Living Trusts

Chances are, you’ve already heard a lot about the attributes of Living Trusts:  avoiding probate and legal quagmires, sometimes lowering estate and/or income taxes and protecting privacy.  Yet it’s also important to receive solid estate planning guidance before making final decisions, and to carefully weigh the benefits and potential drawbacks.

Why Choose A Living Trust?

The desire to ensure that an heir is provided for materially is the most common reason for creating a Living Trust.  In the case of minors, a trust allows a parent to provide for a child without giving the child control over the property.  The parent can also mandate how the property is to be distributed and for what purpose.

A trust is also a useful tool for taking care of heirs who have mental impairments or lack investment experience.  The trust document can establish that all money is controlled by a trustee with sound investment experience and judgement.  Likewise, a trust preserves the integrity of funds when the recipient has a history of extravangance.  It can protect the property from an heir’s spendthrift nature as well as from his or her creditors.

This is also true of persons who may feel pressure from friends, con artists and others who want a slice of the pie.  A Living Trust can make it extremely difficult for a recipient to direct property to one of these uses.

A "spendthrift" provision in a Living Trust is often used to further preserve the integrity of assets.  It prohibits the heir from transferring his or her interest and also bars creditors from reaching into the trust.  Living Trusts are relatively easy to update, modify or revoke in most cases.  A will, however, is difficult to change, and establishing one requires many formalities.

General Estate Planning

The following is intended as a general discussion of estate planning concepts and not as specific advice. This discussion is limited to non-estate tax situations.

Will

  • The Will serves the following basic functions:
  • to transfer title to property of a deceased person to specified persons;
  • to pay the debts of the decedent;
  • to appoint the Executor: the person who is responsible for probate;
  • to appoint the Guardian for a minor child;
  • to appoint the Trustee who will manage and distribute funds for the beneficiaries of any Trust; and
  • to create trusts for persons needing management.

The process of using a Will is probate. The following are the general steps of probate:

  • execution of Will by Testator (the one who makes the Will);
  • death of the Testator;
  • drafting of Probate documents by Attorney;
  • presentment of Petition to Probate to Judge;
  • execution of Order by Judge;
  • issuance of Letters Testamentary by the Clerk (authorizes the Executor to take action)
  • Notice to Creditors to present claims;
  • Satisfaction of Claims; and
  • Distribution of Assets of Estate to Beneficiaries.
  • The time frame is approximately four (4) months to a year, depending on the situation.

Revocable Trust

The Revocable Trust can serve most of the functions of a Will and has two advantages over a Will:

  • avoids Probate; and
  • provides a mechanism to manage property for an incapacitated person.

If used, the Revocable Trust is the central document to the estate plan; it will hold title to assets for life and pass property to descendants without the need for probate.

The Revocable Trust is a contract relating to three parties: the Creator; the Trustee; and the Beneficiary. C stands for control; the Creator is always in control. The Creator is the one who creates the trust and the one in control with the power to amend or revoke the Revocable Trust at all times.

The Trustee is the manager of the Revocable Trust; generally the Creator will serve as the Trustee and continue to manage property as long as willing and able; in the event the initial Trustee becomes unwilling or unable to serve as the Trustee, a successor Trustee named by the Creator will serve.

The Revocable Trust may have an Investment Committee with the power to change the Trustee. The Investment Committee also may meet with the Trustee on an annual basis to review the investments activities of the Trustee. This provides a check and balance against an un-performing Trustee.

Once the Revocable Trust has been signed, title to assets may be transferred into the Revocable Trust. The preferred method of title is: John O. Smith as Trustee of John O. Smith Revocable Trust, dated February 1, 1999. Certain assets should not be put into a Revocable Trust.

Deeds may be prepared transferring title into the Revocable Trust: remember that the Creator controls the Revocable Trust and at any time the Creator can take property out of the Revocable Trust.

Pourover Will

In using a Revocable Trust, the Will becomes less important as title to property will be held by the Revocable Trust; however, the Will is prepared to transfer (or pourover) title to any assets left out of the Revocable Trust, to appoint Guardians, if needed, to transfer title to vehicles and to afford the option of probate to cut off creditors.

Certificate of Revocable Trust

Instead of filing the entire Revocable Trust of record in the county courthouse, Mississippi law allows the filing of a short certificate with only basic information. While the Revocable Trust will not be a public record, an interested party may request and receive a copy of the Revocable Trust.

Personal Property

Personal property will be held by your Revocable Trust. The Creator may want to leave a specific item of personal property to a certain person. To accomplish this, the Creator may wish to describe the item of property and designate to whom the item of property will pass; the Creator should sign and date the list and attach it to the back of the Revocable Trust. The same principal applies if there is no Revocable Trust but a Will: complete the personal property statement and attach it to the back of the Will. There is flexibility to change the list at a later date; since the personal property may change.

Durable Power of Attorney

Under the Durable Power of Attorney, the Principal appoints a person, or persons, as Agent. The Durable Power of Attorney allows the Agent to make financial decisions regarding any and all property and interests whether real, personal, intangible, or mixed. This includes paying bills, selling property, running a business, withdrawing and/or depositing money, signing tax returns, etc. This is a very useful tool during those times when the Principal does not possess the mental capacity to make those decisions.

Normally a Durable Power of Attorney is effective from the time it is signed; however, as an option, a Durable Power of Attorney may be drafted to only spring into life upon incapacity: the time it is needed; two physicians must certify as to incapacity. This springing feature helps to protect against inappropriate use while a person has the capacity to take action, but may hamper its ease of use. The Springing Durable Power of Attorney is generally used for younger clients to provide difficulty in use in the event of divorce or other such event, but has the difficulty of the engagement of doctors prior to use.

A Principal may name one person as an agent to take action, or may name these persons with either one having the right to take action; or may name two persons and require both to consent to take action; or name three persons with a 2/3rds majority required to take action.

Generally, spouses may name each other as Agent; but after spouses, two persons are generally required to consent to take action to prevent abuse and to protect persons serving as Agent. This is also a good way to assist in communication between persons serving as co-agents.

Durable Power of Attorney for Health Care

Under the Durable Power of Attorney for Health Care, the Principal appoints an Agent, possibly the spouse, to serve. While the Durable Power of Attorney deals with financial decisions, the Durable Power of Attorney for Health Care deals with health care decisions. This document comes into play when the Principal cannot make a health care decision either because of a permanent or temporary illness or injury. The Agent will be able to direct any treatment, service or procedure to maintain, diagnose or treat the physical or mental condition of the Principal. The Agent will also be able to refuse to consent or withdraw any care. This also includes decisions as to nursing home care. The health care provider is supposed to ask the first and if the Principal cannot answer, ask the Agent. Of course, the Agent has to let the health care provider know of the document. The Principal should carefully choose and communicate with the Agent. Sometimes only one person is chosen to serve, or two persons are named together with the consent of both required, or the consent of each person serving as Agent is required. A practical way of choosing an Agent is to ask who will be at the hospital at the applicable time.

Ethical Conflicts

In performing estate planning services, the client should fully understand the considerations involved in having the same law firm represent more than one person.

Family members can have differing, and sometimes conflicting, interests and objectives regarding their estate planning. Each of person may obtain separate counsel. If each person had a separate lawyer, each would have an "advocate" and would receive totally independent advice. Information given to an individual’s lawyer is confidential and cannot be obtained without consent.

That is not the case when one firm represents more than one person. A lawyer can be an advocate for only one person. Information that a person or his or her family relating to planning will not be kept from the other persons involved in the process. We will have to immediately tell the other persons anything told to us since not to reveal such information would be a violation of the duty of disclosure. If any of the persons involved request that our firm resign, we will do so. We will also be sharing information with your financial planner.

We will attempt to develop a coordinated overall plan and encourage a resolution of differing interests in an equitable manner in the mutual best interests of all of the parties. Please let me know if this needs to be handled differently.

Closing Binder

A Closing Binder will be prepared containing a copy of the closing letter and each of the documents. The closing letter will explain the goals and objectives and the function of each document. It is recommended to keep the Closing Binder for ready review and keep the original of the documents in a safe deposit box with access given to appropriate persons. It is also important to communicate with persons responsible for implementing the plan. Unless otherwise provided, a Closing Binder will be prepared for the Client and the Planner.

List of Assets

The List of Assets attempts to contain a list of all of the assets that would be involved in your estate plan.


Definitions

The following terms have the meanings described below as used in the context of this estate planning context.

Per stirpes:

Leaving property to children in equal shares, if living, but if a child is not living, the assets that would have gone to the deceased child go to the deceased child’s descendants equally.

Testator (male)
or Testatrix (female):

Person who creates the Will.

Creator:

Person who creates a Trust.

Trustee:

Person who manages a Trust.

Beneficiary:

Person who benefits from a Trust.

Transferror:

A person who gifts or otherwise transfers assets.

Transferee:

A person who receives assets.

Will:

Document effective at death to transfer title to assets and appoint various persons.

Executor (male)
or Executrix (female):

The person responsible for probating a Will.

Probate:

The process of using a Will.

Guardian:

Person to provide care to a minor or incompetent person.

Intestate:

A person dying without a Will.

Testate:

A person dying with a Will.

Minor:

A person under the age of 21, although a person over the age of 18 may contract concerning personal property.

Neither Voya Financial Advisors nor Michael Kavanaugh offers tax or legal advice.  Please consult with your tax and or legal professional regarding your individual circumstance.