One of my pet peeves is when someone says, “My lawyer says I don’t need a Trust because my estate isn’t over $5.49 million” (the current allowable federal exemption from death taxes-2017), to which I respond, “Then your lawyer, while I’m sure (s)he is very competent at almost everything, is not an estate planner.”
BTW, we speak plain English at our firm; not legalese! We want our clients to understand what they are doing!
So, who should consider a Trust? My favorite answer is, “if you own stuff and have loved ones, you are probably better off with a trust.”
A. People Who Dislike High Fees and Wasting Time
Probate court generally will be costlier for clients than the costs of establishing and funding a Trust. If the concept of saving fees later for their beneficiaries is valuable to a client now, then a Trust is a positive choice. Beneficiary designations and joint ownership can only go so far to avoid probate costs and can have devastating consequences. Their use is cautioned by the potential of: a) loss of step-up in cost basis, b) liability for joint owners, and c) deaths out-of- order, d) inadvertent taxes and unwanted beneficiaries. Avoiding probate both during life and after death is important to those who fear the costs, loss of control, loss of privacy, and the snarl that can be courts.
B. People with Highly Appreciated Assets
A full step-up in basis is critical to clients with highly appreciated stock and/or real estate. Don’t assume this requires a wealthy person—the stock or real estate may be the only asset in the estate (as for some farmers). A Trust may prove the most convenient way to control the distribution of such assets in varying proportions to beneficiaries without losing the step-up in cost basis. Very Important for those who succeed you!
C. People Who Like Control
The idea of distributing a significant amount to an adult of 18, or even 25, is often frightening to most parents. Extended control, minor guardianships, and disability/special needs planning are the most important reasons for young couples with children to establish a Trust.
D. People Who Want to Avoid the Potential Hassle and Liability of Joint Ownership
Joint ownership = means giving up control. It can also mean unexpected and unwanted legal and tax issues. Each joint owner owns the asset(s) 100% during life and relinquishes ownership only at death. No single joint owner can do anything with the asset without the consent of all other joint owners (and sometimes their spouses,) or without a court order severing the joint ownership to the benefit of the suing owner(s). The first time a client tries to move a bank account and has to obtain the signatures of their three adult children who are joint owners, the client comes to dislike and distrust joint ownership, and joint ownership may pose debilitating legal difficulties, such as lawsuits, unexpected deaths, deaths out of sequence, etc. Since each joint owner owns the asset 100%, if one is sued and their insurance doesn’t cover the judgment, creditors can attack the asset. (This includes divorce settlements of a joint owner.) When jointly owned property passes to surviving joint owner(s), there is little or no legal recourse for other heirs to claim a share because, ownership passes by operation of law to surviving joint owner(s); most often one sibling who helps the parents most due to geography, etc., and who has assured the parents he/she will share with the other siblings. This happens when parents put their kid’s names on assets to “avoid probate,” and/or make it easier for the kids to help them with finances, etc. We solve this problem by using powers of attorney.
Joint ownership has sometimes led to the inadvertent disinheriting of their own children, especially in second marriage situations!
Lastly and sadly, joint ownership of assets between husbands and wives (the way most of us now hold assets if married) is the way nearly ALL of our clients come to us even if they had a trust done prior! The trust will fail because title to your assets (how you own them) determines where and how your estate will be administered.
E. People Who Want to Avoid Court Guardianship/Conservatorship (Living Probate!)
A Trust generally provides a mechanism by which a Successor Trustee can take over the role of the acting Trustee for the Trustmaker if the Trustmaker is alive but incapacitated. This allows the estate to benefit from the same services as a court appointed conservator but, without legal interference and court costs, attorney fees, or public filings and hearings. Additionally, the Trustee has been chosen by the Trustmaker, so the Trustmaker can rest assured that the assets will be in the hands of a trusted person. You can’t do this with a Last Will as a will is only effective upon death.
F. People Who Want to Simplify Post-Mortem Transfers
The ability of the successor Trustee to handle the transfer of assets post-mortem, completely without probate (court involvement) if trust funding (asset re-titling) is fully accomplished, allowing for the efficient administration and closure of the estate, privately! Or, simply to have the peace of mind to be able to build in family protections that pass your assets to your loved ones free from their creditors, divorce, predators, or sometimes even themselves!
Remember, individually or jointly owned assets will avoid your trust directions and possibly pass to others in ways you did not intend or to someone you may not have intended!
G. People Who Hate Taxes
If an estate is subject to federal estate tax, proper advance planning using proven legal tools such as the Marital/Family, “A/B”, or Credit Shelter Trusts as they are often called, can save your loved one’s significant tax dollars (estate and gift taxes on amounts over the present 2017 $5.49 million exemption are 40%!) Michigan currently has NO estate or inheritance tax.
BTW, the federal estate gift/tax (death tax) has been around in some form since 1916. After 101 years, I suspect it will remain there to haunt us in some context despite political rhetoric to the contrary. When will we die and what will the amount be? Who knows. Best to plan.
H. How Does a Trust Work?
While you the Trustmaker(s) is/are alive and competent, the Trustmaker is synonymous with the Trust. The Trustmaker(s) as Trustee (CEO in this analogy) calls all the shots and uses Trust assets in any legal way the Trustmaker chooses. In a standard Joint Trust, both husband and wife are Primary Trustmakers and Trustees, allowing each to act independently. In separate trusts, each Trustmaker is the Trustee of the other Trustmakers trust to also allow for equal action by either Trustee. Many factors will determine whether a separate or a joint trust is best for you/your family and consulting an attorney who will take time to plan and counsel you as to what is best based upon your unique family and assets.
The IRS acknowledges that the revocable Trust and its Trustmakers are one and the same— therefore, most often, during either Trustmakers lifetime, the Trust uses the Trustmaker(s) social security number as its tax ID number. Unlike a corporation, the revocable Trust does not need its own separate tax ID number until the Trustmakers is/are deceased. So, during life, the Trustmaker(s) files income taxes on a Form 1040, same as before; a joint 1040 if that’s what you did before creating the trust, no tax difference.
Assets are transferred from the Trustmaker’s names to them as Trustees of the Trust (because the individual(s) will someday die but, the Trust/entity will survive). When the Trustmaker(s) dies, there is no probate because the Decedent has no assets to probate—the Trust holds them all, and the Trust is both “living” and structured for the efficient and effective administration and distribution of the assets in the best interests of the beneficiaries, as determined by the Trustmakers/Decedent.