Living Trust and Estate Planning Frequently Asked Questions

OUR FREQUENTLY ASKED QUESTIONS WILL HELP YOU TO BETTER UNDERSTAND A LIVING TRUST RELATED ISSUES.

1. If I make a living trust, do I still need a will? 
2. Is it complicated to hold property in a trust? 
3. How does a living trust avoid probate? 
4. Do I need a living trust? 
5. Can a living trust reduce estate taxes? 
6. Is it expensive to create a living trust? 
7. Does a living trust protect property from creditors? 
8. What is a living trust? 
9. Who is included in a living trust? 
10. Can a living trust be contested? 
11. What steps are taken after drafting the living trust? 
12. Is a living trust document ever made public, like a will? 
13. What is "funding" the trust? 
14. Compare a Living Trust to other ways to transfer assets to inheritors free of probate? 
15. What is a "Pour-Over" will? 
16. How an AB LIVING TRUST works? 
17. What are basic federal estate tax rules? 

  You may find your answer at our Discussion Board 

If I make a living trust, do I still need a will?
Yes. because a will is an essential back-up device for property that you don't transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not remember to transfer ownership of it to your trust, which means that it won't pass under the terms of the trust document. But in your back-up will, you can include a clause that names someone to get any property that you haven't left to a particular person or entity. If you don't have a will, any property that isn't transferred by your living trust or other probate-avoidance device (such as joint tenancy) will go to your closest relatives in an order determined by state law.

Is it complicated to hold property in a trust?
Making a living trust work for you does require some important paperwork. For example, if you want to leave your house through the trust, you must sign a new deed, showing that you now own the house as trustee of your living trust. And in a few states, you may need to use special language in your trust document to avoid problems in your state's income tax laws. This paperwork can be tedious, but the hassles are fewer these days because living trusts have become quite common.

How does a living trust avoid probate?
The person you appoint to handle the trust after your death the successor trustee - simply transfers ownership to the beneficiaries you named in the trust. Much of the time, this can be accomplished in a few weeks. When all of the property has been transferred to the beneficiaries, the living trust ceases to exist.

Do I need a living trust?
The big advantage to making a living trust is a monetary one, since property left through the trust doesn't have to detour through probate court before it reaches the people you want to inherit it. Probate, which may drag on for months, is the court-supervised process of paying your debts and distributing your property to the people who inherit it. By the time the inheritors get anything, a percentage of the property has been used for lawyer and court fees.

Can a living trust reduce estate taxes?
A simple probate-avoidance living trust has no effect on taxes. More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets. The AB trust is a tax-saving living trust designed primarily for married couples with children (it can also be called a "credit shelter trust," "exemption trust," "marital life estate trust," or "marital bypass trust." Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple's final inheritors. If your net assets are between $1,000,000 and $7,000,000 you will need an AB trust.

Is it expensive to create a living trust?
No, because a basic living trust isn't much more complicated than a will and you probably won't need to hire a lawyer. It is possible to create a valid Declaration of Trust (the document that creates a trust) yourself. If you have questions that we or a self-help publication can't answer, you may need to consult a lawyer. Still, you probably won't need to turn the whole job over to him.
 
Lawyers commonly charge upwards of $1,500 to draw up a simple trust, which may be as much as your heirs would have to pay for probate upon your death and would wipe out your net savings.

Does a living trust protect property from creditors?
Yes and no. Since property in a living trust can be quickly and quietly given to the beneficiaries, your creditors may not know what you owned or find out about it until its already given out. Holding assets in a revocable trust doesn't shelter them from a creditor who wins a lawsuit against you, since he can go after the trust property just as if you still owned it in your own name. It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.
 
On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of lack forever.

What is a living trust?
A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust. A "living trust" (also called an "inter vivos" trust) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will. A living trust, unlike a will, offers people a fast, private, probate-free way to transfer one's property after death.
 
Different kinds of living trusts can help you avoid probate or set up long-term property management.

Who is included in a living trust?

• The name of the person creating the trust (the "trustor" or "grantor"). If it's your trust, that's you.
• The name of the person who will manage the trust (the "trustee"). Again, if it's your trust, this is you.
• The name of the person who will take over as trustee and distribute property in the trust when the trustor dies or becomes incompetent (the "successor trustee"). This will usually be your spouse, child or close friend.
• The names of the people who will receive the property in the trust (your beneficiaries, just as with a will).
• The name of a person to manage any property left to minor beneficiaries.

Can a living trust be contested?
Yes. A trust can be contested in a special proceeding. There is no blanket rule that a living trust cannot be contested.

What steps are taken after drafting the living trust?
Once the trust is drawn, you sign it in front of a notary. Then, all property to be distributed under its terms must be transferred into the name of the trust using a deed or other standard transfer document.

Is a living trust document ever made public, like a will?
No. The terms of a living trust need not be made public. A will, however, becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate -- inventories of the deceased person's assets and debts, for example.

What is "funding" the trust?
For a living trust to take effect, title to the grantor's assets must be transferred into the trust. For example, title to any bank accounts, stock certificates or real estate owned by the grantor must be transferred into the trust. The grantor must take active steps to transfer assets and fund the trust, and just executing the living trust itself will not cause the trust to become funded.

Compare a Living Trust to other ways to transfer assets to inheritors free of probate?
There are many ways to transfer assets to inheritors free of probate within weeks or, at most, months of death, including making gifts before death, adding a pay-on-death designation to a bank account, holding your house in joint tenancy with right of survivorship with your spouse or partner, and naming a beneficiary for life insurance and retirement accounts. Other estate planning devices that avoid probate include joint tenancy, a life insurance policy, and in-trust-for bank account (also known as a Totten Trust), and individual retirement, pension or Keogh accounts.
 
But only the living trust can be used for all types of property and offers the broad planning flexibility of a will. With a living trust, for example, you can name alternate beneficiaries to inherit property if your primary beneficiary dies before you do. That's something you can't accomplish with joint tenancy or a pay-on-death bank account.

What is a "Pour-Over" will?
A "pour-over" will is used to distribute any property that is acquired in the name of the grantor after the living trust was established, or any property that was not transferred into the trust in the first place. The use of "pour-over," together with a living trust ensures that assets not held in trust will be distributed in accordance with the wishes of the deceased. A "pour-over" will, like any other will, must go through probate if the decedent dies owning assets, which must pass through the will.

How an AB LIVING TRUST works?
You create an living trust that takes effect at your death (up until your death, you are free to amend or revoke the living trust). You name your spouse as your beneficiary, who has certain rights to the living trust property during his/her life. Your surviving spouse is called the "life beneficiary" of the living trust.
 
The property you put into the living trust is part of your taxable estate. However, when you use an AB living trust, no estate tax will be due at your death - regardless of the value of your estate or the year you die (due to the unlimited spousal exemption). The main benefit of an AB living trust comes when the life beneficiary (i.e., the surviving spouse) dies. The tax-avoidance key to an AB LIVING TRUST is that the life beneficiary never legally owns the trust property; therefore when the surviving spouse dies, the property held in the living trust will not be considered part of his/her estate. This is true even if the life beneficiary had the rights to receive all income generated by the trust property, or to use the property during his/her lifetime - use of a house held in trust, for example. Because the life beneficiary never legally owns the property, it isnt counted as part of his/her estate for estate tax purposes when the surviving spouse dies.
 
When the life beneficiary (i.e., surviving spouse) dies, the trust property goes to the final beneficiaries you specify in the living trust document (usually your children). No estate tax is taken out of the trust property when the life beneficiary dies. By contrast, if you had left your property to the life beneficiary outright, it would have been included as part of that beneficiarys taxable estate when he/she died.
 
Both couples (married or not) and individuals can create bypass/ongoing trusts, but married couples can take optimal advantage of an AB LIVING TRUST.
 
With an AB LIVING TRUST - where property is left for the use of a life beneficiary and then goes to final beneficiaries - the life beneficiary never becomes the legal owner of the assets held in the ongoing, bypass trust.

What are basic federal estate tax rules?