I recently had the opportunity to work with a landowner regarding a land related issue. The owner happened to be the executor of an estate. As it turns out the estate was valued at about twenty million dollars. You may wonder how I know the estate’ value? Because his estate planning tool was a will, the estate had to be probated in open court. The executor was legally obligated to provide an inventory and accounting to the court which then became a matter of public record. And the court record is open to everyone and anyone online. Everyone in that community knows all their business! The family would have been better served to have a family trust or other formal succession plan tools in place for several reasons.
The point is a Last Will and Testament is for situations that will occur after your passing, while a Living Trust helps address several situations while you are living and after your passing.
What is a Living Trust?
By analogy, a trust is a make-believe entity that owns property. A trust allows one person to hold title to property at the request of another person for the benefit of a third person (S to T for B). That can make your head swim!
The S is for settlor and that is the person making the request. In other words, the settlor is the person who deposits property into the trust. The person or entity holding legal title to the property is the trustee. The trustee is a fiduciary. Like an executor and personal representative, the trustee owes a duty of utmost good faith, trust, confidence, and candor to the beneficiaries of the trust. The trust beneficiary is the individual(s) entitled to the benefit of the property held in trust. A simple formula is: S to T for B.
In summary, a Living Trust Agreement is usually a trust set up by the settlor for their own benefit. In short, the settlor, the trustee and the beneficiary may all be the same person(s). You can see why a Living Trust Agreement may be one of the most favored tools for estate planning. The benefit of a living trust agreement is it provides a clean way to make decisions and transfer assets before and after you are no longer capable. The need for probate can be eliminated or, as in the case with minor children, be reduced significantly.
Does a Living Trust Remove the Need for a Will?
No, a trust does not remove the need for a will. However, it does dramatically simplify your will.
What is a Pour Over Will?
A Last Will and Testament associated with a Living Trust Agreement is commonly referred to as a Pour Over Will. A “pour over will” is simply a will giving money or property into a trust. It will also name a guardian(s) for any minor children. So, a pour over will functions as a safety net to make sure all the property remains in the trust handled according to your desire.
Some Examples of Trust Agreements
There are several forms of trust agreements which are beyond the scope of this book. Below is a short list of different forms of trusts.
A-B Trust – An A-B trust is a joint trust created by a married couple for the purpose of minimizing estate taxes. It is sometimes referred to as a bypass trust.
Charitable Remainder Trust – A charitable remainder trust is a tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified time and then donating the remainder of the trust to the designated charity.
Educational Trust – An educational trust specifies that trust funds are to be used for education. In the trust document, the grantor names a trustee and beneficiaries, and states how trust money is to be used.
Grantor Retained Annuity Trust (“GRAT”) – A GRAT is a financial instrument used in estate planning to minimize taxes on large financial gifts to family members. Under these plans, an irrevocable trust is created for a certain term or period.
Intentionally Defective Grantor Trust (“IDGT”) – An intentionally defective grantor (IDGT) trust treated for income tax purposes as if it were the same entity as the grantor, but for estate tax purposes is treated as an entity separate from the grantee. It is an estate-planning tool used to freeze special assets of an individual for estate-tax purposes, but not for income-tax purposes.
Life Insurance Trust – An insurance trust is a trust whose funding consists of insurance policies.
NFA Gun Trust – A NFA Gun Trust is an estate planning tool used to acquire National Firearm Act regulated firearms. These weapons include machine guns, short barreled rifles (SBR), short barreled shotguns, suppressors, and destructive devices. The trust instrument is usually a revocable trust which can be changed or modified at any time before the maker’s death.
Qualified Income Trust – A qualified income trust, is a way for a person to reduce his income so that he qualifies for Medicaid coverage.
Qualified Personal Residence Trust (“QPRT”) – A QPRT is a specific type of irrevocable trust that allows its creator to remove a personal home from his or her estate for the purpose of reducing the amount of gift tax that is incurred when transferring assets to a beneficiary.
Special Needs Trust – A special needs trust (sometimes referred to as a Supplemental Trust) is a legal arrangement and fiduciary relationship that allows a physically or mentally disabled or chronically ill person to receive income without reducing their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income, Medicare, or Medicaid. In a fiduciary relationship, a person or entity acts on behalf of another person or people to manage assets.
Anticipating the Death of a Beneficiary
I recently dealt with a situation where a person died and shortly after his estate was in probate his beneficiary died. It is not uncommon for a beneficiary to die around the same time as the decedent. Providing for those situations is helpful because failing to anticipate the death of a beneficiary may lead to a will contest.
Deterrents to Will and Trust Contests
Often wills contain a no-contest provision(s). Adding a no-contest provision to the will or trust may be helpful in preventing a contest. One such provision states that if someone contests the will without just reason and loses, the executor is authorized to defend the contest at the expense of the estate. A no-contest clause can also mean a provision that threatens to disinherit any beneficiary that challenges the terms of the agreement.
There are other tools besides a straight forward no contest clause. One drafting tool is a severability clause. This clause provides that if any provision of the will is considered invalid, the rest of the will provisions are to be interpreted as remaining valid. Obviously, the use of a living trust is a great way to avoid a will contest as it is private and may completely avoid the need for probate. And finally, keep the document up to date. Let’s face it, our situations are changing all the time. Reviewing your estate plan once a year is good idea.
Manage Everyone’s Expectations
Make those directly impacted by your estate generally aware of your plans. That does not mean you need to show it off; just make sure you do not keep it a total secret either.
For more information on Estate Planning Components & Considerations, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (918) 565-0070 today.