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The Remarkable Living Trust
(Part 2)
by Michael Vallone
Executive Director of Heritage America
THE DANGERS OF JOIN TENANCY
Joint Tenancy Is A Poor Estate Plan
It is very common for individuals try to avoid probate by holding assets in joint
tenancy.
However, the use of joint tenancy has serious potential disadvantages:
-Joint tenancy with children can be dangerous.
If you hold an asset in joint tenancy with one or more of your children, you could
lose your asset. For example, if your child has an automobile accident that results
in a lawsuit, the asset is subject to being lost as the result of a legal judgment,
since the asset is a part of the child's estate.
-Joint tenancy loses half of the stepped-up valuation.
When property is held in joint tenancy in a separate property state (which is
all but 11 of them), rather than as joint property in a living trust, half of the
potential stepped-up valuation is lost. The loss of stepped-up valuation can result
in very costly capital gain tax consequences.
-Joint tenancy causes you to give up control of your assets.
When you place an adult child on your assets as a joint tenant, you give up control
of those assets. With the exception of most bank and investment accounts, you can
not do anything with those assets without the permission and signature of the other
joint tenant. This means if you decided to sell your house, and your adult child
(whom you've made a joint tenant) disagrees with the sale - you can not sell!
-Joint tenancy does not eliminate probate.
Joint tenancy does not eliminate probate - it only delays it. Even though joint
tenancy can
avoid probate on the death of the first spouse, the entire estate must go through
probate upon the death of the survivor.
-Joint tenancy can cause huge tax problems!
Perhaps the biggest problem in making your adult child a joint tenant on fact
that it causes you to make a "gift" to that child. Internal Revenue Regulation25.2511-1
states:
"If A (you) with his own funds purchases property and has the title conveyed
to himself and B (your adult child) as joint owners, with rights of survivorship
... there is a gift to B in the amount of half the value of the property."
Therefore, if you had a house worth $200,000 and placed your adult child as a
joint tenant on the house, you have made a gift of $100,000 to you child. Any gift
in excess
of $10,000 faces severe tax consequences. The tax in this example could be almost
$24,000!! If the gift goes unreported then penalties and interest accrue. We know
of cases where the gift was not found by the IRS for two generations! At that time
the interest and penalties were huge.
We use a Living Trust to fix such situations and to prevent them from occurring.
Stepped-Up Valuation
One of the hidden costs of dying is capital gains tax on the sale of assets when
the first spouse dies. It is very typical that when the first spouse dies, the surviving
spouse often simplifies the estate and sells off assets. This often results in capital
gains taxes, which is something most people don't understand. Henry Abts writes:
The concept of stepped-up valuation is almost totally unknown to most people,
but it is one of the most important concepts that should be understood by all people
who wish to preserve as much of their estates as possible for their heirs. Stepped-up
valuation is one of the key reasons why a well-drawn Living Trust can minimize and
in most cases eliminate capital gains taxes on the eventual sale of highly appreciated
assets (such as the family home) .
The term stepped-up valuation means that, upon the death of the owner of an asset,
the cost basis of the asset (the price at which the asset was originally bought)
is automatically "stepped up" to the market value of the asset (the price
at which the asset could be sold today).
When a married couple uses an A-B Living Trust, it provides a full step-up in
basis on all assests when the first spouse dies, thus avoiding capitol gains tax.
A LIVING TRUST IS A MUCH BETTER ALTERNATIVE
The Living Trust is a legal entity that can hold title to assets. It enables an
individual or a
couple to hold title to their assets in such a way that, at their death, the assets
can pass to their heirs without the intervention of any further legal process.
A living trust does away with many problems, and the way it does it is by virtue
of the fact that setting up a living trust puts a person in a position where they
do not own their property. They control it but they don't have legal ownership of
it. How do you understand what a living trust is? Essentially, a good way to think
of it is to understand it as being like a large box called a trust. You're going
to deposit or put assets inside this box called a trust. Now, the trust is going
to hold or own these assets, and the trust has instructions of what'sto happen to
the assets, how they're to be used during the lifetime of the people who created
thetrust, and it has instructions of what's to happen with the property when the
creators of the trust die.
When a trust is set up, the people who set it up (trustors) are going to serve usually
as trustees and during their lifetime they are the beneficiaries. When they die,
they have
named someone else to take over as the trustee. Now they have also named someone
else to be named as the beneficiaries upon the death of the trustors. Which means
that when the trustors die, someone else becomes trustee and now has the responsibility
to use the assets of the trust for the benefit of a different person, whoever is
named as beneficiary.
I also want to point out that as good as a living trust is, it is not "enough",
even for average estates. A "Complete" living trust package will include
other legal documents, such as powers of attorney for property and health care, living
wills, pour-over wills, a memorandum of trust, and various transfer forms. More on
this later.
REASONS FOR HAVING A COMPLETE LIVING TRUST PACKAGE
While You Are Alive:
- Durable Power of Attorney document will assure that if you become temporarily
disabled, your financial affairs will continue to be handled by someone of your own
choosing - without the intervention or expense of lawyers and courts.
- Durable Power of Attorney for Health Care document will safeguard important health
care decisions if you are unconscious or unable to make your own decisions. You choose,
in advance, who will make those important decisions.
- Nomination of Conservator document allows you to make your own decision concerning
who will be handling your financial affairs in case you become permanently disabled,
and unable to care for these matters on your own. There will be no need to hire lawyers,
or go to court.
- Living Will document allows for you to declare your desire to NOT have the dying
process prolonged by heroic efforts, when your case is unquestionably terminal. Having
such a document takes the pressure and the guilt off of your family members for making
such a decision.
- Nomination of Guardian document gives YOU control over choosing who will care
for your minor children in the event of your death.
- A Living Trust is a concise, easy method to handle and care for your estate.
It is a full legal plan to back up your financial plans.
- A Living Trust is a flexible document. Changes can be easily made. A Will is
not nearly as flexible. If a number of changes are to be made in your Will, a lawyer
will probably suggest that you write (and pay for) an entirely new Will. That is
not the case with a Living Trust.
- A Living Trust provides a measure of insulation from law suits to your property.
Separate Property assets of one spouse can not be attached due to a lawsuit against
the other spouse.
After You Are Deceased:
- It is a simple, quick, and inexpensive way for your heirs to receive your estate
upon your death. With a Living Trust, settling your estate may take as little as
a few hours. Compare that to the average of 18 to 24 MONTHS that it takes to settle
an estate with a Will!
- Your Living Trust will avoid probate. Not only is probate expensive (according
to AARP, as much as 10% or more of the gross estate value), with a Will, you must
go through probate in every state where you own property.
- With a Living Trust, you will eliminate or lessen death taxes. You can eliminate
estate taxes on up to $1.2 million of your estate with an A-B Trust for a married
couple (current figures, and going up to $2 million over the next ten years). You
can protect even more with other Trust configurations. Estate taxes begin at 37%
and go up to 55%!
- Your Living Trust will assure the privacy of your estate. The Living Trust is
not registered anywhere and is a confidential document. The only people who have
a right to see the Trust document are the trustees (and eventually, the successor
trustees). While you are alive, not even the beneficiaries have a right to see the
document! This confidentiality is much in contrast to the way a Will is handled.
Privacy, consequently, is one of the key advantages of a Living Trust.
- A Living Trust will eliminate capital gains tax for your surviving spouse, or
your heirs. Full stepped-up valuation will be given to appreciated assets (such as
your home, stocks, and bonds, etc.) when those assets come out of a Living Trust
at your death. If you try to avoid probate by using joint tenancy, you will forfeit
half of the stepped-up valuation of those assets. Consequently, your spouse or heirs
will be forced to pay a capital gains tax.
- Having a Living Trust will avoid the other problems associated with joint tenancy
which were discussed earlier.
ALL TRUSTS ARE NOT CREATED EQUAL!
Many people go shopping for a Living Trust, and instead of comparing what they
are getting for their dollar, they are only comparing prices.
The vast majority of attorneys selling Living Trusts are only providing a Trust document.
They are not providing the other legal documents that make up an entire Living Trust
package. The other documents are vital to making certain that you have a full legal
package to protect your estate and your heirs. Also, most lawyers are not providing
the absolutely essential assistance in funding the Trust (transferring assets into
your Trust). If they do assist you in the funding process - they often charge you
for the additional work. If a Trust is not properly funded, or not funded at all,
it is nearly useless. This would mean that you spent your money for nothing! There
are a number of desirable provisions (each considered to be a separate legal entity)
which are not legally
required parts of the Living Trust but which should be included in or with the Trust
to provide for future contingencies:
Pour-Over Will
The "Pour-Over Will," is needed to accompany the Living Trust. The Pour-
Over Will
transfers into the Living Trust assets that were inadvertently left outside. The
Pour-Over Will simply says, in effect, that if you forgot to place an asset into
the Living Trust, it is your intent (upon your death) that such assets "pour
over" into your Trust. As a client said so well, "It's similar to a P.S.
to a letter."The Pour-Over Will is therefore a useful catchall and should be
included in every Living Trust.
Living Will
With modern technology, the Living Will is becoming more and more important as
a
protection for you and your loved ones. The term Living Will refers to what many
people know as the "Right-to-Die". This document says in effect that, if
your life is being sustained solely by artificial means, it is your desire - a decision
made when you were competent - that life-support be discontinued. By making this
election before the onset of major medical problems, you may thereafter tell the
doctors and hospitals that you want to die with dignity - and not be subjected to
being kept alive by a machine.
Durable Power of Attorney
The person you name in your Durable Power of Attorney can act on your behalf concerning
your financial affairs and your property. This is helpful should you ever be
laid up or incapacitated. We recommend the use of the type of Power of Attorney that
becomes effective immediately rather than one that does not become effective until
you are legally found incompetent. This is because most people do not become incompetent
over-night, but over some lengthy period of time when they have "good days"
and "bad days". Unfortunately, someone might do a lot of harm to their
financial affairs during their "bad days".
Durable Power of Attorney for Health Care Decisions
This specifically identifies whom you would want to make medical decisions for
you if you were unable to do so yourself (for example, if you were in a coma). This
person can legally make health care decisions for you, such as, approving or disapproving
surgery, or experimental treatment. This document also adds back an element of discretion
concerning the implementation of the living will. It is often times helpful to have
a close loved one or friend who better understands your desires concerning the use
of the living will, and when it's time to "pull the plug".
Competency Clause
If an individual were to become incompetent, for example, as the result of an
accident, a stroke, or senility, management of the individual's assets must continue.
Someone would still need to be able to buy, sell, or transfer the assets and to write
the monthly checks. Without the Competency Clause, a member of the family would eventually
be forced to go into the courts and suffer through the rather degrading process of
establishing incompetency. However, with the Competency Clause, the legal process
is very much simplified. If you should someday become incompetent, two doctors, who
are unrelated to you or your beneficiaries, would simply write a letter to that effect.
Then whomever you have designated to act on your behalf would have the power to carry
on for you.
Appointment of Guardian
The Appointment of Guardian provision is used for minor children and also applies
to handicapped individuals regardless of their age. Many lawyers advocate the insertion
of an Appointment of Guardian provision as a part of the Pour-Over Will. However,
we believe it is best to include the Appointment as a separate document. This is
because our experience has taught us that the Appointment of Guardian is one of the
most frequently changed documents, whereas the provisions of a Pour-Over Will do
not change. Therefore, keeping the Appointment of Guardian provision as a separate
document avoids having to execute a new Pour-Over Will each time a change is desired
concerning the Appointment of Guardian.
Appointment of Conservator
The Appointment of Conservator document identifies the individual who is to be
responsible for your "person" if you become incompetent. This means the
person who would be responsible to care for you physically. It is common to name
this individual as part of the Power of Attorney for Health Care.
WHO IS HERITAGE AMERICA?
Heritage is a private membership organization formed as a not-for-profit Washington,
D.C. Corporation. Our representatives educate people on the benefits of estate planning
through Heritage membership. The clients purchase a membership in Heritage, which
allows our attorneys to prepare an estate plan for them. Heritage has its own staff
lawyers. They work for the Heritage members. Our attorneys can legally serve any
member - in any state. Every member receives a phone call from our attorney &
an office paralegal. We prepare the plan and you assist your client to implement
the plan. We pay a commission to our representatives for recruiting people into membership
of Heritage,
NOT for providing "legal services".
Since our beginnings in 1987, we have been a unique association. We are dedicated
to
educating the American people regarding the unfair, confiscatory taxation and expense
of their estates, to work politically to change those laws, and to providing, for
the mutual benefit of our members, different forums of assistance by which they can
avoid or mitigate the effects of those oppressive laws. The principles of professionalism,
quality work, good value, and teamwork have made Heritage America what it is today
- a fast growing membership of people who have the common goal of protecting their
estates through mutual assistance of our association, and promoting the public welfare
through education regarding these vital issues.
For further information on becoming a Heritage America Representative or member,
please call 1-800-487-8780 or e-mail Michael Vallone at mvallone@interaccess.com
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