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The Remarkable
Living Trust
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(Part 1)
by Michael Vallone
Executive Director of Heritage America
"Why should I have a Living Trust? "There are many reasons to consider
a Living Trust. A Living Trust eliminates the need for your heirs or surviving spouse
to be subjected to the agony and unnecessary cost of probate; it ensures that you
either pay no estate and inheritance taxes or at least minimize those expensive taxes.
It provides a means for your assets to receive full "stepped-up valuation"
- a most important tax benefit for avoiding unnecessary taxation of capital gains.
"I have a Will, and therefore my estate will not go through probate."
Unfortunately, that statement reflects one of the most common misconceptions of
estate planning. The words Will and Probate are synonymous. Having a Will essentially
guarantees your estate will go through probate and the cost of probate can be very
expensive, even to the smallest estates.
Another common misconception heard all too frequently is that people will avoid probate
by having their assets in joint tenancy. You will learn later that having your assets
in joint tenancy only postpones the agony of probate. Yes, probate is avoided when
the first spouse dies, but probate is inevitable - and when the second spouse dies,
the entire estate must then go through probate.
HISTORY OF THE LIVING TRUST
Many people ask, "When did we get this new concept, the Living Trust?"
Surprise! The Living Trust is not a new concept at all. It comes from English common
law, which is the very basis for the legal system in the United States. The concept
of a Trust existed long before this nation was conceived; the origins of a Trust
go as far back as 800 AD, to the days of the Roman Empire. Socrates ran his school
from a trust. Eventually, a Trust became the preferred method of holding title to
property in Europe during the Middle Ages.
Adopted from Roman Law
England adopted the Trust from Roman law as early as the twelfth century to preserve
their property from the many abuses from the king. The king could impose a tax upon
a landowner at any time, to help supplement the lord of the land for numerous causes
(such as the marriage of the lord's daughter or the knighting of the lord's son).
The king had imposed nearly 100 forms of tax, and the people were desperate for some
protection. Henry Abts, writes in his book, "The Living Trust":
"The landowner was prohibited from selling his land or dividing the land
among his children or grandchildren. If the landowner was convicted of a crime, he
forfeited all he owned to the lord or king, leaving his family destitute.
Accusing a peasant of a crime was a very common means of acquiring the peasant's
land and, in the end, was quite profitable for the landlord. The peasants soon found
that the Trust provided a means to protect their lands from this wrongful acquisition
by the noble of the land.
The practice of holding title to land in a Trust eventually became commonplace. The
Trust permitted one party (the trustee) to hold the property for the benefit of the
owner and eventually to pass this property to the owner's children. With the passage
of time (and continued abuse by the crown), passing title of land to a Trust became
an ordinary practice."
Brought to America with the Colonists
The first recorded Trust in America was drafted by Patrick Henry. He wrote a trust
in the year 1765, for a man by the name of Robert Morris, who was the governor of
the colony of Virginia at that time. Therefore, the first Trust was written in America
11 years before our Declaration of Independence, and 24 years before the adoption
of the U.S Constitution.
In the past, the Living Trust has been used by people of great wealth, such as President
John F. Kennedy, William Waldorf Astor, John D. Rockefeller, H.L. Hunt (the Texas
oil billionaire), and J. Paul Getty. Until very recently, average Americans did not
have Living Trusts however, as people are becoming more educated on various estate
planning options, more and more of them are adopting the Living Trust as a way to
protect their estates from the unnecessary expense and delays of probate.
How Long Until Congress Takes It Away?
Many people believe that if the Living Trust is such a good thing, its only a
matter of time
until Congress will take it away (a sad, but true commentary on how the American
people feel about their government). However, you should have little fear that Congress
will deprive Americans of the opportunity to set up a Living Trust. It is not a tax
shelter, but rather it is an opportunity by which married couples can fully utilize
the federal estate tax equivalent exemptions given to them by Congress.
Although more than 70% of all Americans have NO estate plan at all, most senators
and
representatives in Congress have Trusts, and it is extremely unlikely that they would
even have a motivation to take away Living Trusts. Unfortunately, fewer than 1 percent
of the people in the United States have discovered the value of the Living Trust
and have taken advantage of it's many benefits.
Furthermore, the Living Trust enjoys the protection of one of the finest documents
ever
created - the U.S. Constitution. Specifically, the Constitution was created to form
a central
government to represent the people, and the Constitution granted certain rights to
the federal government. The rights that were not specified in the Constitution (and,
therefore, not relinquished by the states to the federal government) were retained
by the states.
Abts writes,
"One of those states' rights is the right of a state to create a legal entity,
such as a corporation or a Trust. Such a legal entity, once created, is equally recognized
by all of the other forty-nine states. The right to create a legal entity is sacrosanct
to the states, and it would be inconceivable to think that the federal government
might trespass in this area. After 1,200 years of use and legal testing, the Living
Trust is basically the same entity as its predecessor from English times. We can
foresee little or no chance of Congress infringing upon this valuable document."
WHAT IS A LIVING TRUST?
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's to happen to the
assets, how they're to be used during the lifetime of the people who created the
trust, and it has instructions of what's to happen
with the property when the creators of the trust die.
The trust has three different positions, three different types of individuals involved
in it, The first are called trustors, these are the people who create the trust,
they're the ones who are granting, or giving assets to the trust, so they're sometimes
also called grantors, they're also called settlers. All those terms mean the same
thing; it is the person who's creating the box, or creating the trust and putting
their assets in it.
The second position is that of trustee. The trustees are the people who manage and
control
all the property of the trust. They make all the decisions, they decide how to spend
the assets, where the assets are going to go, whatto invest in, etc. So they have
100% of the
management responsibility for the assets of the trust.
And then there's a third position called beneficiary, they're the people that the
assets of the
trust have to be spent on behalf of, or spent for. Whoever's the beneficiary, they
get the benefit of those assets. They can be used only for the benefit of the beneficiary.
Now,
when a trust is initially established, the people who create it, the trustors, typically,
also serve as the trustees, the people who manage it and control it. And during their
lifetime, they are also the beneficiaries.
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.
In a Living Trust, the income flows through to the creators and is reported, as before,
on the regular Form 1040 tax return used by individuals. Also, as long as the creators
(trustors) of the Trust are living and competent, the Living Trust is revocable.
Assets may be placed in the Trust or removed from it as desired.
The Living Trust is known by many names: Living Trust, Revocable Trust, Inter Vivos
Trust (which means Living Trust in Latin), Family Trust, and, as it is referred to
in the Internal Revenue Code, a Grantor Trust.
WHY MANY ATTORNEYS AND CPA'S TALK DOWN A LIVING TRUST
People invariably ask, "Why didn't my attorney tell me about the Living Trust'?"
You may believe that the reason was that the attorney would not get his or her probate
fee. Attorneys talk among themselves about their "accumulated Wills," much
as you and I would speak about retirement plans. The attorneys will comment to each
other with pride, "I've got ten drawers of Wills," or "I've got seventeen
drawers of Wills," or "I've got twenty-three drawers of Wills." Such
Wills are sometimes seen as an attorney's "retirement plan"!
However, after having recognized the tremendous potential of the Living Trust, most
of the attorneys then admit that they had never been taught about the Living Trust
in law school. Unlike the typical legal courses, which include Wills and torts, the
Living Trust is included only in the elective courses taught for attorneys who wish
to specialize in estate planning. Consequently, even though greed may be a reason
why some attorneys try to steer clients away from a Living Trust, lack of knowledge
or familiarity with the Living Trust can also be a major factor.
Occasionally, someone will turn to his or her accountant for advice about the advisability
of having a Living Trust. Often the accountant will respond that, since the client's
estate is under $600,000, the client does not need a Living Trust. However, the accountant
is
only addressing federal estate taxes, not the probate process. Most accountants are
not knowledgeable or experienced in estate planing - which is the function of reducing
estate taxes and probate costs in the future. Typically, estate planing is not a
normal function of an accountant.
If an attorney or accountant tells you that your estate will not have to go through
probate or gives you a specific probate cost, ask him or her to put the statement
in writing.
WHAT YOU MIGHT EXPECT TO PAY WITHOUT A LIVING TRUST?
You may be surprised to know what some notable people paid to have their estate settled
through the probate process.
Dwight D. Eisenhower - $2,905,850 estate reduced by $671,420 - a 23% loss!
Nat "King" Cole - $1,876,640 estate reduced by $1,577,740 - a 84%
loss!
Franklin D. Roosevelt - $1,940,990 estate reduced by $574,860 - a 29% loss!
General George S. Patton - $844,360 estate reduced by $266,820 - a 31% loss!
What about your estate? Well, a recent study by AARP (American Association
of Retired
Persons) found that the average cost of probate was 10% of the gross estate (from
Modern Maturity magazine August-September 1991 issue)
Commonly Asked Questions
- What happens if I don't have a Will?
If you die without a Will, then the state automatically provides one for you:
it is much more complex for your survivors, and the distribution of your assets may
not be as you desired.
- Do I need to notify my attorney that I replaced my Will with a Living Trust?
There is no need to notify your attorney. When you execute your Trust (and specifically
your Pour-Over Will) you revoke any former Wills.
- Who keeps my Living Trust?
You do. They are your documents. We suggest that a copy be kept with the attorney,
just in case your original documents should be accidentally destroyed.
- Is a Living Trust registered anywhere?
No, just like a Will, it is not registered with any state or federal agency. It
is unnecessary.
- Is the Living Trust valid in all 50 states?
Yes, the Living Trust is valid in each state and is also recognized in all commonwealth
nations.
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 ommon 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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