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Where there's no will, there's a way.

A living trust can do a lot more than a will, with a lot less hassle.

We have all heard that everybody must have a will. We've been told that it's the only way close loved ones can receive the financial assets and personal property that have been accumulated over a lifetime of work. Well, we all might have received some bad advice.

Instead, our heirs will be much more grateful if we have a revocable living trust (RLT), which has many advantages over a will, one of the biggest being that it can help you while you're alive. While an RLT achieves many of the same ends as a will, the approach is significantly different. Notes Carmel attorney and estate-planning expert John Zanetis, "They're as different as night and day."

Trusts as recognized legal devices go way back in English history to the Middle Ages. A landowner would give a piece of property to a "trusted" individual, who then would manage the property to benefit someone else. The person giving the property is the grantor or settlor or trustmaker, the person receiving the property is the trustee, and the person who benefits from the trustee's efforts is the beneficiary.

An intervivos (living) trust is simply one that becomes effective while the grantor is still alive. A testamentary trust is one that becomes effective upon the death of the grantor.

A revocable trust is exactly what it sounds like, one that the grantor or trustmaker can change. As the years go by, you as the grantor might wish to alter your trust. You might have a new spouse, grandchildren, or more than one home to deal with. It's nice to know the decisions you make today about your financial future are not carved in stone. Irrevocable trusts do exist, but they are mainly used as tax-management vehicles.

Typically, says Zanetis, a person choosing to set up an RLT will opt to wear all the hats. That person will be the trustmaker, trustee and beneficiary, thus creating, managing and receiving the benefit of the trust. With such self-administered trusts, people can rest assured that they are still the bosses of their estates, even though they must officially transfer ownership of their property to the trust. "Any time people talk about relinquishing their assets, they feel like they have less control," notes Zanetis, "but they are the trustees."

The existence of an RLT, he says, can be barely perceptible under normal circumstances. "Tax returns don't change, checks don't change, the ability to buy and sell investments doesn't change. An RLT is transparent to one's day-to-day life."

With a self-administered revocable living trust, it's very important to designate a successor trustee in the event of death or incapacitation. The successor trustee can see to it that the trust assets are always under management--that you or your heirs are continuously benefiting from the trust. In most cases, Zanetis notes, the heirs themselves are named as the successor trustees. "So control is always with you as long as you're alive and competent, or passed to your hand-picked trustees. There are never any outsiders brought into control."

It's the intervention of outsiders that can make use of traditional wills so complicated and costly. Wills can become hung up in the legal process known as probate, while trusts are not subject to probate.

Probate, as many have unfortunately discovered, can be a time-consuming, costly and public process. A will is probated to determine ownership of the property in the will. Probate is, in the words of attorney and financial planner Robert C. Ware of Indianapolis, "a legal proceeding ... to see all of the decedent's property is collected and accounted for, that all valid debts and expenses are paid, and that the balance of the property is distributed to the heirs named in your will."

"Probate came into being many years ago to protect creditors," Zanetis adds, "to prevent someone from inheriting property of a deceased person before all debts are paid, one of those debts, of course, being taxes."

Probate proceedings take time, one to two years on average, but it's possible with very large estates to have probate last five or 10 years. While in probate the property or financial assets contained in the will cannot be touched without the court's permission. If an heir needs money or a place to live, the court must approve of it first.

Probate also can be expensive. Ware says the legal fees and court costs of probate can run from 3 to 12 percent of the gross value of the estate. In actual dollars, larger estates pay more; but as a percentage of an estate, smaller estates are affected more. Probate is also a public process. Every detail of a decedent's will is open for public view at the courthouse. If there are some items in your will you prefer to keep private, too bad.

Living trusts can avoid all these problems. A trust is not probated because ownership of all the property in the trust belongs to the trust and needs no further validation. There are no debts to settle because the trust has been in effect for some time before death and will be in effect afterward, with the trust or successor trustee managing things throughout the existence of the trust.

Ted Dickman, a tax partner and CPA with the Indianapolis-based accounting firm Geo. S. Olive & Co., brings up another good reason why people should consider an RLT. "A living trust can be very good for people with out-of-state property, like a home in Florida," he says. "If the home is part of a will, the executor of the will would have to hire an attorney from Florida to handle the probate of the home in the Florida courts. This could add 2 to 5 percent to the cost of probate."

Because there is no probate with an RLT, there are no court costs or legal fees to reduce the size of the estate. And any intimate details of a family's property can remain private. Only those mentioned specifically in the trust agreement will know who received what or how much. Ever wonder how so many wealthy people can keep the terms of their wills so secret? They don't have wills, they have living trusts.

Actually, they probably do have wills, too, but short ones. A RLT may be more than 100 pages long, and a will only a few pages long. A trust can cover not only financial assets, but personal property down to clothing and jewelry. The will typically has only two parts, one that designates a guardian for children in the event of both parents' deaths, and a "pour-over" provision that tells the court that all property not specifically covered in the trust agreement shall be made part of the trust. This provision covers a person who forgot or didn't have the time to retitle all the property he wanted to go into the trust.

That retitling is a crucial part of setting up a living trust, Zanetis stresses. "If the assets are not correctly retitled to the trust, it's not going to work. If it doesn't hold title to the assets, it is nothing more than a fancy will."

A well-designed RLT can even help reduce estate taxes. Trusts are tax-neutral. If they generate income, they pay income taxes. The recipients of a distribution from an estate governed by a trust agreement would pay estate taxes on the amount over $600,000. (More precisely, they would get a tax credit of up to $192,800, which is the amount of tax that would be owed on the $600,000.) Prudent use of an RLT with a credit-shelter trust could potentially save someone's heirs hundreds of thousands of dollars in estate taxes.

First, witness the tax situation that arises when a married couple does not have a credit-shelter trust. Let's say spouse A has an estate worth $1.5 million. Spouse A dies. Spouse B inherits all $1.5 million and pays no estate taxes because there's an unlimited deduction for property passing to a surviving spouse. When spouse B dies, the $1.5 million passes to B's beneficiaries. The beneficiaries must pay taxes on the entire $1.5 million minus the unified tax credit on the first $600,000. The tax rate on $1.5 million is 45 percent, or $555,800. The tax credit amount is $192,800, so the actual tax to be paid (and this all must be paid within one year of a death) is $363,000.

Using the so-called A-B strategy to reduce estate taxes with the same estate of $1.5 million: Spouses A and B create a joint living trust. The trust provides that on the first death, say spouse A, the $1.5 million is divided between two trusts; $900,000 goes to a trust for the surviving spouse and is not taxed because it qualifies for the marital deduction. The remaining $600,000 goes to a credit-shelter trust and is not taxed because of the $192,800 unified credit.

Spouse B now has a $900,000 estate, and then dies. The tax on the $900,000 is $306,800 minus the $192,800 credit, or $114,000.

The result of the A-B strategy is that the heirs have an additional $249,000 that would have gone to Uncle Sam.

We said at the beginning that RLTs are not only for the dead, but also for the living. While many people set up RLTs to serve as wills, bank trust department officers from around the state say at least as many people are creating living trusts as a means to manage their affairs should they become incapacitated.

Dickman of Geo. S. Olive believes the trend to use RLTs for this reason stems from demographic changes. "As the population grows older and more people are getting older for longer periods of time, preparing for the administration of someone's financial affairs is more and more important."

Richard Segrue, a senior trust officer with Society Bank in South Bend, relates a story that is becoming more and more common. "Ellen, who was a retired nurse, explained, 'Let's face it, at some point we know that we won't be able to handle things like we do now. We'll need someone to take care of our financial affairs.' She feared that her children would bicker over the financial issues associated with caring for her."

RLTs can eliminate the prospect of a court appointing a guardian because a successor trustee would be part of any trust agreement worth writing. The trustee can manage the property and day-to-day financial needs of the sick or injured grantor.

It's becoming increasingly common for children to persuade their parents to create trusts. Some of these adult children don't want the responsibility of caring for an incapacitated parent, or they live hundreds of miles away and are unable to care for Mom or Dad. But the children care enough about their parents to make sure they are taken care of through an RLT. It's likely that the attorney drafting the trust agreement will also ask the parents to execute a power of attorney so that someone can act on their behalf beyond the bounds of a trust.

Estate planners will tell you that revocable living trusts are central to the modern estate-planning practice. They can make it so much easier for your loved ones upon your death, and so much easier for you if you were to become incapacitated. Yet much of the population remains unaware of the benefits.

The most important part of doing any type of financial or estate planning is to find someone knowledgeable--and with considerable experience--whom you can trust. Miles Gerberding, a partner at Barnes & Thornburg and the Indianapolis-based law firm's chief estate planner, says, "Expertise is key. Someone with specialized training. You may, in fact, need a whole team of people with special skills--a banker, CPA, lawyer, insurance agent, broker--who knows not only their areas of expertise, but also knows when to defer to someone else's."

Such expertise costs money, he acknowledges, "but people risk hundreds or thousands of dollars if the advice they do get is wrong. The time and money you spend on getting first-rate help is one of the best investments in your future you can make."
COPYRIGHT 1992 Curtis Magazine Group, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:living trusts
Author:Miller, Chuck
Publication:Indiana Business Magazine
Date:Nov 1, 1992
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