Trusts, Wills
And Estates

If you have a Last Will & Testament to provide guidance as to your intent, it is testate. If there is no Last Will & Testament, it is administered by a statutory formula and it is called intestate.

Probate is the court-supervised process whereby debts and taxes of a decedent’s estate are paid before distributions are paid to heirs of the decedent. A Personal Representative, Executor or Executrix administers the estate.

Generally all assets are probated, except for assets with named beneficiaries such as pay-on-death accounts, IRAs, 401(k) accounts, life insurance, joint tenancies and revocable living Trusts assets are not probated, generally all other assets are.

Most states have enacted laws for the expedited probate administration of small estates in order to enable heirs to obtain property of the deceased provided certain requirements are met. As a result, small estates can be administered with less time and cost. If the deceased had conveyed most property to a trust but there remains some property, small estate laws may also be available.

The spouse of a decedent is entitled by law to receive a certain percentage of the decedent’s estate.

A settlor or grantor (the terms are interchangeable) is the creator of the Trust.

A Trust is an arrangement where money, real estate, or other assets are transferred from the settlor to be managed and administered for the benefit of another pursuant to the terms of the Trust.

It is where the Trust is created during the settlor’s or grantor’s lifetime. Generally, the revocable living Trust is created by a written document, known as a Trust instrument, and funding of the Trust should occur at the same time as the execution of the Trust instrument, or shortly thereafter . Most often the grantor or settlor, the creator of the Trust, and Trustee, the administrator of the Trust, are the same individual, and the grantor or settlor reserves the right to revoke or amend the Trust at any time.

The grantor or settlor is typically the primary beneficiary during his or her lifetime. At the grantor or settlor's death, the Trust becomes irrevocable, and, after payment of taxes, expenses, and debts, the Trust assets are distributed to designated beneficiaries or allocated among new Trusts created at the death of the grantor or settlor under the Trust instrument.

The primary reasons to consider using a Revocable Living Trust have to do with ease of administration and to avoid probate. The Trust instrument typically provides that in the event of the grantor or settlor’s incapacity, such as mental illness or physical disability, a successor Trustee takes over the administration of Trust property. This means that a costly and public court proceeding to establish guardianship is avoided.

The main attraction of Revocable Living Trust is the avoidance of probate upon the grantor or settlor’s death. Probate is avoided because the Trust assets are owned by the Trust rather than the grantor or settlor. Also, if a grantor or settlor has properties in several states, the cost of probate administration is avoided because administration is consolidated with one Trust instrument.

The property held in the Trust will pass at the grantor or settlor's death free of probate unless the Trust estate is to be distributed to the Personal Representative of the probate estate.

Generally, during the grantor or settlor/Trustee's lifetime, because of the Trust’s revocability, the grantor or settlor is considered to own the assets, the trust is a disregarded entity for tax purposes and is the grantor or settlor is taxed on any income (and entitled to any deductions) as though the Trust does not exist. At the grantor or settlor/Trustee's death, the Trust is deemed a taxable entity separate from the settlor or grantor/Trustee and from the estate.

It is the person or persons for whom the Trust is administered and intended to benefit. There are principal beneficiaries and income beneficiaries. Principal beneficiaries get direct distributions of a trust asst or the proceeds from the sale of a principal asset held in Trust. Income beneficiaries are entitled to a current return of income a Trust asset.

The Trustee administers the Trust subject to the parameters of a contract known as a Trust instrument. If you are a widow or widower, you may wish to have a son or daughter listed as Co-Trustee with either signature required. Or you may wish to serve as sole Trustee, with a son or daughter listed as Successor Trustee, to serve only if you become incapacitated or die. If that son or daughter is unable to serve years from now when needed, you will want to list several successors in order that they would serve. You will want the Trust never to be without a Trustee that you have chosen.

If you have no children, or your children cannot serve, or you wish not to use your children, you may choose any person even if not related to you. You may also choose an attorney or a bank with Trust Powers, although you should be aware of the yearly costs. However, in a large, complex estate, a banking institution with Trust Powers may have advantages that outweigh the costs. Should your spouse be a resident or non-resident alien you will be required to use a U.S. person if you wish to preserve the marital deduction for estate tax purposes. Your particular situation should be discussed on an individual basis. Back to Top

A revocable living Trust can have more than one Trustees, known as Co-Trustees, so that the court doesn’t have to appoint a Trustee upon the death or incapacity of the sole Trustee. In most situations, you and your spouse will be Co-Trustees.

While Co-Trustees serve as Trustees at the same time, a successor Trustee takes over upon the death or incapacity or resignation of the then-serving Trustee. Generally, spouses will be Co-Trustees and then when both spouses are no longer capable of managing the assets, their child or children will serve as a Successor Trustee.

Yes, the same person may be the grantor or settlor, a Trustee, and a beneficiary (with perhaps additional Trustees and beneficiaries).

Yes. The Trust instrument could be drafted so that during the lifetime of the beneficiary, the Trustee could distribute to or for the benefit of the beneficiary as much as income and as much as principal as in the sole and exclusive discretion of the Trustee as is necessary for the health, welfare, support, and education of the beneficiary.

A spendthrift provision prevents creditors from attaching the interest of the beneficiary in the Trust before that interest (cash or property) is actually distributed to him or her. Most well drafted Trust instruments contain spendthrift provisions because such provisions protects the Trust and the beneficiary in the event a beneficiary is sued and a judgment creditor attempts to attach the beneficiary's interest in the Trust.

The assets that are transferred to the Trust. Just drafting and executing a Trust is not enough: asset transfer documents need to be executed to perfect the transfer of the assets and insure insider control.

You should transfer title to the Trust the way it normally would happen: with a deed for real property; a vehicle title for a car; or a bill of sale for personal property. If you have a mortgage, you should contact the lender to find out if they will permit the transfer. The transfer to the Trust will be effective and perfected when the deed is signed, documented and recorded.

A bill of sale is used to transfer most personal property. Anything not transferred to the Trust may be subject to probate. Because personal property may be purchased after the date of the bill of sale, periodic transfers would need to be made or purchase may be made directly by the trust with its cash, bank note or credit card.

Generally, no. Assets are treated as owned by the grantor or settlor and subject to creditors. However, beneficiaries may be protected with spendthrift provisions.

A revocable Trust is a Trust where the Trust can be modified, amended, or revoked; an irrevocable Trust is a Trust, which, by its terms, cannot be modified, amended, or revoked. What does this mean? While the Revocable Living Trust allows the grantor or settlor to retain some asset control, has flexibility and avoids the costs and duration of probate, the tradeoff is that the assets in the Trust do not avoid the estate tax. With an Irrevocable Living Trust the grantor or settlor’s control is ceded, but the estate tax is avoided.

Tax avoidance schemes marketed by promoters promise taxpayers that they can avoid paying taxes while not losing control of their assets and may involve the use of Trusts.

Generally, Trust income is taxable unless there is a specific exemption. However, a Trust may deduct distributions to its beneficiaries. Meanwhile, typically in abusive Trust schemes, there are improper deductions of these expenses and repeated shifting of remaining income to other Trusts in an effort to hide the money. As a result, there is a decrease in the amount of taxable income is underreported.

There are proper uses of Trusts for estate planning, but you have to be wary of Trust “shell games” where income is shifted and deductions are claimed for illegitimate expenses. It is essential you seek the guidance of a knowledgeable attorney.

The Durable Power of Attorney is a document you will keep in your possession and under your control, but you will tell your spouse and/or child that there is a Durable Power of Attorney authorizing them to act if you are alive, but incapacitated.

For example, if you are in a car accident and taken to the hospital, who will be able to get your car from the storage lot to where it is towed? If the car is titled in your name alone, your spouse or, if your spouse is out of town or in the same accident, your child or friend cannot sign your name to get the car released without specific written Durable Power of Attorney which states that it survives your disability.

You should have a Durable Power of Attorney for each spouse for the other spouse and, in case your spouse is deceased or also incapacitated, a second Durable Power of Attorney to a child or friend. Since some entities such as a car-tow lot may require only a simple Power of Attorney, you may want a regular Power of Attorney rather than a Durable Power of Attorney.

Without the Durable Power of Attorney, you would be required to have a conservator or guardian of your property appointed by the court, which is expensive and extremely cumbersome. However, there are situations when someone else may require a conservator or guardian be appointed by the court and you will want the conservator or guardian to be a family member rather than some stranger or professional guardian. The law allows you to make a pre-need designation of guardian.

An Advanced Health Care Directive, Living Will or Power of Attorney for Health Care Decisions is a person's written indication of the person that makes health care decisions on their behalf, when to terminate life support and the types of treatments he or she wants to receive if he or she becomes ill and cannot communicate his wishes at that time. If you are lacking an Advanced Health Care Directive, Living Will or Power of Attorney for Health Care Decisions to provide guidance to family and health care providers as to your wishes, decisions about your health care may be made for you by a court-appointed guardian, your wife or husband, your adult child, your parent, your adult sibling, an adult relative, or a close friend. The individual making healthcare decisions for you may or may not be aware of your wishes concerning treatment restrictions. If you have an Advanced Health Care Directive, Living Will or Power of Attorney for Health Care Decisions and discuss it with your family and significant people in your life, it will better assure that your wishes will be carried out.

The Pour-Over Last Will & Testament bequeaths assets you direct and the assets remaining are transferred to a Trust or Trusts so that the Trust grantor or settlor can maintain control over certain assets during their lifetime and then have it for the benefit of Trust beneficiaries upon his or her death.

For example, Billy Bob has a house, some land and a glittery diamond ring. He sets up a Trust for his son, Sam. When he sets up the Trust, he funds it with the land and the house. Billy Bob forgot to put the diamond ring in the Trust, but the Pour-Over Last Will & Testament provides that anything not specifically transferred during the lifetime of the grantor or settlor “pours over” into the Trust so the diamond ring becomes the property of the Trust upon his death.

In the past, the Marital Exemption Trust or A/B Trust allowed married persons to escape certain estate taxes. Now, the estate tax is being gradually phased out until 2010. Without further legislative action, the estate tax will be restored in 2011. Because of the legislative uncertainty, is therefore difficult to predict whether the Marital Exemption Trust would be useful. However, a judicious estate planner may want to have a Marital Exemption Trust if the estate tax remains.

The estate tax is levied by multiplying the gross estate (plus adjusted taxable gifts) by the estate tax rate. Then, amounts in excess of a unified credit ($2,000,000 in 2007 or $1,000,000 for each spouse) are subject to the federal estate tax. In the case of a married couple, each spouse is entitled to all of their unified credit and each spouse may pass to their children or others, tax-free, the full value of their applicable credit equivalent amount. Furthermore, when spouses leave their estates to a surviving spouse, the estate tax marital deduction is unlimited. However, the down side is that one spouse leaving their estates to the other pushes the value of the surviving spouse’s estate so it is beyond the credit equivalent.

This is avoided by using a Marital Exemption Trust or A/B Trust. Because the marital deduction is unlimited, some think that they can leave their estates to their spouse with no estate tax consequences. By failing to plan, the married couple Last Will & Testament have thrown away the deceased spouse's unified credit ($1,000,000 for each spouse) and, the deceased spouse Last Will & Testament have stacked -- up to an amount equal to the annual estate exclusion amount that could have passed tax-free -- into the estate of the surviving spouse.

When both spouses establish credit bypass Trusts for each others' benefit, under the terms of their Trust instruments, the first credit equivalent amount applicable in the year of death of their estate passes to the Trust. Generally, the Trust provides that all of its income is for the benefit of the surviving spouse, certain distributions of principal are allowed, and upon the surviving spouse's death, the remainder passes to the beneficiary or beneficiaries tax-free.

The operative feature of a credit bypass Trust -- and the reason it is not included in the estate of the surviving spouse -- is that it is not considered property of the deceased spouse at the time of his or her death owned outright. Instead, the decedent may have an income interest for life in the Trust established by the other spouse.

A gift is made when you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. It also may be when you sell something at less than its full value or if you make an interest-free or reduced-interest loan.

The gift tax applies to the transfer by gift of any property. The general rule is that any gift is a taxable gift. For estates of decedents dying, and gifts made, after 2006, the maximum rate for the estate tax and the gift tax for 2007, 2008, and 2009 is 45%.

Yes, there are many exceptions. Generally, the following gifts are not taxable gifts:

1. Gifts that are not more than the annual exclusion for the calendar year.
2. Tuition or medical expenses you pay for someone (the educational and medical exclusions).
3. Gifts to your spouse.
4. Gifts to a political organization for its use.

Currently it is $12,000. This means you can make gifts totaling that amount tax-free.

You may give a substantial amount during your lifetime without ever paying a gift tax. As of 2008 the amount is $1,000,000.

The lifetime exclusion isn’t triggered until your gifts to one person in one year exceed the annual exclusion amount (currently $12,000). So for example, if you make a $15,000 gift in 2008, $3,000 of your lifetime limit will be expended.

Any dollar amount used out of your lifetime gift tax exclusion is deducted against the estate tax exclusion, which is $2,000,000 as of 2008 and $3,500,000 as of 2009. This means that if you use $250,000 of the limit by making gifts during your lifetime, you have reduced by $250,000 the amount that can be passed tax-free.

The laws governing the validity of premarital agreements vary from state to state. In general, the agreements must be in writing and signed by the parties.

In most states, the parties must disclose their income and assets to the other party. This way, the parties will be apprised of the consequences of signing a premarital agreement. Sometimes it is difficult to make a precise statement of a party's net worth, such as in the instance of a small business where it is difficult to ascertain the value of the business.

In order to be valid, an agreement must not be the result of fraud or duress. An agreement is likely to be invalid on the basis of fraud if the wealthier party deliberately misrepresents their financial condition. Also, if one person exerts excessive emotional trauma to force the other party to sign the agreement, a court also might declare the agreement to be invalid because of duress.

In order to avoid an appearance of duress and to give the parties ample time to consider the agreement, the agreement should be reviewed within a reasonable time frame by separate, independent attorney at law for each party. The greater the amount of time the parties have to consider the agreement, there is more of a likelihood a court would find the agreement to be voluntary.

The parties, particularly the less wealthy party, might be asked to sign a written statement reflecting their understanding and consent to the agreement. Alternatively, the signing of the agreement might be videotaped (or audio taped) with the parties providing oral statements of their understanding and consent to the agreement as well.

If someone becomes incapacitated a Guardian may be appointed to make decisions concerning them personally or their property. A Personal Guardian tends to the personal care of the incapacitated individual, while an Guardian of the Property or Estate Guardian is the Guardian of a person’s estate (real estate, personal property, money, and the like). One person can be Guardian of both, or separate Guardians may be appointed.