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If you don't have a Living Trust, you might want to consider getting one. It literally could save your heirs a small fortune in probate and legal fees. Not only that, it assembles all of your assets under one roof for ease of management.

Avoid Probate

The Living Trust can best be characterized or described as an extension of you and/or your spouse. Its primary function is avoiding probate or speed up the transfer of assets process (depending on what state you reside) and maximize allowable federal exemptions.

It is somewhat similar to a Will in that it specifies who gets what, when, how much and under what circumstances. Although your Living Trust and Will work in conjunction with one another to some limited extent, you must decide prior to death which device will be used.

A Will typically does not come into play while your are living. By contrast, The Living Trust has an immediate effect, and in the great majority of estate planning cases (again, depending on what state you reside) the Living Trust can make the most practical sense for several reasons.

  • First, a Living Trust typically allows you to transfer your entire assets free of costly probate fees or court-appointed guardianships;

  • Second, it assembles your assets under one roof providing continuity of asset management while living and after your death;

  • Thirdly, it can protect and potentially maximize your current then-available Unified Federal Exemption; and

  • Lastly, it allows you to transfer unlimited wealth to your surviving spouse free of taxation.

Now or Later

A Living Trust must be set up before you die. As trustee, the Living Trust allows you to continue to fully control the disposition of all of your assets throughout your lifetime.

There are no gift tax or estate tax implications in setting up and funding the Living Trust as it does not remove any asset from your estate or control.

As Trustee, you and your spouse can revoke it on a moment's notice. Not too many people exercise this option, but it is available. You may also amend the trust, at your discretion or as new situations may dictate.

You may change any provisions within the Living Trust at anytime and have the option to name successor trustees to relieve you of that responsibility if you become disabled or unable to manage your own affairs.

It is important to realize that a Living Trust is a legally binding document based on a set of statutory federal and state laws. Therefore, to maximize its effectiveness and satisfy legal requirements, you must change title on all the assets you currently own, with the exception of IRA or tax qualified assets.

Again, as trustee, you maintain control and operate those assets, as you are accustomed.

A-B Testamentary Trusts

The A-B Trust, also known as a Credit Shelter Trust, ensures that both you and your spouse will each be able to utilize your current then-available estate tax exclusion. It and works as follows:

After the first death, the assets in the A portion of the Trust are retained by the surviving spouse and are available for income. The A Trust is not taxed as it comes under the Marital Deduction Exclusion. The B Trust goes to your children with the surviving spouse having the right to the interest and principal, if necessary, for "ascertainable standards."

Because there will be estate taxes due on the A trust, the idea is to have the A Trust shrink and the B trust grow, preferably in a tax preferred environment as to maximize the earnings potential.

In certain states, you will be better served by establishing a living will with pour-over provisions instead of a testamentary trust so check with our retained council or yours.

The primary advantage to establishing an A/B Trust is the effect of "doubling your tax credits" for the then available exemption amounts.

Q-TIP Provisions

A Q-TIP (Qualified Terminable Interest Property) provision created by the 1981 ERTA tax law should be included in your Living Trust.

It provides two primarily advantages:

1) income to the surviving spouse and 2) ensures that the principal will go to your children or other designated beneficiaries.

It is highly recommended for second marriages in which the Trustor wants the majority of the assets to go to the children of the first marriage rather than that of the second spouse and his or her heirs.

Other Living Trust Provisions

We suggest the following provisions be included in your Living Trust, as they are key ingredients to its potential long-term effectiveness:

  • Durable Power of Attorney: This provision authorizes someone (usually the spouse) to act on behalf of the other in the event of incompetence. Without legal authorization, the spouse would have to go to court any time he or she had a transaction involving the assets or other properties held in the estate. This oftentimes is referred to a "living probate."

  • Capability Clause: This provision authorizes a successor trustee to administer to the estate assets in the event you and/or spouse is no longer competent enough to manage your assets.

  • Catastrophic Illness Clause: This provision helps to preserve a portion of the estate for the "well" spouse.

  • Appointment of Conservator: This clause identifies who will take are of you, should either one of you become incompetent. Because we have witnessed first hand our clients suffering from strokes and Alzheimer's disease, we understand the importance of having this feature.

  • Separate Property Arrangements: If you and your spouse have accumulated assets separately other than through marriage, this important provision details how the property will be distributed and to whom.

  • Appointment of Guardian: For people with young children or physically or mentally challenged, a guardian appointment is crucial. Establishing someone who will raise the children if the parent (or parents) die is of incalculable importance for the entire family.


Action To Take

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Copyright 1998 Fielder Financial Management, LTD.
All Rights Reserved.

Securities offered through Fortune Financial Services, Inc. member FINRA, SIPC.  Fielder Financial Management, Ltd. not affiliated with Fortune Financial Services, Inc.  Mark Fielder, Financial Professional, CA. Insurance Lic. # 0690576.