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Revocable Living Trusts

 

Background - The Probate Process

  1. WHAT IS PROBATE?

    • A WAY FOR THE COURTS TO MONITOR "THE ESTATE"
    • TO PROVE THE WILL VALID, IF THERE IS ONE
    • TO PAY DEBTS IN A SPECIFIED ORDER
    • TO DISTRIBUTE PROPERTY
    • TO ALLOW CHALLENGES
    • TO CLEAR TITLE

  2. WHEN DO YOU NEED TO PROBATE?

    • FUNCTION OF DOLLARS - NOT WHETHER A WILL EXISTS OR NOT
    • SUMMARY PROCEEDINGS LESS THAN $100,000

  3. WHAT GETS PROBATED?

    • INVENTORY AND ASSETS
    • REAL PROPERTY AT FAIR MARKET VALUE (FMV)

  4. WHO DOES IT?

    • EXECUTOR/ADMINSTRATOR & ATTORNEY

  5. SAMPLE PROCESS

    • FILE WILL
    • PETITION FOR PROBATE
    • NOTICE OF DEATH/PUBLICATION
    • OBTAIN ORDER FOR PROBATE
    • OBTAIN BOND
    • OBTAIN LETTERS TESTAMENTARY
    • PERPARE INVENTORY AND APPRAISEMENT
    • ALLOW FOUR (4) MONTHS FOR CREDITORS CLAIMS
    • SALE OF REAL PROPERTY (IF NECESSARY)
    • PRELIMINARY DISTRIBUTION
    • FINAL ACCOUNTING AND DISTRIBUTION

  6. STATUTORY FEES

    • SLIDING SCALE DEPENDING ON VALUE
    • REMEMBER, HOUSE AT FULL MARKET VALUE NOT EQUITY
    • EXECUTOR/ATTORNEY
    • SAMPLE WORKSHEET

  7. REASONS PEOPLE WISH TO AVOID PROBATE

    • COST
    • TIME
    • LACK OF PRIVACY

 

Statutory Probate Fees

4% for the first $100,000
3% for the next $100,000
2% for the next $800,000
1% for the next $9,000,000.

Examples

SIZE OF ESTATE ($)

% of estate 100,000 250,000 500,000 750,000 1,000,000 2,000,000
4 (first $100,000) 4000 4000 4000 4000 4000 4000
3 (next $100,000)   3000 3000 3000 3000 3000
2 (next $800,000)   1000 6000 11000 16000 16000
1 (next $9,000,000)           10000
Total 4000 8000 13000 18000 23000 33000

Attorney & Executor are each entitled to above fees.

There are also additional costs such as : Filing Fees, Publication, Bond, Probate Referee, etc.

 

Ways to Avoid Probate

  • GIFTS

  • MATTERS OF CONTRACT:

    LIFE INSURANCE
    IRA, KEOGH, 401k

  • FORMS OF TITLE:

    JOINT TENANCY (PASSES BY OPERATION OF LAW)
    JOINT BANK ACCOUNTS
    BANK ACCOUNTS IN TRUST FOR ("TOTTEN TRUSTS")
    NEW COMMUNITY PROPERTY WITH RIGHT OF SURVIVORSHIP

  • TRUSTS:

    SEPARATE ENTITY IN WHICH YOU MAY BE IN CONTROL

 

What Is A Revocable Living Trust?

  • A written legal document/agreement indicating what you want to happen to Your assets when you die.

  • Like a will, but avoids probate because separate legal entity which trustee controls.

  • Trustor/Settlor is person creating the Trust.

  • Trustee is person managing the Trust.

  • Trustor & Trustee may be the same or different individuals.

 

Drafting And Funding Of Revocable Living Trusts

  • Declaration of Trust - Identifies the players, the assets (separate, or community property), and how assets are to be distributed

  • Trust holds assets for the benefit of yourself or others

  • Special on-going provisions may be made (i.e. special needs and care for a particular incapacitated individual; special educational requirements or conditions of distribution; partial distribution at different ages, etc.)

  • "What if" scenarios and contingencies can be addressed

  • Directs who will manage the Trust after the death of Trustor/Trustee

  • Directs who will manage the Trust after the incapacity of a Trustee

  • No contest clauses

  • Assets are transferred to the trust by changing "Title":

    Real Property via quitclaim deed
    Securities and Bank Account via Letter of Instructions
    Furnishings and other tangible property via Bill of Sale

  • Trust assets are listed in "Schedules" (normally found at the end of the trust)

 

Managing Revocable Living Trusts

  • Sign legal documents as Trustee

  • Buying and Selling assets done the same way

  • Keep Trust Schedule(s) updated - the trust is a living document

  • Change of trustee is done via written notice

  • Trust should already have contingent successor trustees in case of death or incapacity

  • May have issue with refinancing

 

Potential Advantages Of A Revocable Living Trust

  • No Probate - Saves Time and Executor/Attorney's Fees

  • Privacy

  • Professional Management

  • Continuity - Successor Trustee

  • Credit Shelter trust can save substantially on Federal Estate Trusts

 

Possible Disadvantages

  • Takes time up front to set up

  • On-going records should be kept

  • Attorney Fee higher than that of setting up will

 

Federal Estate Taxes

Estate taxes is an excise tax imposed on your right to transfer your property at your death - as high as 55%. (Robin Hood Principle)

You are currently exempt from Estate taxes if your total assets are under $2,000,000 (Remember all assets are included; i.e. 401K, IRAs, Life Insurance)

If married typically no estate taxes until death of surviving spouse (because of marital deduction) - however, at second death of only one $2,000,000 exclusion

Properly structured Credit Shelter Trust allows for the "split" of the trust at the death of

Example 1 - Estate size now or will grow to $2,500,000

Without a Trust - Estate taxes would approximate $250,000 [($2,500,000 - 2,000,000)/2]

With a Credit Shelter Trust, there would be no Estate taxes. A savings of $250,000

Example 2 - Estate size now or will grow to $4,500,000

Without a Trust - Estate taxes would approximate $1,250,000 [($4,500,00 - 2,000,000)/2]

With a Credit Shelter Trust, Estate taxes would be $250,000. A savings of $1,000,000

Trust "A" = $2,250,000

Trust "B" = $2,000,000

Trust "C" = $250,000

ZERO ESTATE TAXES ON TRUST B

ESTATE TAXES ON TRUST A + TRUST C = [2,250,000 + 250,000 - 2,000,000] /2 = $250,000

 

Estate Taxes Exclusion Amounts

2002      $1,000,000
2003      $1,000,000
2004      $1,500,000
2005      $1,500,000
2006      $2,000,000
2007      $2,000,000
2008      $2,000,000
2009      $3,500,000
2010      Unlimited
2011      $1,000,000
2012      $1,000,000
etc.        etc.