Some of the worst trust documents are also the most expensive. Length is also no suggestion of quality. Some very well written trust documents are only a few pages in length.

No Official Trust Format

As stated, there is no official trust format. A trust may be any size at all and in any order imaginable. Many trusts are so disorganized that trustees end up hiring expensive professional council in an attempt to properly follow the trust directives. Even simple things, such as refinancing a home, could mean costly legal time when the trust is poorly written. Many trusts do not even contain such simple things as subtitles and a summary of the contents.

Another problem with many of the trust documents seen today have to do with "legalese." That is, the legal language used in the trust document. Although there must be a certain amount of language used that is peculiar to the legal profession, this should not necessarily make the document impossible to read and understand by the average client.

Lack of Communication

Probably one of the most recent problems with trusts is a lack of communication between the client and the drafting attorney. While this may happen even when they are in the same room, today this problem is often due to the fact that the two never actually meet face-to-face. Rather, the client deals with a middleman. This may be any person, but it is often an insurance agent who may not even realize their legal vulnerability. The middleman (or woman) generally uses a generic, fill-in-the-blanks type of format to gather basic information. This is passed on, along with the client's check, to an organization who typically works with an attorney. The organization's attorney then puts the information into a basic living trust document. Often even the person gathering the information in the field never sees the lawyer who signs off on the document. No specialized attention is possible in such a transaction. Professionals in the estate planning field never work in such a manner.

Future Events Need to be Addressed in the Trust

It is important to understand that a trust must cover not only circumstances that exist today, but also any future circumstances that may develop. Depending upon the intent of the trust, the document may even need to last into the next generation.

As we stated, price is no indicator of quality. In fact, an attorney who must start from scratch, learning how to write a trust (which takes research time) may actually charge his client more than an experienced attorney. Any person selected to write a trust document should already be experienced, having drawn up and settled a substantial quantity of living trusts. Do not hesitate to openly discuss previous experience with an attorney. A truly professional attorney would expect such a discussion to take place. He would probably even encourage it since he realizes that this discussion validates his fees.

Knowing What a Revocable Trust Can and Cannot Do

There is no doubt that a living trust may be beneficial regardless of the age of the creator. However, many older people assume or are led to believe that a revocable living trust will do more than it actually can.

Revocable Trusts Are Most Commonly Used

The most commonly used type of trusts is, in fact, revocable living trusts. It has been estimated that slightly over 90 percent of all trusts created are revocable. A revocable living trust may also be called a family trust, changeable trust, inter vivos trust or a grantor trust. All these terms mean the same thing. A trust that is revocable may be changed by its creator at any time for any reason. That is, in fact, the beauty of a revocable living trust: it is changeable.

The ability to change, while a positive factor, can also lend to confusion. If a trust is changed, within the same document, too many times it can end up more confusing than helpful. As we've said, it is important to understand that there is no formal format in creating a living trust. Therefore, it may consist of only three pages or three hundred pages! Some trusts seem to be created purely for effect, with page after needless page of confusing language. The most effective trusts make use of the available flexibility without needless rhetoric.

The Most Commonly Stated Reasons for Creating a Trust

There are several commonly stated reasons for creating a living trust document. Some of the reasons cited do not necessarily accomplish that which is desired. The reasons most often stated (which may or may not be accurate) for acquiring or creating a revocable trust include:

1) estate taxes

2) inheritance taxes, where applicable

3) protection from creditors

4) bankruptcy

5) Title 19, Medicaid qualification

6) to avoid probate proceedings

7) privacy of settlement

8) generation skipping

9) conservation, distribution and professional investment management

Let us review these commonly stated reasons one by one. Keep in mind that we are looking at these from the standpoint of the most commonly used trust, which is the revocable (versus an irrevocable) trust. Some things (which cannot be accomplished with a revocable trust) may be possible when an irrevocable trust is used.

We will look at these commonly stated reasons to see if those who use trusts for this reason will get what they desire. We will rate them as True or False.

Reason Number One: To Save Estate Taxes

False. This is a Federal tax, not a state tax. The living trust will save NO money on estate taxes. At best, it may delay payment of taxes or shift payment to another person. Both of these are doubtful. Any document that allows the owner of the asset to maintain control of it will not deflect taxation.

Estate taxes are a Federal tax on the value of the property left behind by the creator at the time of death. The creator is the person who creates the trust. These taxes are due with or without a trust. Either the person or the trust will owe these taxes.

Reason Number Two: To Save Inheritance Taxes

False. These taxes are paid by the estate; not the beneficiaries. A revocable living trust does not prevent the payment of inheritance taxes. This is a state tax, not a Federal tax. A few states do not impose inheritance taxes, so this would apply only in those states that do. It is important to understand that this tax will be due in any state where real property is located. Real property is the opposite of personal property. Real property is land and any items permanently attached to it, such as buildings or crops. Therefore, even if a person is a resident of a state that has no inheritance taxes, if the property is located in a state that does, inheritance taxes will be due. Real property is taxed by the state in which it is located.

Reason Number Three: Financial Protection From Creditors

False. Creditors may make claims against a revocable living trust just as they would against a will. In fact, trusts tend to give less creditor protection than a will would. Since probate closes itself to creditors at a specific point, wills are often better protection against creditors than are revocable trusts, which may be open to creditors for several years longer than a will. The exact time will depend upon individual state laws. It will also depend upon the will that comes with the trust. Many professionals who are at a high risk of lawsuits favor the use of wills because of the creditor protection given by closure of probate.

Reason Number Four: Bankruptcy Protection

False. Older people are often led to believe (or they are allowed to assume) that a revocable living trust will protect their assets should they declare bankruptcy. This is certainly not true. Since the creator has the legal right to change a revocable trust at any time, the assets within that trust may be attached. Bankruptcy is a federal procedure rather than a state procedure, so federal laws apply. Even so, there will be state laws that create some differences. Some states are easier to file in than are others. Because state laws do create variances, anyone considering bankruptcy should contact local legal council. Trusts, like bankruptcy, are subject to federal laws. Like bankruptcy, state laws will still create variances in how federal laws are applied.

Reason Number Five: Title 19 - Medicaid Qualification

False. Many people wish to avoid the responsibility of paying for their own nursing home care by putting that responsibility onto Medicaid, which is considered by many to be medical welfare. These people feel that having a revocable living trust will allow them to shelter their assets while qualifying for Medicaid benefits. Of course, many of the fears that lead to the creation of a trust are not greedy. When a couple has limited benefits, the costs of long-term nursing care are truly a scary prospect. Using these very real fears, many salespeople lead the consumers to believe that a revocable trust will allow qualification for Medicaid based on the fact that assets were transferred to a trust. There is no truth in this. All of the same Medicaid qualification rules apply whether the assets are in a revocable living trust or out of it.

Medicaid is a joint federal/state program that pays for medical care for individuals, of any age, when they cannot pay for the care themselves. Because Medicaid means the spending of tax dollars, Congress has mandated estate recovery procedures. All states must attempt to recover Medicaid dollars that were spent on an individual's care. This is, in fact, mandated for tax dollars spent on nursing home care, and other facilities that pay for home and community based services. States may go beyond federal requirements to collect the money, but they cannot do less than required.

"Estate recovery" of course refers to someone who has died. Even so, this brings up an important point: those that are attempting to "hide" their assets may only be shifting the financial burden from themselves to their children. Additionally, Medicaid qualification can be delayed when assets were transferred prior to needing long term care in a nursing home or other qualified institution.

It is possible to shelter assets, which may allow Medicaid qualification, using irrevocable trusts. In order to have any possibility of qualification, however, the individual must totally give up all benefit from the assets. In addition, there are time limits that apply.

Reason Number Six: To Avoid Probate

True. A revocable living trust will avoid probate proceedings. Probate is Latin meaning "to prove the will." That is exactly what probate does. It proves the will to be either valid or invalid, depending upon the circumstances. A will identifies and transfers rights and powers as well as transferring property. This is not necessary with a trust, since the trust did not die. Only the creator of the trust died. Because the trust may still exist beyond the creator, probate proceedings, and the related costs, do not apply. Therefore, a trust (whether revocable or irrevocable) does save probate costs.

Reason Number Seven: For Privacy

True. A will is a public document; a trust is a private document. Therefore, a trust does provide privacy that might not be available through a will. A will's public exposure may be minimized, however, by probating it in a different county within the same state. Still, even this will not evade the fact that a will is certainly a public document.

Reason Number Eight: Generation Skipping

True. This is a benefit of a revocable living trust that is seldom mentioned. There may be situations where the creator may desire to leave his or her assets to their grandchildren skipping their own children. Since wills are much easier to challenge, a trust works very well in this situation. It is extremely difficult to break a well-drafted trust if assets have been properly transferred into it. Only when assets have not been properly transferred or the trust has not been clear in its language are there good legal grounds to challenge a trust.

Reason Number Nine:

Conservation, Distribution and Professional Investment Management

True. Trusts are often used for this purpose by financial planners and they work very well in this capacity.

When a person has a living trust, assets need not necessarily be distributed. Under a will, assets must be distributed because there is no legal entity left in which to hold them. Under a revocable living trust, there is a legal entity in which to hold the assets. Therefore, assets may be continued without distribution.

Under a living trust, the methods of allocating, management conservation, investment and distribution are nearly endless. The trust typically sets down instructions for asset use and distribution, which the trustee or co-trustees must follow.

This last point, allocation and distribution, are often considered to be the most useful part of any living trust and the best reason to utilize one.

It should be noted that the first five points most often cited as the reasons a revocable living trust has been created are actually not valid. Therefore, people are creating revocable living trusts to accomplish something that is not even possible. Only the last four points are valid. It is unfortunate that so many trusts are created for reasons that are based on misinformation.

Many of the trusts that are currently being created may also face problems at the creator's death. If properly executed signatures are not on the trust document, the trust may not even be valid. An attorney, in many states, must sign off on the trust to ensure its legality and some of the trusts on the market today do not have such signatures. Also, the assets must be properly transferred into the trust so that it is funded. Again, some of the do-it-yourself kits and the generic trusts with middlemen may have never had assets transferred correctly.

Property that is not properly identified within the trust may actually hold up the settlement of the estate. The family of the deceased creator may end up quarreling over whether specific property belongs in or out of the estate. This would especially be true if family members felt shortchanged through the will or trust.

For example:

Charlie Croonan owned a business. His intent was to divide it between two of his four sons. These two sons had contributed greatly to the building of the business while the other two sons had not. Therefore, he named the business in his trust, but the company who put it together never actually transferred it over. When Charlie died, all four sons laid claim to the business. The two who should have actually received it cited the trust as proof to their claim. The other two sons, who were named equally in the will, claimed it belonged under the will since it had never formally been transferred over to the trust. Their fight over this business lasted for eight years and eventually caused the business to go broke. It also caused a fracture in the family that continued for years more.

Making Change Possible

All trusts (even irrevocable ones) should be made amendable. Some attorneys do not include this right within the trust. That is unfortunate since any change then requires an entirely new document. It has been suggested that attorneys purposely leave this ability out to generate new business for themselves, but that is doubtful. Rather, it is probably a lack of training that accounts for this shortcoming.

Living Trust Advantages

A living trust has many advantages not fully realized by the general public. The points often considered by the public may be incorrect while the true advantages are often overlooked or simply not appreciated. Those advantages include:

1) Provide for minor children, grandchildren or handicapped persons of any age.

2) Assures privacy of the estate.

3) Provides a small estate the use of an A-B Trust.

Provides For Beneficiaries

The first point should never be overlooked. Providing for minor children often makes a revocable living trust advantageous aside from all the other considerations. Sometimes a trust may be needed to protect a fully competent individual from family members that may take advantage of that person's good intentions or kind heart. Perhaps a father wishes to protect his daughter from her greedy, selfish husband. Perhaps a mother knows her son will gladly give all of his inheritance to organizations that solicit his donations. Whatever the reason, by naming a bank or other institution or person as trustee or co-trustee, the daughter or son would not find themselves in a difficult financial situation. Sometimes financial protection is not appreciated by the beneficiary. If this might be the case, it is all the more important to word the trust appropriately.

When minor children are involved in an estate, if no living trust were in place, the state would set up a trust of sorts. The trustee may easily be someone unknown to the family. That trustee may also have the opportunity for great financial gains as a result of his or her appointment. Aside from the financial standpoint, no court can truly know the desires of the parents. Even modest estates may want to consider the use of a trust to protect minor children or even adult individuals with poor money management skills.

Privacy

Many celebrities and prominent people desire privacy in their affairs. Even everyday people, however, often seek privacy. This may especially be true in small towns where everyone seems to know each other and gossip easily spreads. Obtaining privacy can be difficult. Since a living trust is not registered publicly it does maintain its privacy. The only people who see a trust are the trustee or co-trustees and the successor trustees. Not even the beneficiaries have a legal right to see the trust document, unless it specifically gives that privilege.

This privacy continues even when a person suspects that a trustee is misusing trust funds. Say, for example, that a child's aunt feels that the child's trustee is misusing the trust fund belonging to the minor child. The aunt's sole recourse is to hire an attorney who will request that the probate court (which has jurisdiction over trusts) review the trustee's use of the funds. The court will then review the records kept by the trustee and make their decision. Throughout this process, neither the aunt nor her attorney will be allowed to review the trust documents. It is this legal privacy that makes it so difficult to challenge a trust.

Using an A-B Trust

Two people use this trust jointly. Although they are typically two married people, they do not have to be married to utilize it. Often advising CPAs only consider using A-B trusts for large estates that may be adversely affected by taxation. However, other situations should also be considered:

1) The decedent's Trust B becomes irrevocable upon death.

2) A catastrophic illness provision may be included.

3) No estate tax may be due even if the estate is eventually valued highly.

It is easy to see why CPAs generally only consider this type of trust for large estates. When the same estate is held in a living trust, the estate is still divided in half with half belonging to the husband and half belonging to the wife (which explains why an A-B Trust may only be created while both husband and wife are living). Under an A-B Trust (sometimes written as A-Trust-B-Trust), each spouse's share of assets comes down into separate divisions of the same trust which preserves both Federal estate tax equivalent exemptions. The term, A-Trust-B-Trust, or A-B Trust, often makes individuals think they are two separate trusts, but that is a false impression. The trust is one trust which simply has two divisions; one division for each spouse.

Preserving Beneficiary Designations

One of the primary reasons (aside from preserving the federal exemption) of using an A-B Trust is to ensure that the assets attributed to the first to die will eventually flow down to the decedent's heirs. Upon the death of one of the two spouses, one-half of the estate becomes irrevocable. This ensures that at least half of the total estate will go to those heirs that were selected. Understand that the selected heirs may well be the surviving spouse, but it may also be someone else, such as children from a previous marriage.

When one spouse dies, their share flows into the decedent's Trust B. Typically, the assets in the Trust B are for the use of the surviving spouse as long as he or she may live. Upon the death of the surviving second spouse, those assets will go to the beneficiaries specified by the original spouse. The surviving spouse may use the assets (which may even mean exhausting the assets entirely), but may not change the listed beneficiaries.

Catastrophic Illness Provision

In reference to the Catastrophic Illness Provision, it may be included in an A-B trust in many cases. This is usually done with long term nursing home confinements in mind. While this has traditionally been a consideration of the elderly, with the current epidemic of AIDS, many younger people are now utilizing this element of the A-B Trust. Remember, although this is usually considered an estate tool for a married couple, they do not have to be married. Any two people may utilize this document. Many consider it to be one of the most important reasons for using such a trust. Since an A-Trust may not be divided, it may not utilize the Catastrophic Illness Provision. An A-B Trust, which may be divided, works well for two people, married or not.

A catastrophic illness is an illness, which is expensive in relation to the size of the estate. The financial effects are those that would be devastating to the estate itself. When the Catastrophic Illness Provision is included in an A-B Trust, upon the onset of a financially catastrophic illness, one-half of the assets are immediately preserved for the benefit of the other spouse. As a result, only the assets that form the share of the stricken spouse will be consumed.

The fear often expressed about using an A-B Trust is that the surviving spouse may lose control of the assets in the decedent's B-Trust. While the option is available to restrict use of the B-Trust, it is rarely done. Normally, the surviving spouse would be granted full rights to the assets by the deceased partner. If the surviving spouse is named as trustee, this is certainly true.

The A-B Trust has several valuable points in respect to the surviving spouse:

1) If granted, the right to all income from Trust-B.

2) If granted, the right to use any and all principal in Trust-B for medical expenses or daily living expenses

3) The right to spend each year $5,000 or 5 percent of the assets in the B-Trust, whichever is greater, for any reason at all. This right is not generally cumulative. The right must be exercised each year or it is generally lost.

The specific wording in the living trust document is used to satisfy the IRS and, therefore, may cause confusion and fear over the assets in the Trust-B. This specific wording (to satisfy the IRS) is necessary in order to insulate the assets in the decedent's Trust-B from further estate taxes.

When considering an A-B Trust, it is important to realize that children are actually contingent beneficiaries in most cases. The surviving spouse is typically the primary beneficiary. Even so, the contingent beneficiaries (children) do have specific rights and the surviving spouse, as the trustee, does have a fiduciary responsibility to protect those rights.

The A and B divisions of an A-B Trust are both revocable as long as both husband and wife are alive. Upon the death of either, the decedent's B-Trust immediately becomes irrevocable. The difference between revocable and irrevocable lies in the ability to change the trusts. While revocable, the trust may be changed as often as desired as long as the settlor lives. The settlor is the person who puts their assets into a trust document. The trust may be changed or may even be terminated while it is revocable. Once a trust becomes irrevocable, no further changes may be made (unless authorized by the document) and the trust may not be terminated, except as provided for within the terms of that trust.

To Recap: The A-Trust is revocable whereas the B-Trust is irrevocable.

Types of Trusts

A-Trust

A trust used for single persons, married or unmarried couples. This type of trust is sometimes written as Trust-A. The entire estate will flow down to the named beneficiaries with no probate fees. If the estate is under the federal dollar limit, there will also be no federal estate taxes due.

A-B Trust

An A-B trust is used by two people, whether married or unmarried. Upon the death of one of the two individuals, half of the assets will flow down into the B-Trust (the decedent's trust) and the other half of the assets will flow down to the survivor in the A-Trust (the survivor's trust). As a result, the entire estate may be used by the remaining person (the survivor).

A-B-C Trust

An A-B-C trust is generally used by married couples whose estate exceeds two federal estate tax equivalent exemptions. This trust is used to provide the right to bypass any federal estate taxes when the first spouse dies, regardless of the size of the estate.

Of the decedent's portion of the estate, one federal estate tax equivalent exemption amount will flow into the decedent's B-Trust. Any excess will flow into the C-Trust, which prevents estate taxation upon the death of the first spouse.

The C-Trust is also known as a Q-TIP Trust. Q-TIP stands for Qualified Terminal Interest Property. To qualify for this right the surviving spouse must have two rights:

1) the right to income (though not necessarily any principle), and

2) the right to change beneficiaries in Trust-C.

The C-Trust is expandable which means that the surviving spouse may pass any amount in excess of the federal estate tax equivalent exemption to the Trust-C. There is no dollar limit. This defers any assessment of estate taxes until the death of the surviving spouse.

When a couple divorces, a living trust cannot be cut in half. Therefore, it is not practical to continue the trust as it was originally written when a divorce occurs. It is possible for either the husband or the wife to revoke their interest in a trust allowing the other person to then continue its use. That is accomplished by using what is called a Disclaimer of Trust Interest form. Most professionals feel that an attorney should be consulted to be certain that it is properly executed. However, it is more likely that both parties will simply pull out their assets leaving the original trust empty.

The Trust and Taxes

It is common for living trusts to be used in an attempt to avoid taxation. Generally speaking, this is not possible. Taxes will always be paid by someone at some point in time. After all, the IRS has as much legal council as any other group. Possibly more.

The IRS's interpretation and adamant position of the living trust states that the living trust "has no effect upon income taxes." Even with a trust document, all income still flows to the individual who will still be required to report all income as if no trust existed. Even with a living trust, the individual will continue to use his or her Social Security number, as before executing the trust, when filing the Form 1040 personal income tax return. Any income from the trust document must still be reported.

For simplicity, it is best to use Social Security numbers as the Trust Identification Number. That will prevent unnecessary correspondence with the IRS. It also cannot be stressed enough that the term "grantor trust" needs to be used in any correspondence to the IRS since it is their term for revocable living trusts.

Trust Termination

While a trust may remain empty or non-funded, typically a trust terminates when the assets are distributed out of the trust. No court action by a trustee is necessary.

The Law of Perpetuity

Even so, in order to satisfy the Internal Revenue Service (and because it is possible to maintain a non-funded or empty trust), a revocable living trust must specify a specific termination date. This is referred to as the Law of Perpetuity.

The Law of Perpetuity specifically states that upon the death of all creators of a given trust, all potential heirs are identified. That would include children, grandchildren, great-grandchildren, unborn fetuses, aunts, uncles, nieces, and nephews. The trust document must cease twenty-one years after the death of every one of those heirs. Considering small children or unborn fetuses, that could certainly stretch to over a hundred years. Many people would not desire their trust to continue such a long period of time. Most creators specify a time of ending for their trust.

Appointing Trustees

It's Only a Nomination

It is often recommended by professionals that more than one trustee be named as successor trustees. Understand that a named trustee is under no obligation to accept the position. Therefore, one should consult with the person or organization that is desired before nomination. The word "nomination" says it all. It is a nominated position which means that the nomination may be refused.

Trustees

The trustee is the individual or organization who handles the administration of the trust. When a revocable trust is first created, the trustee is typically the same person as the creator (trustor) and settlor of the trust. That may be one person or multiple people. In fact, this is often a selling point: even though assets are placed in a revocable living trust, control is still maintained, if so desired, by the creator.

Successor Trustees

A successor trustee needs to be named to succeed the creator of the trust. If there is more than one creator, as in the case of a married couple, then there exists a surviving trustee when one of the couple dies. When either the husband or the wife dies, the remaining person is the surviving trustee and continues to manage that trust.

In the past, women were often considered unsophisticated in financial matters. As a result, husbands were often the sole trustee when a trust was created. If he died, an institution or trusted friend typically took over the management of the trust. This is seldom true today.

A successor trustee will take over upon the death or incompetence of the original trustee without requiring any court proceedings or legal action. The successor trustee will immediately have the same powers as the original trustee held. He or she may buy, sell, borrow against or transfer trust assets, assuming it is allowed within the trust document. A successor trustee may not, however, change the trust document in any way. Only the creator of the trust may change the trust document.

Fiduciary Responsibilities

Any successor trustee must serve in a fiduciary capacity. This means that, in all financial matters relating to the position, the trustee must act with prudence and strictly in accordance with the trust instructions. There is absolutely no reason that is legally acceptable for acting irresponsibly or contrary to the trust instructions. Not even bankruptcy would protect an irresponsible trustee.

Many trusts name more than one person or organization to be successor co-trustees. This is viewed as protection for the trust. When more than one person or organization is named as co-trustees, all must act in concert. Any action on behalf of the trust will require agreement and signatures of each successor co-trustee.

A person must be of legal age to serve as a trustee. Generally, legal age is considered to be 18 years old, but this may vary according to the state where the trust was created.