What is estate planning?
Estate planning is the creation of a comprehensive and complete plan to manage your assets while you are alive and to distribute your assets after your death.
What is my “estate”?
When we talk about an estate, we mean all assets of any value that you own, including your residence, other real property including mineral rights, business interests, automobiles, artwork, collectibles, investments, insurance proceeds, bank accounts, annuity contracts, retirement benefits, household and personal property, and even your personal effects and family mementos and memorabilia.
These assets may be owned by you separately (in your name alone) or jointly with others. Below are some examples of how married people often hold title to assets:
* Separate Ownership: Ownership by one of the spouses alone. Upon that person’s death, the ownership passes according to his or her Will.
* Tenancy in Common: Ownership by both spouses. Upon the death of one, the deceased person’s part of the ownership passes according to his or her will. (Ownership does not necessarily pass to the surviving spouse.)
* Joint Tenancy: (Also called Joint Tenancy with Right of Survivorship.) Ownership by both spouses. Upon the death of one, the deceased person’s part of the ownership passes immediately to the surviving spouse, and the survivor becomes the sole owner. (The deceased person’s Will does not control or have any effect on the passage of ownership to the surviving joint tenant.)
What happens if you do nothing?
Most Americans do choose to do nothing. Experts report that 70% have no written estate plan. And, of those who have planned, most have created a simple Will or rely on joint tenancy ownership of their assets to distribute their estate. Unfortunately, for the majority who have no plan in place, state law will dictate how their estate is to be distributed at death. As you might imagine, the government’s plan of distribution cannot address your specific desires for the best interests of your family.
Doing nothing can result in probate and unnecessary estate settlement costs, and perhaps increased taxes. Major problems may result from relying on a Will or owning assets in joint tenancy.
This Living Trust seminar will cover each of the estate planning problems and explain what happens if you plan with joint tenancy or a simple Will, or with a Living Trust.
If you have a small estate, do you need estate planning?
Yes. While an estate under the exemption amount is free from the Federal Estate Tax, you may experience a “living probate” if you become incapacitated, and your estate may need a death probate when you die.
Remember, probate and the Federal Estate Tax are two separate matters. Estate taxes are paid to the federal government for the right to transfer property at your death. Probate fees and costs are for supervising the administration of your estate and for controlling distribution of assets to your beneficiaries. So, your estate may owe no Federal Estate Tax, yet still require probate.
What is Joint Tenancy? Why do so many people use it?
With joint tenancy ownership, two or more people own an asset together. Upon the death of one owner, the entire ownership passes automatically to the surviving owner(s). The full name of joint tenancy is Joint Tenancy with Right of Survivorship (JTWROS). Right of survivorship means that whoever survives owns the whole property.
Joint tenancy property is not controlled by the owners’ Wills, except on death of the last to die.
Montana couples have long used joint tenancy, assuming it to be an acceptable way to hold title to their homes, bank accounts, cars, and investments. Upon the death of one, title shifts to the survivor. In some cases, joint tenancy ownership is useful and efficient. But there are traps and significant risks.
Are there planning traps with life insurance?
Yes. Life insurance can be an important component of estate planning. But life insurance beneficiaries must be designated with care, and these designations must be continuously monitored. Life insurance is paid to the named beneficiary and is not controlled by the insured person’s Will or Trust.
Is creating a Will a good idea?
Many people plan their estates by creating a document called a Last Will and Testament. A Will is a legal document that sets forth how you want your assets distributed at your death.
Your Will does not take effect until you die, so a Will is no help with lifetime planning. A will does not even control the distribution of all of your assets. Joint tenancy property, pay-on-death (POD), transfer-on-death (TOD), life insurance, and retirement plans all pass outside your Will.
Upon your death, your Will becomes a public document when it is filed with the probate court and is available to anyone who wants to read it.
With a Will, your estate must go through probate, so a Will system may not be the best planning document for most families.
Why do estate planning professionals recommend a Revocable Living Trust?
A Revocable Living Trust is a complete Will substitute. The Trust can control all of your assets both during your lifetime and after your death. Here is how it works:
When you set up your Living Trust, you name yourself as the trustee and beneficiary. You then transfer your major assets (your residence, bank accounts, stocks and bonds, other real estate, etc.) from your name to the name of the trust. As trustee, you and you alone, have total and complete control of all your assets. As trustee, you can buy, sell, trade, do whatever you want — just as you do now.
Isn’t a Durable Power of Attorney sufficient to avoid Living Probate?
No. A durable power of attorney may prove to be inadequate if you become incapacitated. The Living Trust is a more complete system for incapacity asset management. See page 6.
Actually, you also need a durable power of attorney, in addition to the Living Trust, to manage business affairs you may have outside the trust.
What is a Living Probate?
When you mention the word “probate,” most people think it is something that happens after you die. Unfortunately, a process similar to probate can also happen while you are alive. It is often referred to as a living probate, but it is technically called a conservatorship in Montana. In some states, it is called an “estate guardianship.” (In Montana, the “guardian” is the court-appointed person to handle health issues.)
If you become incapacitated, the probate court may appoint someone to take control of your assets and personal affairs. The court-appointed agent must file strict annual accountings with the court. The entire procedure is expensive and time-consuming, and may be humiliating because of the legal requirement that the judge must first declare you incapacitated.
Does Joint Tenancy avoid a Living Probate?
No. Each joint tenant is required to sign documents on all major transactions involving joint property. If one of the owners is incapacitated, everything may have to wait until the probate court appoints a conservator.
Does a Durable Power of Attorney avoid a Living Probate?
It may or it may not. A power of attorney is a document signed by one person authorizing another to act as agent in financial transactions. A “durable” power of attorney is one that is effective when you are incapacitated. While often useful, a power of attorney has its limitations and traps.
For example, let us say that Gladys, a widow, executes a Durable Power of Attorney document naming her daughter Ellen as agent. Daughter Ellen later becomes incapacitated or dies. The power of attorney now has no agent so has become worthless as a way of managing Gladys’ assets while she is incapacitated. (In Montana, a power of attorney may provide a means to appoint successor agents.)
Further, in some states, there is no legal requirement that a third party (such as a bank or title company) must honor a durable power of attorney. Many may be reluctant to do so, particularly with a document several years old, questioning whether the power of attorney is still valid or whether it may have been revoked. (Montana has rules to help avoid rejection.)
Does a Will avoid a Living Probate?
No. Your Will takes effect only at the time of your death. It has no control over events during your lifetime. A Living Trust, however, avoids living probate because the Living Trust takes effect as soon as you create it.
What is Death Probate?
The basic reason for Court probate is not difficult to understand. At your death, your debts and taxes must be paid, and your assets distributed to your beneficiaries, and any loose ends looked after. You, obviously, cannot sign the deeds, write the checks, or handle your business affairs. The probate process takes over those duties.
The Court probate process can be needlessly long, complicated, bureaucratic — and expensive — a completely unnecessary experience for your family.
How much does Probate cost?
Death probate administration certainly has an expense. Legal and accounting fees, personal representative fees, and appraisal costs comprise most of the administration cost. Small estates are particularly vulnerable because even reasonable fees can consume a large percentage of an estate’s assets. Every dollar going to probate costs is a dollar that could benefit your family.
How are Probate Fees calculated?
Probate legal fees and personal representative fees are to be reasonable, and are usually calculated either by a percentage of the estate (a method which is allowed by state law) or on an hourly or flat fee basis. Either way, the total is expensive because the probate process may be needlessly cumbersome and time-consuming.
In Montana, both the Personal Representative and the attorney can take a “reasonable” fee based on the total value of the Estate. Fees computed on hourly rates may or may not turn out less, and in any event hourly fees have the obvious built-in conflict-of-interest of producing no incentive for efficiency.
Remember, probate fees are often levied at each spouse’s death. Depending on how title is held on the date of death, there could be some form of probate fees on the death of each spouse.
It is true, of course, that the estate may save some fee expense by having a family member serve as personal representative. But having a family member serve may come at another unacceptable price — family dissension because one member is handling the estate and the others deem that handling to be unsatisfactory. And for the family member to serve without compensation may not be fair to him or her.
How do you probate real estate located in another state?
A probate must be instituted not only in the state where you legally reside at your death, but also in every other state where you own real estate. This is called an “ancillary probate.”
Each state has probate jurisdiction of the real property located within its borders. A new probate must be filed in each state and an attorney hired in that state to represent the estate. Of course, this adds to the expenses that must be paid before your family receives your assets.
Ancillary probate will be required for out-of-state homes, rental properties, condos, time-share units, mineral rights, oil and gas rights, and a part interest in the old family farm, as well as other interests in real estate.
Does Joint Tenancy avoid a Death Probate?
Well, the answer is yes and no. Yes at the first death, but no at the second. Suppose a husband and wife own their assets in joint tenancy. When the first spouse dies, there is no death probate because asset titles pass automatically to the surviving joint owner. (Steps are required, however, “to remove the deceased person’s name” from the joint tenancy assets.)
When the surviving spouse dies, however, there will be a complete probate on the entire estate.
Does a Will avoid a Death Probate?
No. In fact, a Will requires probate. All property that is controlled by your Will must go through the probate process. Once your estate enters the probate process, it is in the system.
(No Montana Inheritance or EstateTax)
What are Death Taxes?
In addition to the expense and delay of probate, your family may also be liable for death taxes. There are two types of death taxes: the Federal Estate Tax and the State Estate and/or Inheritance Tax.
Most states have abolished the state estate and inheritance taxes (Montana did so as of January 1, 2001), but the Federal Estate Tax is still with us and it can be a big tax if the estate is large enough. It is a tax on your right to transfer property at your death to your children or to other persons other than your spouse or charity.
ABOUT THE REVOCABLE LIVING TRUST
Does a Living Trust avoid a Living Probate and Death Probate?
Yes. All assets transferred to your Living Trust completely avoid the probate process, both during an incapacity and at your death.
The Living Trust is not new. It has been successfully used in one form or another since the Middle Ages.
A properly prepared Living Trust requires you as the owner of assets to transfer the asset titles from your name to the name of the trust. This means changing the title to your property. For your residence and other real property, you sign a new deed, including a new deed for real property located in other states. For other assets, you sign special transfer documents changing ownership to the name of your trust. Once the transfers are made, your assets will be owned by the trust.
Almost nothing will be owned by you personally. Your Living Trust has title to the assets. You (and your spouse if you are married) have complete control of the trust while you are alive. You can amend the trust or even revoke the trust whenever you like. But if you become incapacitated, and when you die, there are no assets in your name as an individual, so there is no need to use the probate system. The trust document has your written instructions directing your hand-picked agent (the successor trustee) how you want your estate distributed.
With a Living Trust, there is no need for the probate system. Your trust completely eliminates these unnecessary procedures and costs. Also, “ancillary” probates (of your out-of-state real property) will be avoided because you will have transferred those ownerships to your trust.
Moreover, your estate can be distributed in most cases soon after your death. Your trustee merely follows your instructions in distributing your estate according to your wishes. (Note: Your trustee must, however, see to the payment of your funeral, debts, and taxes.)
Can I act as my own Trustee?
Yes. If you are competent to handle your financial affairs now, there is no legal reason why you cannot be the trustee of your own Living Trust. In fact, most people who create Living Trusts act as their own trustees. A married couple can act as co-trustees.
You may, however, appoint others to act as your trustee. You definitely should designate successor trustees against the day of your incapacity or death. Your grown children or a trust company are possibilities.
What can I do with my assets once they are in my Living Trust?
As the trustee, you can do anything you want with the trust assets. When you set up your Living Trust, you transfer the title of your assets from you as an individual to yourself as the trustee of your trust. You then manage the property for the benefit of yourself as the beneficiary. This means that you will have absolute and complete control over the assets of your trust. If you want, you can spend, save, invest, or even give the assets away*at your discretion. There are no restrictions on what you can do with the assets in your Living Trust. Moreover, you can amend the trust or even revoke the Trust at any time without penalty.
* Caution: A Gift Tax Return may be required. See a professional before undertaking major gifts. (This caution would apply whether or not you have a trust.)
Does my Living Trust avoid income taxes?
No. The purpose of creating your Revocable Living Trust is to avoid living probate and death probate, and to reduce or eliminate the Federal Estate Tax and to insure distribution of your assets after your death The Trust is not a vehicle for reducing income taxes. In fact, you will file your income tax returns in exactly the same way you filed them before the trust existed. There are no new tax returns to file, and no new tax liabilities are created.
Can I transfer real estate into my Living Trust?
Yes. Ordinarily, all real estate should be transferred into your Living Trust. Otherwise, upon your death, there will be a death probate in every state where you own real estate. Real estate owned by your Living Trust requires no probate, either in your home state or elsewhere.
Will my property taxes go up?
No. Transfers of real estate into your Living Trust have no effect on your property taxes.
I am only a part owner of property, so can I transfer my share into a Living Trust?
Yes. Your share can go into your Living Trust without changing the interests owned by others.
Caution: You may, however, be subject to restrictions entered into by you and the other owners. So review your ownership documents.
Can I name Trustees and Beneficiaries who live out of state?
Yes. There is no limitation on where your trustees or beneficiaries must reside.
Is my Living Trust registered or recorded anywhere?
No. Your Living Trust is a private document which need not be recorded at the courthouse. However, when you transfer real estate to your trust, the deed you sign to the trust will be recorded.
Must I consult an attorney each time I buy new assets?
No. Once your current assets are transferred into your Living Trust, you see to taking title to each new asset in the name of the trust. In this way, each new asset will be owned by your trust. No amending or updating of your trust will be necessary.
Can I sell assets owned by my Living Trust without complications?
Yes. You sell assets in the same way you currently do. The deed or other transfer document will, however, recite that you are acting as trustee of your trust. The result is the same as if the asset were in your name alone. No amending or updating of your trust will be necessary.
Can I change the terms of my Living Trust?
Yes. While you are alive and competent, you can alter your Living Trust or even revoke the Trust at any time without penalty. (Obviously, a married couple who divorce would revoke their joint Living Trust.)
Why might I want to amend my trust?
Changes occur in our lives and families. Perhaps you want to change your Successor Trustee. Or provide gifts to new family members such as grandchildren.
Is my Living Trust just a tax loophole that the government will close down?
No. Your Living Trust has been authorized by the law for centuries. The government has no interest in making you go through a living probate or a death probate. Those proceedings only clog up the court system.
Government policy actually encourages the use of the Living Trust system.
Can a married couple from a “community property” state transfer community property into their Living Trust?
Yes. All your assets, both separate and community, are transferred into your Living Trust. If you so direct in your Living Trust, separate property assets retain their separate property character while in your Trust. If your marriage breaks up, all assets will then come out of your Living Trust in the same way they went in: Community property from your having resided in a community property state (these are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin) is divided between the spouses and separate property is returned to the party who originally owned it.
Are all attorneys well-qualified to create a Living Trust for me?
No. The drafting of your Living Trust should be done only by an attorney trained in the area of tax and trust law. You may wish to seek a law firm which specializes in the creation of Living Trusts. Choose a law firm that is both qualified and experienced.
If I move to another state, is my Living Trust still valid?
Yes. Your Living Trust is valid in all 50 states and the District of Columbia, regardless of where it was originally created.
Is a Living Trust for only the rich?
No. A Living Trust can help anyone who wants to protect his or her family from unnecessary probate process, costs, and fees, and from the Federal Estate Tax. In fact, if your total estate is greater than $100,000, a Living Trust can offer substantial protection for your family. To determine your asset values for this purpose, include the full value (without deducting mortgage) of your house and cars, and remember to include all life insurance proceeds as well as those retirement benefits that do not cease at your death.
Is a Living Trust a good idea for a single person?
Yes. If you are widowed, divorced, or never married, a Living Trust offers protection for your estate. It will completely eliminate a living probate and a death probate, and you can pass your exemption amount free of the Federal Estate Tax. See page 12 for a table of the exemptions.
Funded or unfunded?
“Funding” your Living Trust means transferring your assets out of your individual name into the name of the trust. Incredibly, some people create Living Trusts, and then take no further steps. You should “fund” your Living Trust by transferring your assets into the Living Trust. (An experienced trust attorney can advise if any asset is better left out of the trust.)
What if I die without a trust or a will?
One who dies without a trust or a will is said to die “intestate.” State law (of the state where the decedent is a legal resident at death) determines the heirs (the persons who inherit the decedent’s assets). These are the laws of “Intestate Succession.” You may not want the government “fall-back rules” deciding who gets your estate. Your Living Trust avoids this problem.
Can I direct that my assets remain in trust after my death?
Yes. In your Living Trust, you can direct, for example, that your assets are to be retained in trust for your spouse, and after your spouse’s death, retained in trust for your children until they reach mature years or even (if you so specify) for their lifetimes. Your trust attorney can explain this.
This technique is especially useful to protect your spouse as well as to protect your children from a prior marriage, or to protect the inheritance of a young or an incapacitated person, and even protect the inheritance from being wasted by spendthrift child or lost to the child’s ex-spouse.
Can the trust be protected from the creditors of my beneficiaries?
Yes. Under the “Spendthrift Clause” in your Living Trust, the trust shall be free from interference from the creditors of your beneficiaries. The courts will enforce these protections.
Are legal services required after a death?
They may be. Your Living Trust is designed to carry on after your death, with minimum interruption and expense. However, tax reporting is required at each death, and your successor trustee will have questions about creditors and the mechanics of asset divisions and distributions. Our law firm is experienced in these matters.
Are there any major disadvantages to a Living Trust?
No. You have complete control of all assets in your trust, so you are free to manage your Living Trust in any way you want. Also, because your Living Trust is amendable and revocable, you have the right to make any changes in the trust while you are alive and competent.
Can my Living Trust protect my “Special Needs” child?
Yes. A “special needs” person refers to one with physical or mental disabilities who receives (or may need in the future) help from Medicaid or other government or private sources.
Medicaid has strict limitations on how much money a disabled person may have. If you should leave him or her an outright inheritance, Medicaid regulations would require the inheritance money to be “spent down” before Medicaid qualification.
Your Living Trust can protect the “special needs” person’s inheritance from Medicaid “spend-down.” Discuss this with your attorney.
A Living Trust avoids Death Probate
With a Living Trust, your assets will go directly to your beneficiaries after your death. There will be no probate fees or court costs. There will be no unnecessary delay in distributing your assets, and all your estate planning goals will be completely private.
A Living Trust can reduce or eliminate the Federal Estate Tax
Proper Estate Planning can make sure that a married couple’s estate gets two exemptions. See page 12 for the exemptions.
A Living Trust allows you to direct how your estate is managed and spent even after your death
Your trust can provide that after your death your assets can be distributed outright to your children or other beneficiaries. However, if you wish, your Living Trust can provide for the care, support, and education of your children by turning over assets to them only at an age chosen by you. Even life insurance proceeds can be paid to the trust, and if that is done, your successor trustee can also manage the insurance proceeds for the benefit of your family.
A Living Trust can protect your spouse and also your children of a previous marriage
Your surviving spouse, as well as your children from a previous marriage, can receive fair treatment and protection under the terms of your Living Trust.
A Living Trust can carry out your wishes without being subject to attack
Your Living Trust may contain a “No Contest clause” that helps deter grasping heirs from attacking your estate plan.
A Living Trust gives you peace of mind
When your Living Trust is completed, you and your family will know that your estate will be managed by someone you have selected, and will be distributed to the beneficiaries you have named, in the manner you decide on.