Although it is difficult to think about times when you are no longer around, it is important to do so to ensure that your loved ones will be taken care of. One option you should look into is a revocable trust. This offers confidence in what otherwise can be a very troubling decision to make.
You might think this is the same as a living will, and indeed the two are similar in several ways. However, a living will basically says what you want to happen to you if you are in a vegetative state from which you cannot recover, while the trust will say what should happen to your property when you die.
You’ll be working with several people as you set this up, including the primary trustee and a secondary trustee who will work with the property and benefactors who will receive it. True, this does essentially the same thing as a normal will, but many people consider it a better option.
One of the reasons it is preferred is that it works in coordination with a living will to declare what will happen to both you and what you own should you be incapacitated. You’re going to want to have both of these, and should check with your state to see if they should be notarized.
Just why is getting this so important? If you don’t, your property might not go to the people who deserve it. This is because it will have to go through a process of probate that can take a very long time to complete. When you have a revocable trust in place, you can be sure this won’t happen.
As you can see, you’ll want to get both the revocable trust and a living will as soon as possible. The people who are left behind will be in a very bad position without them, and the times will already be hard enough. Make everything easier for them and for you by taking care of these things as soon as possible.
A “Trust” is nothing more than a contract. Contractual arrangement whereby property is transferred from one person (The Grantor) to another person or corporate body (The Trustee) to hold the property for the benefit of a specified list or class of persons (The Beneficiaries). Although a trust can be created solely by verbal agreement it is normal for a written document to be prepared which evidences the creation of the trust (the Trust Deed), sets out the terms and conditions upon which the trust assets are held by the Trustees and outlines the rights of the Beneficiaries.
In essence, a trust is not dissimilar to a will except that assets are transferred to trustees during lifetime rather than those assets being transferred to executors on death. The trust deed is analogous to the deed of will.
He’s the guy with the buck; the owner of the asset(s). The grantor’s motivation is to get asset(s) out of his name for either some or all of the following:
• Asset protection / wealth preservation
• Reduce potential frivolous lawsuits
• Elimination of the “probate process”
• Elimination of estate taxes
• To gain some tax benefit or some other tax deferral benefit.
If the “Grantor” initiates the trust (contract), it’s called a “Grantor Trust,” otherwise it’s called a “Non-Grantor Trust.” To me, it’s just legal garbage so lawyers can charge you more. If the “Grantor” wants to retain certain control over his asset(s), it’s called a “Revocable Trust”; otherwise, it’s an “Irrevocable Trust.”
Revocable / Irrevocable has significant asset protection and tax differences. “Revocable,” is like the kid next door that brings the ball to play basketball with the other kids. Everything is fine, as long as he makes the rules, and he makes the rules as he goes along. If you don’t agree with the rules as he makes them up as you play, he takes the ball and goes home. The ball game is over.
Living Trusts Are Outright Dangerous
The Living Trust can destroy your estate in the event of a lawsuit, serious illness, or elderly care. One name given to a “revocable” trust is the “Living Trust” The sole purpose of the Revocable Living Trust is:
• to “eliminate the probate process.”
• Assets in a trust, avoids probate.
• Assets that are not in a trust goes to probate, with or without a will. The living Trust is outright dangerous for asset protection, wealth preservation, and estate tax elimination.
It’s obsolete for assets greater than $1,000,000. With the Living Trust the owner of the assets retains significant power over his wealth and will not insulate assets from the lawsuit explosion. There’s absolutely no tax benefit, no asset protection and no wealth preservation benefits with the “Living Revocable Trust.
The Trustee is the guy who manages your trust assets. Great care should be taken in your selection of your trustee. The trustee is bound by the trust document (contract) and he has a duty to protect trust assets for the beneficiaries. The independent Trustee manages, holds legal title to trust assets, and exercises independent control. The trustee can be your lawyer (worst person you would ever want to trust), your accountant, best friend, or anyone you trust who’s not a relative by blood or marriage. You may have more than one trustee. I usually recommend two trustees in all cases of $750,000 or more.
Accountability Of Trustee
The law imposes strict obligations and rules on trustees including a duty to account for any benefits the trustee may have gained directly or indirectly from a trust. This goes beyond fraudulent abuse of position by a trustee.
There is a basic rule that a trustee may “not” derive any advantage directly or indirectly from a trust unless expressly permitted by the trust; for example, where he is a professional trustee and the trust provides specifically for a right to make reasonable charges for services.
However, full disclosure of the basis and amount of charges is required. The trustee of an “Irrevocable Trust” has sole discretion over trust assets. Your selection of your trustee must be a carefully planned decision.
The significant item to remember is that an “Irrevocable Trust” gets the assets completely out of your (Grantor’s) name and in return you get complete asset protection, elimination of probate, elimination of estate or inheritance taxes, in certain cases a tax deduction for the assets contributed to the trust, and finally, under certain conditions other uncommon tax benefits not otherwise available. The most important rule relating to the duties of a trustee is that requiring them to obey the directions in the trust deed both with regard to the interests of the beneficiaries (i.e. who is entitled to what) and with regard to the administration of the trust (managing the trust property). Trustees are also subject to very strict standards as to the way in which their powers and discretions may be exercised.
Fiduciary Relationship Of Trustee
The courts regard a trust as creating a special relationship which places serious and onerous obligations on the trustees. Thus the law regards the special “Fiduciary” relationship of a trust as imposing stringent duties and liabilities on the person in whom confidence is placed – the trustees in order to prevent possible abuse of that confidence. A trustee is therefore subject to the following rules:
• No private advantage – A trustee is not permitted to use or deal with trust property for private direct or indirect advantage. If necessary the court will hold him personally liable to account for any profits made in breach of this obligation.
• Best interests of beneficiaries – Trustees must exercise all their powers in the best interests of the beneficiaries of the trust.
• Act prudently – Whether or not a trustee is remunerated he must act prudently in the management of trust property and will be liable for breach of trust if, by failing to exercise proper care, the trust fund suffers loss. In the case of a professional the standard of care, which the law imposes, is higher. Failure to exercise the requisite level of care will constitute a breach of trust for which the trustee will be liable to compensate the beneficiaries. This duty can extend to supervising the activities of a company in which the trustees hold a controlling interest.
Additional Safeguards Of Assets
In cases of substantial assets, you may add one other safety measure, “the Trust Protector.” The trust protector’s sole function is to hire and fire trustees, at will and without explanation. The Trust Protector can save unwanted and often unpleasant results (i.e. your wife runs away with the trustee).
The beneficiaries are the reason for your trust (contract). Your beneficiaries are the guys that will enjoy the benefits of your trust assets. They include, wives, children, grandchildren, charitable organizations of every color and variety. The length of your beneficiaries is unlimited. Beneficiaries could include the original grantor, but that would be self-defeating. Generally, trusts are irrevocable. The grantor gives-up his assets to gain asset protection, elimination of probate, elimination of estate taxes, and gain certain uncommon tax advantages. Any degree of control by the grantor will render the trust revocable and subject to court discretion.
The period of time of the trust depends on the selection of your trust’s legal jurisdiction. Most states and countries have rules against “perpetuities.” That’s to say, that your trust must have an end. Selection of your trust’s Jurisdiction in Utah or outside Utah depends on the degree of risk to be assumed by you. Foreign Asset Protection Trusts (FAPT) are significantly stronger than domestic trusts. Judgments are generally not enforceable outside the Utah, United States.
Pitfalls of Probate
In either of the situations above, where a person dies intestate or with only a will in place, the person’s estate needs to be probated if the gross value of the estate exceeds $100,000. Probate serves a useful function in society, by providing an orderly system for notifying heirs of distributions and making sure that estate assets go to the people who are supposed to receive them. However, probates in Utah are generally considered among the most onerous in the United States, for three main reasons.
• Probates in Utah, like almost all court proceedings, are public. Any interested person can stop by the probate court and ask to see a copy of a person’s probate file. The file will usually include the person’s will, a list of heirs, a list of assets and their approximate values, and a host of other information. Many people consider this a violation of their privacy.
• Probates in Utah take a long time-usually somewhere between eight months and two years. Certain assets of the estate are frozen during this time. It is not unusual in a probate for a surviving spouse to have to petition the court for an allowance from the estate to provide for day-to-day living expenses.
• Probates in Utah are very expensive. Probate fees, which are the fees paid to the executor and the attorney for the estate, are based on a percentage of the gross value of the estate. These fees routinely run into the tens of thousands of dollars, even for relatively modest estates.
Benefits of a Revocable Trust
For these reasons, many people in Utah choose to avoid the probate process by setting up a revocable trust. A trust accomplishes the same goal as a probate: distributing assets to the people who should receive them. However, a trust is generally considered superior to a probate for several reasons.
A properly drafted trust allows a person all the flexibility of a will, but with the added advantage of private, non-probate administration. A trust administration is private-the only people entitled to notice or accounting of trust assets are the beneficiaries of the trust. Distribution of trust assets can often be accomplished within a few weeks of the death of the person who set up the trust. In addition, a trust administration is usually fairly inexpensive compared to a probate. Where a probate might cost the estate almost ten percent of the estate’s total value, a trust administration can often be completed for a small fraction of that amount.
Setting Up a Trust in Utah
Drafting a trust or a will may appear to be relatively simple, and many people use inexpensive forms or computer programs to set them up themselves. However, there are numerous pitfalls that can cause problems for the unwary. Oftentimes people will be unaware of important provisions in the law that may lead to unintended consequences. Sometimes individuals inadvertently disinherit someone they intended as a beneficiary, and sometimes, as mentioned above, individuals cause significant problems for beneficiaries who are receiving state or federal disability or other benefits. An improperly drafted trust can also cause significant tax headaches for a surviving spouse or child.
The Irrevocable Trust
But there’s another kind of trust that’s used for purposes that a revocable living trust just can’t accomplish. What’s an irrevocable trust? It’s a trust that, once it’s established, generally can’t be changed or canceled. So, once you establish an irrevocable trust and transfer property to the trustee, the trustee manages the property according to the terms you’ve established; but, you can’t change the terms of the trust or take your property back.
What an irrevocable trust lacks in flexibility, it makes up for in estate tax planning and asset protection power. Since you give up the ability to exercise day-to-day control over the trust property (even though you still might benefit from the property), the law doesn’t count the property as yours when it comes to taxes or creditors’ claims.
Many of my clients ask me about the benefits of using a trust as part of their estate plan but they are unaware that there are many different types of trusts and each may serve an important purpose as a part of your estate plan, depending on what your ultimate goals and concerns are.
For instance, a special needs trust allows for your beneficiary to receive a stipend of money or financial help of some sort from the trustee without affecting or negating any financial aid they receive from the government due to a disability or disorder. Of all the many categories of trust, the two most basis are revocable and irrevocable.
Every trust, no matter what its purpose, will be labeled as either revocable or irrevocable. An irrevocable trust serves the dual purpose of asset protection and estate tax reduction. The assets in an irrevocable trust are protected because the grantor no longer owns them in the eyes of the law.
When an irrevocable trust is created, a new entity is formed with its very own federal tax id number. It is not an extension of its creator. On the contrary, it is its own unit that can accept, manage and distribute assets through the named trustee and only by the wording of the initial trust language. Once the irrevocable trust is created and funded, it can no longer be amended or revoked. The only parties with access to the trust assets are the trustee and the beneficiaries. The grantor is not permitted to be the trustee or the beneficiary. However, the trustee may be the same party as the beneficiary and, in fact, this is often the most ideal situation. Once the assets are in the irrevocable trust, they are now protected from the creditors, litigants and spouse of the grantor.
The assets are also protected from the creditors, litigants and spouses of any trustees or beneficiaries, so long as the assets remain in the trust. Since the irrevocable trust has no creditors of its own, the assets will remain out of the reach of any financial vultures looking to acquire them.
In addition, by removing these assets from your individual name and assigning them to the newly formed irrevocable trust, you have reduced your eventual estate tax level by that same amount. When you die, the federal government will add up the value of all of the assets you owned in your individual name and assess your estate with a tax based on that value.
This estate tax will take into account real estate, bank accounts, brokerage accounts, collectibles, cars, jewelry, paintings, and even life insurance policies. By moving your assets from your individual name into the name of your newly created irrevocable trust, you will remove those assets from your estate even if you retain access and enjoyment to them during life.
For these and many other reasons, it is always good practice to consult with an attorney who specializes in trust and estate law. Every county in the state has at least a few attorneys who have taken the extra training, education, and experience to become certified as specialists in estate law. These attorneys know estate law inside and out and are able to counsel with clients effectively on the potential problems that might await in an estate planning situation. Contact us today.