I N T R O D U C T I O N

COMMONLY ASKED ESTATE PLANNING QUESTIONS

WHAT IS ESTATE PLANNING?
Estate planning is the creation of a definite plan for managing your wealth while you're alive and distributing it after your death. When we talk about an estate, we mean all assets of any value that you own, including real property, business interests, investments, insurance proceeds, personal property and even your personal effects.

These assets may be owned by you separately or jointly with others. Below are some examples of how married couples often hold title to property:

Community Property: Undivided one-half interest owned by each spouse. Massachusetts is not a community property state, however.

Separate Property: Entire interest owned by one of the spouses. Property was generally acquired prior to marriage or was a gift or inheritance to one spouse alone after the marriage.

Joint Tenancy: Undivided interest owned by any two or more people in which the survivor acquires the entire interest upon the death of the other joint tenants.

WHAT EVILS ARE WE TRYING TO AVOID?

All of us face three principal obstacles in planning our estates:

  • Living Probate (The expensive court proceeding to manage your estate if you are disabled).
  • Death Probate (The expensive court proceeding to manage and distribute your estate at death).
  • Death Taxes (The taxes the government demands at your death. The federal tax starts at 37% and rises to 55% of everything you own at death.) Also, Massachusetts estate tax ranges from 5% to 16%. So, in a taxable estate, the total tax can range from 42% to 71%.

WHAT ARE YOUR ESTATE PLANNING OPTIONS?
There are four basic methods you can use to plan your estate:
  • Do nothing
  • Hold title to your assets in Joint Tenancy
  • Create a Will
  • Establish a Revocable Living Trust

WHAT HAPPENS IF YOU DO NOTHING?
Believe it or not, a majority of Americans unwittingly choose to do nothing. Experts report that 70% of all Americans have no written estate plan. Of those who have planned, most have created a simple will or rely on joint tenancy ownership of their assets to distribute their estate. Unfortunately, for the majority who have no plan in place, state law will dictate how their estate is to be distributed at death. As you might imagine, the government's plan of distribution has no particular concern for the best interests of your family.

There is no argument that doing nothing can result in probate costs, attorney's fees and, of course, higher death taxes. But most people don't realize that there can be major problems as a result of creating a simple will or holding title to your assets in joint tenancy.

This Living Trust seminar will walk you through a discussion of each of the estate planning evils and explain what happens if you plan with joint tenancy, a simple will or a living trust.

WHAT IS JOINT TENANCY AND WHY DO SO MANY PEOPLE USE IT?
Joint tenancy ownership is where two or more people hold title to an asset together. However, unlike other forms of joint ownership, upon the death of one of the owners the entire interest passes automatically to the surviving joint tenants. Actually, the full name for joint tenancy is Joint Tenancy With Right of Survivorship (JTWROS). Right of survivorship means that whoever dies last owns the whole property. Because a joint tenant's interest passes to the surviving joint tenants immediately at death, it is not controlled by the owner's will. For example, let's say two good friends, Bob and John, owned a piece of property as joint tenants. Bob dies and his will says that upon his death all of his estate should go to his wife, Mary. What happens to his interest in the real property he owns with John? Because the title passes automatically at death to the surviving joint tenants, John will own the entire property and Mary will get nothing. Further, Bob owns another piece of property and puts his son on the deed as a joint tenant, to ensure that his son will take title at Bob’s death. If at a later date Bob decides he wants the property to go to his wife, Bob must obtain his son’s permission before being able to substitute Mary in his son’s place. These are only a few of the unforeseen problems that joint tenancy ownership can create.

IS CREATING A WILL A GOOD IDEA?
Many people plan their estates by creating a document called a Last Will and Testament. A will is essentially a legal document that lays out how you want your assets distributed at death. As we've already learned, a will doesn't control the distribution of all your assets. Joint tenancy property and life insurance proceeds both pass outside your will. Wills don't take effect until you die so they are no help with lifetime planning. Upon your death, your will becomes a public document when it's filed with the probate court and is available to anyone who wants to read it. Once your will enters the probate process, your estate is no longer controlled by your family. It is in the hands of the court and the probate attorneys. Because a will guarantees that your estate will go through probate, it's a very poor estate planning document for most families.

F R E Q U E N T L Y  A S K E D
Q U E S T I O N S  A B O U T
L I V I N G  T R U S T S

CAN I ACT AS MY OWN TRUSTEE?
Yes. If you are competent to handle your financial affairs now, there is no legal reason why you cannot be the trustee of your own living trust. In fact, most living trusts have the people who created them acting as their own trustees. If you're married, you and your spouse can act as co-trustees.

WHAT CAN I DO WITH MY ASSETS ONCE THEY’RE IN MY LIVING TRUST?
If you're the trustee, you can do anything you want with the trust assets. When you set up your living trust, you are transferring the title of all your assets from you as an individual to yourself as the trustee of your trust. You then must manage the property for the benefit of yourself as the beneficiary. What this means is that you will have absolute and complete control over all the assets of your trust. If you want, you can spend, save, invest or even give the assets away at your discretion. There are no restrictions on what you can do with the assets in your living trust. Moreover, if you don't like the terms of the trust, you can amend it or revoke it at any time without penalty.

WILL MY LIVING TRUST AVOID INCOME TAXES?
No. The purpose of creating your Revocable Living Trust is to avoid living probate, death probate, and reduce or eliminate federal estate taxes. It's not a vehicle for reducing income taxes. In fact, if you're the trustee of your living trust, you will file your income tax returns in exactly the same way you filed them before the trust existed. There are no new returns to file and no new liabilities are created.

IF I TRANSFER REAL ESTATE INTO MY LIVING TRUST, WILL MY PROPERTY TAXES GO UP?
No. Transfers into your living trust have no effect on your property taxes.

IF I’M ONLY PART OWNER OF PROPERTY, CAN I TRANSFER MY SHARE INTO LIVING TRUST?
Yes. Your share can go into the trust without changing the interests owned by others. However, any property held in a joint-tenancy or tenancy by the entirety should first be converted to a tenancy in common.

CAN I NAME TRUSTEES AND BENEFICIARIES WHO LIVE OUT OF STATE?
Yes. There is no limitation on where your trustees or beneficiaries must reside.

WILL I HAVE TO CONSULT AN ATTORNEY EVERY TIME I BUY NEW ASSETS?
No. Once your current assets are transferred to your living trust, you take title to all new assets in the name of the trust and they will automatically be owned by your trust.

DOES MY LIVING TRUST NEED TO BE REGISTERED OR RECORDED ANYWHERE?
No. Your living trust is a private document which is not recorded. However, if you own any interest in real estate, the new deeds showing trust ownership will be recorded, and in that situation, the trust document must be recorded as well.

CAN I SELL ITEMS IN MY LIVING TRUST WITHOUT COMPLICATIONS?
Yes. You sell assets in the same way you currently do. You will, however, need to add the word "Trustee" after your signature.

CAN I CHANGE THE TERMS OF MY LIVING TRUST?
Yes. While you're alive and competent, you can alter or revoke your living trust at any time without penalty.

CAN I TRANSFER REAL ESTATE INTO MY LIVING TRUST?
Yes. In fact, all real estate should be transferred into your living trust. Otherwise, upon your death, there will be a death probate in every state where you own real property. When it's owned by your living trust, there is no probate anywhere.

IS MY LIVING TRUST JUST A TAX LOOPHOLE THAT THE GOVERNMENT WILL CLOSE DOWN?
No. Your living trust has been authorized by the law for centuries. The government has no interest in making you go through a living probate or a death probate. Those proceedings only clog up the court system. The only tax aspect of your trust that is likely to change is the amount of the federal estate tax deduction. It is currently $650,000 and is increasing as identified on page 17. A properly drafted living trust will provide the benefit of the progression in the federal estate tax deduction ($650,000.00, currently) and can double the amount you can pass tax free. At its current $650,000 level, your trust will allow you to pass $1,300,000 estate tax free.

CAN I TRANSFER MY SEPARATE PROPERTY AS WELL AS MY COMMUNITY PROPERTY INTO MY LIVING TRUST?
Yes. All of your assets, both separate and community, are transferred into your living trust but they are not commingled. Separate property assets retain their separate property character while in your trust. If your marriage breaks up, all assets come out of your living trust in the same way they went in: Community property is divided between the spouses and separate property is returned to the party who originally owned it.

CAN ANY ATTORNEY CREATE A LIVING TRUST?
No. The drafting of your living trust should only be done by an attorney trained in the area of tax and trust law. It is important that you seek out a law firm which has developed an expertise in the creation of living trusts. After all, your trust will be the document which manages and disposes of all your hard earned wealth. Make certain you choose a law firm that is both qualified and experienced.

IS MY LIVING TRUST STILL VALID IF I MOVE TO ANOTHER STATE?
Yes. Your living trust is valid in all 50 states, regardless of the state where it was originally created.

IS MY LIVING TRUST VALID IN COUNTRIES OTHER THAN THE UNITED STATES?
Yes. Besides being valid in all 50 states, your living trust is valid in all US Territories and Possessions, all EEC countries, and all countries that derived their legal system from British Common Law (i.e. former British colonies). Should you have a substantial asset basis outside of the United States or your primary tax residence is a country other than the United States, certain tax provisions may be added to your living trust to enhance its tax efficiency.

IS A LIVING TRUST ONLY FOR THE RICH?
No. A living trust can help anyone who wants to protect his or her family from unnecessary probate fees, attorney’s fees, court costs and federal estate taxes. In fact, if your total estate is greater than $200,000, a living trust offers substantial protection for your family.

IS A LIVING TRUST A GOOD IDEA FOR A SINGLE PERSON?
Yes. If you're widowed, divorced, or unmarried, a living trust offers protection for your estate, as well. It will completely eliminate a living probate, a death probate and you can pass $650,000 free of federal estate taxes.

ARE THERE ANY DISADVANTAGES TO A LIVING TRUST?
No. Because you have complete control of all assets in your trust, you are free to manage your living trust in any way you want. Also, because your living trust is revocable, you have the right to make any changes in it while you’re alive and competent.