Estate Planning

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What happens when you die WITHOUT a Will?

When you die without a will it is called dying intestate. Although laws pertaining to dying intestate vary by state, distribution of property and assets generally follows a similar pattern. In other words, every state has a "default" plan for the distribution of property in the event that you die without a will. The laws follow a predefined formula and might not be what you want or expect.

What happens when you die WITH a Will?

A will is a legal document that spells out your wishes regarding care of your children, as well as distribution of your assets after your death. When you die this document is used as

guide to go through a lengthy court process called probate. In addition t o being time consuming and costly (usually involving a lawyer) it is also public. All When you die with

only a will, that document must be filed with the court, and can be accessed by anyone.

Revocable Living Trusts

Trusts: Revocable Living Trust

What Is a Revocable Living Trust?

A revocable living trust is a trust created during the grantor's lifetime that the grantor may alter, amend or revoke. After the grantor’s death, the trust either becomes irrevocable or terminates. The revocable living trust may be contrasted with both an irrevocable trust (also created during life but which can't be changed) and a testamentary trust (established by the decedent's will to take effect after death—assets must travel through probate before entering the trust).

Purposes of the Revocable Living Trust

Because of the revocability feature, the revocable living trust does not provide any tax advantages during the grantor's lifetime or at the grantor's death. However, while these trusts do not reduce or avoid taxes, they can help the grantor to:

avoid probate on any assets transferred into the trust during the grantor's life (assets do not, however, avoid estate taxes);

receive life insurance proceeds made payable to the trust at the grantor-insured's death;

receive probate assets pouring over into the trust under the deceased grantor's will at death (assuming the trust did not terminate upon the grantor's death);

keep the decedent's directions for distribution of the assets from being open to public inspection (wills admitted to probate are subject to inspection by the public);

control, through the terms of the trust, the disposition of trust assets much as the grantor's will would have done if these assets were part of the probate estate;

provide management of the assets transferred to the trust by a trustee other than the grantor, if the grantor becomes incapacitated;

allow flexibility through the grantor’s ability to have an attorney prepare a written amendment to the trust at any time without tax or other penalty; and

provide security for the grantor and the grantor's family through the right to revoke the trust and reclaim outright ownership of the former trust property if an emergency arises.

Typical Features of a Revocable Living Trust

Typically, the first part of the trust instrument directs how the trust is to be managed during life, and the second part deals with the management and disposition of trust properties after death.

The first part of the trust agreement will generally provide that, during the grantor's life, the grantor:

receives all trust income;

may add property to the trust or take property from the trust at any time; and

may change any of the trust provisions—or cancel the whole arrangement—for any reason and at any time.

The grantor can serve as the sole trustee of the trust. Alternatively, to avoid day-to-day investment responsibility, the grantor could choose to name a bank or some other person as trustee.

The second part of the trust instrument will direct exactly how the trustee is to use the trust properties during the grantor’s life and disposed of them after the grantor's death. In this sense, the revocable living trust is like a will. The grantor can change the terms of the trust instrument at any time during life, but those terms become unchangeable at the grantor's death.

Avoiding Probate Costs and Delays

Properties the grantor transfers to the revocable living trust during life are not subject to probate at the grantor’s death. Therefore, assets in the trust avoid the delays and costs of settling or probating an estate. Probate costs can vary from modest to substantial, depending on state law.

Settling the estate of a decedent always ties up the decedent's property—at least to some degree. Typically, the local probate court will appoint the executor or an administrator who will collect all the properties of the estate, hold these properties until creditors' claims are satisfied and other formalities are complied with, and then distribute the remaining properties as directed in the decedent's will. (If there is no valid will, property will be distributed according to state intestacy laws.) During this time, which usually ranges from six months to a year or more, the properties may be poorly invested and income or principal may not be readily available to the beneficiaries or heirs.

The revocable living trust can be especially important if the grantor owns real property in states other than the grantor's state of residence. The grantor can avoid multiple probate proceedings in several states (called ancillary probate) by placing the property in the trust during life.

Pourover Receptacle

The revocable living trust can be a "shell" during the grantor's lifetime—that is, inactive. If the trust did not terminate at the grantor's death, the trust may receive assets passing under the will (after probate) and from life insurance policies. This is often called a "pourover trust." Remember, the trust is now irrevocable, and the grantor's comprehensive plan for the disposition of assets will be carried out via the trust terms.

With respect to life insurance proceeds, the trust can provide more flexibility in the payout to beneficiaries than is possible with the standard settlement options offered by the insurer. Also, where there are a number of different policies, the proceeds can be consolidated in the trust and administered under one comprehensive plan of disposition.

Asset Management

The revocable living trust can be more than a mere shell during the grantor's lifetime. If the grantor wants to be free of investment responsibilities, or fears future mental incapacity or absence from the property, the grantor may transfer assets into the trust during life, where the trustee will professionally manage them. Typically, the grantor will receive any income earned by these assets.

Tax Consequences of the Revocable Living Trust

The grantor generally does not enjoy any federal income tax or estate tax benefits from the trust. If the trust generates income, the grantor is taxed on it. In fact, if this income is paid to someone other than the grantor, it would be a gift potentially subject to the gift tax.

The trust can be designed to provide fairly liberal benefits to the beneficiaries—all the income and even some rights to withdraw principal—and the trust can still escape the federal estate tax when a beneficiary dies.

The IRS issued regulations that allow a "qualified revocable trust" (QRT) to be treated as part of the decedent’s estate for federal income tax purposes. If both the executor and the trustee so elect, a revocable trust will not be treated as a separate trust but as part of the estate. The election would allow certain income tax advantages that apply only to estates to apply to qualifying revocable trusts as well. The election may be made on Form 1041, the federal income tax return for trusts and estates.

Disadvantages of the Revocable Living Trust

Besides the lack of tax savings for the grantor, other disadvantages of a revocable living trust include:

The legal fees for the creation of the trust will be more expensive than the costs of a will.

If the trust is funded with assets during the grantor's life, a trustee other than the grantor or a family member may assess an annual fee for managing the trust assets.

Assets in the trust at death may not escape the claims of creditors of the estate, just as if the grantor still owned these assets outright.

Funding the Revocable Living Trust

A grantor may:

immediately transfer the ownership of certain properties to the trust;

arrange to transfer properties to the trust at a later time—typically when there seems to be a high risk of death, disability or incapacity;

name the trust as the beneficiary of life insurance benefits; and

in the will, name the trust as the beneficiary of certain properties or even of the entire net probate estate.

Graphic: How the Revocable Living Trust Works

Copyright © 2022, PGI Partners, Inc., 921 East 86th Street, Suite 100, Indianapolis, Indiana 46240. All rights reserved.

This service is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that neither the publisher nor any of its licensees or their distributees intend to, or are engaged in, rendering legal, accounting, or tax advice. If legal or tax advice or other expert assistance is required, the services of a competent professional should be sought.

While the publisher has been diligent in attempting to provide accurate information, the accuracy of the information cannot be guaranteed. Laws and regulations change frequently, and are subject to differing legal interpretations. Accordingly, neither the publisher nor any of its licensees or their distributees shall be liable for any loss or damage caused, or alleged to have been caused, by the use of or reliance upon this service.


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