Living Trusts

Most individuals think of wills when it comes to estate planning. But the "living trust" is a versatile alternative to the will and is quickly gaining ground because of several distinct advantages it offers.

The benefits of a living trust are many. A living trust provides a relatively simple means by which a trusted family member can step in and take over your financial affairs should you become incapacitated and unable to do so. In addition, it prevents your heirs from being subjected to the sometimes unnecessary cost of probate.

Finally, it provides an entity to ensure a reduction in estate and inheritance taxes (assuming the proper additional provisions are included), and it provides a means for assets to receive full "stepped-up valuation"--a most important tax benefit. A living trust is also private, easy to change or revoke, and very difficult to contest.

These advantages become more obvious if you look at the alternatives. A simple will offers no protection should you become incapacitated--it only takes effect once you die. Instead, if you become unable to handle your own affairs, your family must go to court to prove your incompetency, and the court will appoint a guardian. This procedure is expensive and time-consuming, particularly since a guardian must seek court approval every time an issue arises involving major money matters.

A will does allow you to dispose of your estate in the manner you prefer when you have passed on. However, to carry out your will, your heirs must go through probate court, which can result in long delays. It can also be very costly, including court fees, attorney fees and executor fees. And it can be contested.

In addition, any court proceeding is a matter of public record, with the ultimate decision made by the court rather than your family.

A living trust is an advantageous alternative for many individuals. It is versatile, and should be individually tailored to the needs and desires of those on whose behalf the trust is created.

From the viewpoint of settling an estate, having a living trust means that you do not hold title to any assets that are held inside the trust; the trust holds title to everything. However, although you have given up ownership of the assets, you still retain control of the assets. Since the document is written while you are still living, you become a trustee of your own trust, and you continue to have the same power and ability to do whatever you wish with your assets. Your control of those assets is no different than it was before you put them into the trust.

In addition to naming you as a trustee, a typical living trust will also name a successor trustee. This is usually a family member who knows what you want and is capable of stepping in and taking over your affairs should you become incapacitated; the successor trustee will also take charge of the trust should you die.

The significance of not "owning" anything becomes extremely important when you ultimately pass away. Since your assets are in the trust, none of those assets are titled in your name; thus, upon your death, there is nothing to probate. If you are married, the surviving spouse typically becomes a surviving trustee, and continues to have the same power over those assets as you once did. Upon the surviving spouse's death, there is still nothing to probate, since the assets were in the trust name for the surviving spouse.

Living trusts, unlike wills, are applicable from state to state. Since the basis of the trust is English common law, a trust is also recognized in Canada, England, and all Commonwealth nations. Although most European and South American countries use civil law, the trust is recognized in these countries as well.

There are a number of desirable provisions that are not legally required parts of a living trust, but that you may want to consider including in or with your trust to provide for future contingencies. Each provision should be considered separately. They include:

* Living Will: Also known as a "right to die" clause, this is a document stating that if your life is being sustained solely by artificial means, it is your desire (a decision made when you are competent) that the plug be pulled.

* Durable Power of Attorney: This gives the power of attorney to the individual whom you have specified to act for you only when you become incompetent.

* Competency Clause: This allows a named individual to manage your assets should you become incompetent, and avoids the necessity of going into court to establish incompetency. Typically, you would identify two doctors of your choice while you are competent to judge your competency. To put the clause into effect, these doctors would write a letter concerning your competency, and the individual you designated would have the power to carry on for you.

* Catastrophic Illness Provision: Under this provision, at the onset of a catastrophic illness half of the assets of a married couple are immediately preserved for the benefit of the other spouse. Thus, only the assets that form the share of the estate belonging to the spouse with the catastrophic illness need to be consumed. Once the afflicted person's half of the estate is exhausted, that person can receive governmental assistance without reducing the other spouse's half of the estate.

* Assignment of Furniture, Furnishings and Personal Effects: This clause allows for specific bequests and assignment of personal belongings to individuals.

* Appointment of Guardian: This provision is used in the naming of a guardian upon your death if you have minor children or if a handicapped individual is under your care.

* Appointment of Conservator: This document identifies the individual who is to be responsible for ensuring your safety and well-being if you become incompetent.

* Anatomical Gift: This document allows you to give your vital organs, upon your death, for use in saving other people's lives or providing sight to elderly people with glaucoma.

* Separate Property Agreement: This document lists those assets that, by definition, are the separate property of each spouse. Separate property assets placed in a living trust retain their characteristics as separate property, even though they take on the name of the trust.

All of these provisions should be discussed with your legal counsel when considering the creation of a living trust.

Because the general population has become more aware of the living trust in recent years, its popularity has risen. However, because of the demand for this vehicle, there may be some attorneys drafting such documents without the required expertise and ability to do so. You should look for a specialist in the estate planning area when considering a living trust.

The importance of understanding the trust document--and implementing it--cannot be understated. The key to the proper use of a living trust is to move most, if not all, of your assets into the trust. Too many situations exist where an excellent trust document has been created but is, in reality, worthless because the assets have never been reregistered into the trust.

A surprisingly simple and quick rule of thumb to use in determining if a trust is comprehensive or not is to see whether the document is a "thin" trust or a "thick" trust. A good living trust must usually be a rather thick document if it is going to adequately handle the many contingencies that may occur during the lifetime of the creators.

Two of the primary purposes of a living trust are to give the trustee or trustees the greatest latitude in which to operate, and to satisfy the specific requirements of the Internal Revenue Service. However, the size of this document should not be directly related to its cost. You should have an approximate idea of the cost of drafting your document before it is created, and should not be charged "by the pound."

Remember that the quality of the trust is of utmost importance and should be a number one priority. A poorly written trust document can turn out to be a nightmare.

Understanding the advantages of having a living trust and deciding that you want your own living trust are not enough. Unless you understand how your trust works, and the particular advantages it can bestow on your personal financial and estate planning goals, the trust cannot work for you to its best advantage. The living trust should be individually tailored to your needs and desires. You decide what is best for your particular situation, and you decide who is to get what and when.

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