One of the benefits of the end of the recent economic downturn is the fact that many individuals are seeing an increase in their net worth and the overall value of homes and other investments. With such financial growth comes the need to make sure that in the event of death, that the assets are transferred to family members, or other intended beneficiaries, without a delay and avoiding the payment of Estate Taxes if possible.
There are several ways of doing this, but the most economical way to make sure your wishes are adhered to would be to create a living trust. A living trust is a form of estate planning that provides a method of avoiding probate and may also help avoid paying estate taxes. When an individual creates a living trust, what occurs is that a new entity is created. Once the new entity is created, all of the individual’s assets are transferred to the trust and managed pursuant to the specific terms of the trust agreement. This control of the trust is normally left in the hands of the creator (“trustor”) of the trust who also assumes the duties as trustee of the trust.
The trust agreement provides the terms and conditions as to management of the trust assets, and how the trustee is to distribute the assets. Usually, while the trustor is alive and acting as the trustee, the funds are not restricted and may be withdrawn at will. The trust agreement also provides for the appointment of an alternative trustee in the event of the incompetence or death of the original trustee. The trust agreement will provide for the distribution of the assets, upon the death of the trustor.
By establishing a trust, if properly funded, there should be no probate, the trust just continues under the control of the new trustee.
A joint trust is usually set up by a husband and wife, to take advantage of the unified credit, to avoid paying estate taxes. In simplistic terms, upon the death of one of the co-trustors, two separate trusts are created. One trust to take advantage of the tax benefits, and the other for the surviving trustor, with funds that are unrestricted. Upon the death of the first co-trustor to die, the trust set up for the tax benefit is non modifiable, but the assets are usually set up to be used for the care of the surviving spouse. After the death of the second trustor, the trust is distributed as provided in the trust document.
The major advantage of having a living trust is to avoid probate. If there is only a will and not a trust, a court proceeding known as probate is opened, for the purpose of gathering of all of the assets of the deceased, paying off obligations and distribution of the assets pursuant to the terms of the will. This process can take several years, as compared to distributions made through a trust taking only about five or six months.
