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The Revocable Living Trust: Peace Of Mind

DO ANY OF THESE SCENARIOS MAKE YOU THINK OF YOU?

  • Richard and Joan are in their mid-60’s, with assets of about $2,000,000.00. Richard handles all of their financial affairs, and he is concerned about what would happen if he became ill or became mentally incapacitated. Tom, their only child, who is 40, could help them, of course, but Richard does not want Tom to make any financial decisions for him, however well-meaning, while Richard is able to handle his own financial affairs. What can he do?
  • Ed and Kathryn are in their early 70’s. They live on a modest pension and social security payments. Their total assets barely exceed $500,000.00, including a home worth about $200,000.00. They own everything jointly with rights of survivorship. Ed and Kathryn are beginning to experience memory difficulties. They realize that, sometime in the future, they may need assistance with their daily financial affairs and protection against being swindled or talked into doing something foolish with their assets. They also want to minimize Probate costs in order to leave something to their children. What can they do?
  • Judy is in her late 40’s, with an estate of about $900,000.00. She has two children, each in their 20’s. She owns and operates a small business which is incorporated, and she owns a real estate investment in two different States as well as her residence. Judy would like to avoid Probate at the time of her death, both in the State of her residence and in the States where she owns her investment properties. She also wants her children to be able to take over her business immediately upon her death, since any delay could seriously hurt the business. What can she do?
  • Sam and Christine were married two years ago. Sam has been married three times and Christine has been married twice. Both have children from earlier marriages. Sam has an estate of over $3,000,00.00. While Sam wants to provide sufficient income for Christine to meet her needs during her lifetime, it is also important to him that, upon her death, his assets go only to his children. He is concerned about what would happen if he become too ill to handle his financial affairs or became mentally incapacitated. Since his new wife and his children do not have a close relationship, how can he be sure that, during his lifetime, neither could do something which would prevent his wife from receiving the benefits of his assets during her lifetime or prevent his children from receiving his estate after his wife’s death?
  • Tom and Jane are in their 60’s, and Tom is getting ready to retire. Although they have been married for almost 25 years, this is the second marriage for each of them; Tom has 3 children from his first marriage and Jane has two from her first marriage. They have accumulated assets, including their home, having a value of about $1,500,000. Tom and Jane each want to leave part of their joint estate to their own children while still assuring that the surviving spouse has the benefit of all of their assets during his or her lifetime. Further, they would like to avoid Probate of their estates in order to prevent any disputes between their families upon their death. What can they do?

These are just a few examples of the many situations that can arise when protection and controls are needed during one’s lifetime. In each of the above cases, and in many other situations as well, a Power of Attorney can not accomplish what is needed – the best solution is a Revocable Living Trust. You do not need to have a large Estate to secure these benefits – it is not how much you own, but rather what you want to achieve, that matters. You do not need to have a large estate to secure these benefits – it is not how much you own, but rather what you want to achieve that matters.

SECTION I: WHAT IS A REVOCABLE LIVING TRUST?

Before you can fully understand and appreciate what a Revocable Living Trust can do for you, you need to understand exactly what it is.

First, a few critical definitions:

  1. TRUST – a separate entity that we can create for you which is designed to meet your particular needs. The Trust will own, manage, and distribute your property as you direct. “Property” includes real estate, stocks, bonds, bank accounts, certificates of Deposit, insurance policies, future compensation or other monies due to you, vehicles, home contents, etc.
  2. REVOCABLE LIVING TRUST – a Trust which you can create during your lifetime and which you can revoke (terminate) at any time.
  3. GRANTOR – the person who creates a Trust. Because the Grantor has the power to revoke the Revocable Living Trust, change its terms, and remove property from it, the Grantor has total control over everything that the Revocable Living Trust does. You would be the Grantor of your personal Revocable Living Trust.
  4. INCOME BENEFICIARY – the person who receives all of the income earned by the Trust and who can receive principal as needed. For your personal Revocable Living Trust, you would be the Income Beneficiary for your entire lifetime.
  5. TRUSTEE – the person or financial institution who manages the property in the Trust (its “assets”) – you would be the initial Trustee of your personal Revocable Living Trust. At such time as you are no longer able or willing to serve as Trustee, the Successor Trustee which you will name in your Trust Agreement will begin serving as Trustee of the Trust for your benefit.

In summary, for your personal Revocable Living Trust, you, and you alone, will have total control (as Grantor), you and you alone, will receive all of the Trust’s income for your lifetime (as beneficiary), and you, and you alone, will buy, sell, receive, spend and manage the assets of the Trust for as long as you wish and are able to do so (as Trustee).

SECTION II: WHAT A REVOCABLE LIVING TRUST IS INTENDED TO ACCOMPLISH

  1. Protection of the Grantor – you – while living: In the event that you become mentally incapacitated or are otherwise unable to manage your financial affairs, the successor Trustee which you have selected and designated in your Trust Agreement (because you trust him, or her, or it) takes over as Trustee. While a Power of Attorney provides the power to act in your place, a Revocable Living Trust not only does that but it also creates a duty upon the Trustee to assure that you are well cared for, that your interests are protected, and that your needs are met. A Revocable Living Trust Agreement sets forth rules with which the new Trustee is legally obligated to comply; a Power of Attorney does not. A Revocable Living Trust protects you against being taken advantage of by others while mentally incapacitated; a Power of Attorney does not.
  2. Avoidance of Probate: Assets which are owned by the Revocable Living Trust at the time of your death do not go through Probate. A Trust continues without interruption for the benefit of your spouse, children, or heirs that you have designated in your Trust Agreement; a Power of Attorney terminates upon your death and can not assist in avoiding Probate. Use of the Revocable Living Trust eliminates the expenses of Probate, eliminates the limitations on the use and availability of assets for the needs of your spouse and children after your death, and eliminates the uncertainty, the unpleasantness, and the stress that your spouse and/or your children would experience by going through Probate just after you have died. Wills must go through Probate.
  3. Estate Tax Reduction: The Revocable Living Trust can also establish a credit shelter trust upon your death if you are married and your spouse survives you. Your spouse would receive all of the income for his or her lifetime, and principal if needed, but any principal remaining in the trust after your spouse’s death passes on to your children (or other beneficiaries) totally free of estate taxes, while your spouse still has the benefit of an estate tax exemption to reduce or eliminate estate taxes with respect to his or her own estate.
  4. Avoidance of Publicity: With a Revocable Living Trust, upon your death there is no publicity with respect to the assets in your Trust. No public inventory is required, unlike Probate of a Will. Therefore, there is less opportunity for persons who oppose your wishes to attack the plan of distribution and less opportunity for creditors of your beneficiaries to have knowledge of distributions made to them.
  5. Immediate Access to Assets of a Business: Partnership interests, Limited Liability Memberships and Closely Held Corporate Stock are immediately and privately available, for transfer to your beneficiaries, for sale, or for redemption, and your heirs can take over the operation of the business immediately. Assets which go through Probate cannot be distributed for a substantial period of time, and the business must be operated by the Executor until distribution can be made.
  6. Elimination of Ancillary Proceedings: The Revocable Living Trust not only eliminates Probate of your Estate in the State of your residence, it also eliminates the need for Probate proceedings in other States where you own property.
  7. Flexibility: A Revocable Trust Agreement does not have to be redrawn whenever you change your residence. Unlike a Will, upon your death there is no need to locate witnesses to establish the validity of your Trust. The next beneficiary can move the Trust to the State of his or her residence without difficulty.
  8. Protection for your children from a prior Marriage: If you are currently married and also have children from a prior marriage, the Revocable Living Trust, unlike a Will, can eliminate potential conflicts between your spouse and your children in the event you become mentally incapacitated or otherwise unable to manage your financial affairs during your lifetime. The Revocable Living Trust, like a Will, permits you to give your spouse the use of your assets (including income from investments, and principal if needed) during his/her lifetime while providing that your assets will go to your children upon the death of your spouse.

SECTION III: HOW A REVOCABLE LIVING TRUST WORKS

  1. While you are acting as the Trustee, you can do anything you want with the assets owned by the Trust and with the income earned by the Trust. You can buy, sell, spend, save, make gifts, put assets into the Trust, take assets out of the Trust – there are no limitations. All income is yours and is reported on your personal tax return; no separate Trust tax return is needed. There is no practical difference between assets you own personally and assets owned by your personal Revocable Living Trust; when your sign your name, you just add the word “Trustee” at the end. Also, there is no Trustee fee to pay while you are serving as the Trustee – no designated successor Trustee (a bank, for example) receives any fee until the Trustee actually starts to serve as Trustee when you resign or are no longer able to serve.
  2. If and when you no longer act as Trustee for any reason (mental incapacity, physical illness, etc.), the next Trustee that you have designated in your Trust Agreement begins to serve as Trustee. No legal proceeding is needed. The new Trustee can do everything you could do with respect to the assets in the Trust.
  3. While you are not serving as the Trustee, all Trust income is given to you or spent to pay your bills. The new Trustee is obligated to act for your benefit, in your best interests, including maintaining your standard of living and, should you need medical care, providing funds to pay for top quality medical care. The Trustee is obligated to use Trust principal (its assets) for these purposes also if there is not enough income. For your entire life you are the only income beneficiary – the only person entitled to receive any benefits from the Trust. The Trustee is also obligated to manage and invest the Trust assets prudently to maximize the likelihood that there will be funds available for your entire lifetime to maintain your standard of living and to be sure you receive top quality medical care. South Carolina now has a Trust Code which establishes protections for a Grantor of a Trust and creates duties and obligations for the Successor Trustees.
  4. The Trust also acts as your Will, designating your beneficiaries and what they will receive. During your lifetime, you can change any of the terms of the Trust Agreement, including any beneficiaries and their inheritances, whenever you want. You can change the successor Trustee whenever you want. You can also revoke (terminate) the entire Trust at any time.
  5. For your protection, if you become mentally incompetent the Trust becomes Irrevocable and you can no longer remove assets from the Trust, change the Trust terms, etc. This is for your protection, so that no one can persuade you to give your assets to them (or to others), or to invest them foolishly, while you are incompetent. The Trust Agreement contains a definition of “incompetent” – simply put, it requires that two doctors, one of which is your regular physician (or as close to it as possible), determine that you are incapable of handling most of your regular financial affairs or of protecting your assets for your future needs.

SECTION IV: THE JOINT REVOCABLE TRUST

If the total assets that you and your spouse own have a value which is less than an individual estate tax exemption, eliminating any concern about estate taxes, you can create one joint trust for the both of you. You and your spouse would both serve as Trustees; if one is unable or unwilling to serve, then the other could serve alone. This creates a structure very similar to owning all of your assets as joint tenants with rights of survivorship, but with all of the benefits of a revocable trust. Upon the death of one spouse, the entire trust would then pass immediately to the surviving spouse; no Probate would be required if all assets are titled in the trust. While both spouses are living and competent, all actions, including buying or selling assets, changing or terminating the trust, or changing the successor trustees, would require the approval of both spouses; if one died or became incompetent, the remaining competent spouse would be able to do so by himself or herself. With the joint revocable trust, you would save the costs and delays of two Probates. Equally as important, this structure would provide automatic protection for a surviving spouse who may be unable to handle all financial matters by himself or herself, as you would designate an alternate trustee to serve in such a situation; if no trust existed and the surviving spouse received all assets outright, he or she might be overwhelmed by the difficulty of managing such substantial assets or might be subject to undue influence by others.

SECTION V: WHAT THE REVOCABLE LIVING TRUST OFFERS FOR YOUR SPOUSE, CHILDREN OR OTHER HEIRS AFTER YOUR DEATH

  1. If, under your Trust Agreement, a Credit Shelter Trust is created upon your death for the benefit of your spouse, it continues for your spouse’s entire lifetime. All income goes to your spouse, or is spent for his/her benefit, for his/her entire life. If there is insufficient income to maintain your spouse’s standard of living and provide him/her with top quality medical care, Trust principal (its assets) can also be used for these purposes if you wish. Your spouse has the absolute power at any time to discharge the current Trustee, without cause, and to appoint a successor Trustee with whom he/she feels comfortable. This protects your spouse if the Trustee is not doing a good job or is charging unreasonable fees. It also enables your spouse to move the Trust if he/she moves to a new location.
  2. Bequests to minor heirs can be kept in Trust for their benefit until they become 21 (or older if they were living at the time of your death).
  3. No heir can spend (or lose) his/her inheritance. No creditor of a beneficiary can collect a beneficiary’s debt from Trust assets while they are in the Trust.

SECTION VI: AFTER YOU CREATE YOUR REVOCABLE LIVING TRUST

After you have created a Revocable Living Trust, there is one more step to be undertaken – transfer of your assets into the Trust. Many of the benefits of the Revocable Living Trust only commence when you put your assets into it. In some cases the transfer is easy – for example, bank accounts and stock brokerage accounts usually require only a change of the name of the account (or at worst a few simple forms if a joint account must be separated), insurance policies require only the filing of a Change of Beneficiary form, and transfer of real estate can be done by having your attorney prepare and record a deed. Transfer of a vehicle requires a bit of effort, as does the transfer of a stock certificate that you hold in your own name. I can assure you that it is well worth the effort.

Transfer of assets to your trust does not create any income tax liability. You do not lose any tax benefits that you had when you owned the property in your individual name. For example, the primary residence income tax exclusion still applies if your home is owned by your Revocable Living Trust.

SECTION VII: WHAT DOES IT COST TO ESTABLISH A REVOCABLE LIVING TRUST?

The cost of a Revocable Living Trust reflects the time required to prepare it (conferences to determine facts, drafting, reviewing, discussion with clients and execution), and the experience and expertise of the Attorney. As to my experience and expertise, I have been practicing law, principally in the area of Estate Planning, for over thirty-five years, and I have a Masters Degree in Tax Law from New York University.

We offer a 30 minute, FREE consultation which will enable us to determine the extent of the legal services needed to secure the benefits that you desire to achieve. With that information we can provide you with a fee proposal which we feel is reasonable and equitable to you and to us, for your consideration and approval. Please note that the cost of preparing a Revocable Living Trust is substantially less than the cost of Probating an Estate, however simple it may be.

SECTION VIII: OTHER LEGAL DOCUMENTS THAT YOU MAY FIND BENEFICIAL

  1. A Durable General Power of Attorney. This document authorizes someone to act for you in matters other than the management of Trust assets. Signing legal documents (tax returns, etc.), transferring assets into your Revocable Living Trust, and acting on your behalf in legal matters (lawsuits, etc.) are just a few of the things that your attorney-in-fact can do for you.
  2. A Medical Power of Attorney. With this document you give to one or more other persons the power to authorize specific medical treatment for you in the event that you are unable to make decisions on your own. It provides specific instructions about what you want.
  3. A Living Will. This document authorizes the termination of extraordinary treatment when you are near death or permanently unconscious.

CONCLUSION

Should you have any question regarding the contents of this Memorandum, or if anything is in need of a more detailed explanation, you are urged to call me at (843) 842.2202 or e-mail me at info@peterwolfattorney.com. A free 30 minute conference is offered at your convenience. For your convenience we have early evening and weekend appointments available and if need be I can come to your residence to assist you with your Estate Planning.