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The sister of a friend wanted to know why she and her husband should have a trust instead of just simple wills. These are very well-educated people, with good jobs, homeowners, with some retirement savings. Their children are grown and they have a few grandchildren. The total value of their joint estate at present is estimated to be around $1.5 million. I wrote a reply to their questions, and then realized my reply was my next blog post. The question is one I am asked so frequently, and the answer, at least in my mind, is so clear. Both from a financial standpoint, as well as an ease of administration standpoint, a living trust estate plan meets so many people’s needs so much better than passing property through a will through the probate process. Here is my answer to my friends, on why they should have a living trust instead of just a will:
First, off, as between spouses, with or without a trust, there is no probate on the death of the first spouse as to any jointly-owned (community or joint tenancy) property. The surviving spouse just gets it all, without any administration. However, if either spouse has separate (as opposed to community) property, there is a “simple” probate procedure for that property to transfer to the surviving spouse. Even a very simple spousal probate will cost $5,000 or upwards (I just finished one of these for a client whose husband left all his separate property to her in his will. It cost her close to $6,000, and I’m a pretty inexpensive lawyer!).
On the second death, if there is no trust, all property passing to heirs does go through probate on an estate of this size, except for life insurance proceeds and other accounts that have named beneficiaries. The size of estate not requiring probate is minimal ($100,000 maximum gross estate value, only $30,000 of which can be real estate). Fees for “regular” probate are based on a sliding scale percentage of the total gross value of the estate (not taking into account any mortgages or loans on property). For an estate with a gross value of around $1,500,000.00, probate will cost your heirs around $25,000.00 in attorney’s fees, plus filing fees and real property appraisal fees, for close to another $1,000.00.
A revocable living trust estate plan for a married couple should cost you around $2,000.00 to $2,500.00 to set up and fund. That cost should include grant deeds to transfer your real property into the trust, and also should get you each a will (still needed to cover those minimal assets that don’t go into a trust, and deal with things like cremation vs. burial, etc.), a Financial Durable Power of Attorney, and an Advance Health Care Directive. That is a LOT less money to spend, for a lot more protection. It will completely bypass the probate courts, and on the death of the surviving spouse, your successor trustee can just transfer the property out of the trust to your designated beneficiaries. Also, trusts are private documents. Probate filings are public record. Everything filed in a probate proceeding is available for anyone to find and scrutinize, as opposed to trust documents, which are not recorded or filed anywhere.
Another advantage of having a trust is that, if you become incapacitated, your successor trustee can immediately begin to act as trustee and manage your assets on your behalf. This is especially helpful for the surviving spouse, as well as for single people.
Another issue is federal estate taxation. As of this year, there is no need to be concerned about federal estate taxes, as the tax is repealed for this one year only. However, in 2011 the federal estate tax threshold is scheduled to return to $1 million per person. That’s gross estate, not taking into account any debt on the property. That means anything over $1 million will be taxed at a top rate of 55%. Even if your total estate is less than that right now, if property values again start to rise, it could go over that threshold very easily. The marital trust can preserve the estate tax exemption of the first spouse to die, until the second death, effectively doubling your exemption, creating a tax exemption of $2 million on the second death, instead of $1 million.
People have been speculating for years about what the legislature will do with the estate tax. So far, the legislature has defied all speculations. So, while many people still speculate about how the legislature is going to change the federal estate tax exemption, and based on that speculation give advice about what kind of estate plan to create, the fact remains that this is how it stands now, until it is changed by the legislature, and there is presently no bill before them to change it.
The bottom line is, having a living trust estate plan will save you and your family a lot of time and money, and allow you and your family some security and peace of mind regarding how your estate will be transferred on your death. That’s worth a lot, in my opinion.
If you are married, and if you and your spouse are fortunate enough to be concerned about Federal estate taxation issues, then “portability” is a new concept you are likely to encounter in your research into estate planning.
For some years now, estate planning attorneys have used the Marital A-B Trust to help spouses minimize estate taxes on the death of the second spouse to die (“surviving spouse”). This type of trust allows the Federal estate tax exemption of the first spouse to die (“deceased spouse”) to be saved and used when the surviving spouse dies, thereby doubling the exemption of the surviving spouse.
Now there is new legislation in the works that will eliminate the need for this type of complex trust, in some circumstances, and simply allow the deceased spouse’s Federal estate tax exemption to be transferred to the surviving spouse automatically. This is the concept of “portability”.
In many situations, there will no longer be a need for a Marital A-B Trust. However, there will still be some families for whom the A-B Trust is still the better choice, as when there are children from a previous marriage, or one spouse has significant separate property, or the spouses want to pass property directly to grandchildren through their trust. Your estate planning attorney can discuss these situations with you and make recommendations based on your own unique circumstances.
The term “estate planning” doesn’t mean much to most of us. We might conjure up thoughts of a wealthy spinster aunt planning for the distribution of her vast accumulation of properties to a long list of distantly related nieces and nephews. While there are probably a few of those folks out there, the vast majority of us just want to make responsible decisions to help our loved ones sort out our assets and belongings after we pass on. This is what I do, and what I will attempt to help you understand how to do, in my practice: to know some of the reasonable options available in making choices about how your assets, your health care, your children, and other major components of your life are to be treated upon your incapacity or death.
Your estate planning professionals, in helping you make those decisions, should keep in mind the following objectives, which are the “heart” of estate planning:
- To ensure that your family members have all the information they need to provide for your health care in the event of a terminal illness or injury, and that they know your wishes in advance regarding the use or removal of life support and other crucial end-of-life decisions.
- To ensure, to the greatest extent possible, that those who are appointed to carry out your wishes after your death (including executors, successor trustees and guardians of minor children) have all the resources they need to do their job properly.
- To ensure that your intended beneficiaries receive your assets upon your death, not the courts, lawyers and IRS. If you should die leaving minor children, a proper estate plan also ensures that your children’s inheritance will be safeguarded for them.
- To ensure that your family members and others who are important in your life understand the purpose behind your estate plan, so that they may effectively carry it out.
Communication is a key component to any estate plan. If you are married, you must communicate with your spouse so that you both agree on a common estate plan, or determine where you don’t agree so that those differences can be taken into account. You must also communicate with your estate planning professionals to help you set up a plan that actually will achieve what you want. And finally, you need to communicate with your family members and others who are integral parts of your estate plan: trusted people whom you have named to assist with important tasks, such as executors, successor trustees, guardians of minor children, etc., as well as those who will eventually receive the benefits of your plan.
The process of creating an estate plan is one that most people who have completed it describe in terms such as “satisfying”, “freeing”, “rewarding”, etc. Most of my clients wonder, at the end of the process, why they waited so long to do it. If you are one of those who have waited to create your estate plan, you are not alone; however, now is not too late to begin. You need not have made all the decisions before making an appointment to get started; in fact, sitting down with a qualified estate planning professional is often the first step in the process. You should be able to leave that first meeting with an action plan in place, knowing what steps will be taken by you and your professional advisor to complete your estate plan.
To give you a “head start” on what your estate plan might look like, I have described on the pages of this website the most common types of estate planning documents and their uses. While the details will vary for each individual or family, depending on your own unique circumstances, these tools are flexible enough that they can be drafted to provide for your wishes in almost any circumstance.
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Helping You I create custom, affordable estate plans for caring people. I help my clients create a plan that meets their need to provide for their families, and that also honors their need to leave a legacy, whether financial, philosophical or otherwise. Learn more about me and my services. . . |
