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Living Trusts and probate

Here is an overview of an estate planning tool known as a Living Trust. It is often referred to as an inter vivos trust. Such estate planning tools target one or more of three issues in estate planning with the overall goal being wealth maximization. Those target areas include: minimizing estate and gift taxes, providing for long-term nursing care, and eliminating probate costs.

Those with individual estates in excess of one (1) million dollars need to plan to minimize or eliminate the federal estate and gift tax. I say one (1) million because that will be the exemption amount in 2011 unless Congress extends the repeal of the tax. Currently, the exemption is at two (2) million and increases to three and a half (3.5) million in 2009. In 2010 there will be no federal estate and gift tax. A married couple can plan carefully to combine their exemptions, but for those with smaller estates, planning around this issue is unnecessary.

Providing for long-term care takes two forms: obtaining long-term care insurance or decreasing assets and income so as to qualify for medicaid funding. Obtaining long-term care insurance can be too expensive to achieve if one waits until they are of an advanced age. Decreasing assets involves navigating complex and changing medicaid regulations which go beyond the scope of this overview.

While expected probate costs are often exaggerated, avoiding them and especially avoiding the aggravation for family members who are still grieving can be achieved at low cost. The most used tool for avoiding probate is the Living Trust. Where there are no estate and gift tax concerns, using a revocable trust is preferred. A trust is a legal vehicle where an individual transfers the ownership of their assets. The trust then owns the persons stocks, bonds, bank accounts and other property. Since it is revocable, the person setting up the trust (the grantor) can take those assets back out of the trust and cause the trust to no longer exist. The grantor can still receive the income and have use of the assets and property. Typically, when a person is using this as an estate planning tool they are becoming older or have health concerns and they will designate a trusted loved one to be the trustee who will manage the assets.

The difference between a trust and a will is that a living trust becomes effective immediately, while the grantor is still alive. A will, however, has no effect until the individual passes away. This is how a living trust bypasses probate. The assets are already transferred. When the grantor dies, the trustee has the power distribute the income or assets of the trust in the way the trust document prescribes. In that way, it serves the same function as a will. There is no need for court involvement or probate fees.

July 21, 2007 Posted by | Estate Planning | 5 Comments