Because a will must be probated and therefore has to go through the court system, everything you identify to leave to your beneficiaries in the will becomes a matter of public record. This means that anyone can go to the court records and discover the value of your estate. This may not sound terrible, but there are swindlers just waiting to prey on the vulnerable. There is the case of a stockbroker who checked court records monthly. If he saw a case where the husband died and left a sizable stock portfolio, he immediately called the widow to say that her husband had asked him to help manage the portfolio. He was shrewd and convincing; he would name some of the stocks in the portfolio so the widow would think he was telling the truth. Before anyone knew what was happening, she had handed over her entire portfolio to him.
Furthermore, as part of the probate proceedings, you are required by law to place a notice of the death in the newspapers. The issue of privacy usually rears its head when some unfriendly relative or disgruntled business associate happens to see the notice and wants to make a claim to some of your money; all they have to do is to "contest" the will. The estate could easily be tied up for many years to come. Unfortunately, this happens all too often.

A will does not deal with issues such as the possibility of conservatorship; this needs to be addressed while you are alive. It only instructs the court as to whom you want to get your property, money, and valuables upon your death. Should you develop Alzheimer's disease or become unable to deal with your affairs, a conservatorship may have to be established. It is a most unpleasant and expensive procedure to have to go to court to have someone declared incompetent in order to gain conservatorship over that person's affairs.

A will cannot legally appoint someone as a guardian for a child. Again, it merely states your wishes. So your son Jonathan, who is thirty five, and his wife, Tracy, just had their first child - your first grandchild. They decide it is time to have a will drawn up indicating that if anything happened to them, you will become guardian of the child. If something were to happen to Jonathan and Tracy, their will would still have to be probated and the court would establish a probate guardianship. The court can decide that it is in the best interest of the child not to appoint you the guardian and select someone else. The court even has the right to control all funds your grandchild inherits until he or she turns eighteen.

A point that is always overlooked is that during the probate period, your beneficiaries may be required to file a separate income tax return for the probate estate. If it takes two years to settle your estate, which is not uncommon, your beneficiaries may have to file (and pay) income taxes for the estate during that entire time.

The biggest financial drawback of a simple will is that it does not alleviate the estate tax burden. No one in their right mind would ever consider making the IRS one of the main beneficiaries of their money. But if you do not take the proper planning steps now, that is exactly what you could be doing. It seems that the old adage "Where there is a will there is a way" should perhaps read "Where there is only a will you are going to pay!"

The Trust

If you want to avoid the problems that having only a will or not having a will creates, consider having a trust. The following portion of this discussion will give you a basic understanding of some of the different trusts and how they can benefit you. Since I am not a lawyer, the information presented here is an interview with my associate Janet L. Dobrovolny, an attorney who is an expert in the area of trusts. I asked her questions I thought would be most helpful to you. Let's begin with a few key terms you will need to know:

Revocable Trust or Living Trust. The document, as it is generally referred to.

Trustor. The person who creates the trust, who owns the property that will be put in the trust. That would be you. When setting up a trust with a partner or a spouse, you would be known as trustors.

Trustee. The person you designate to make all the decisions about the money and property in the trust. Ninety-nine percent of the time this will be you. Again, if you and your partner or spouse are designated together, then you are known as cotrustees. An institution can also be named as a trustee, if you wish.

Successor Trustee. The person, or people, you designate to manage your trust if something happens to you.

Beneficiary or beneficiaries. The person or people who will receive the assets of the trust upon your death.

The following questions and answers essentially show you how a trust works.

What is a trust?
A trust is a device that allows you to transfer legal title of your property to another person (or to yourself as trustee) to hold for the benefit of yet another person (beneficiary) in the cheapest and most effective way. Consider the oldest known history of a trust. Land was given to medieval knights for their service in battle. As long as they served the king, they kept the land. But battle-worn knights who no longer wanted to fight began to pay the king a fee for the land instead of paying service. They also began to discover that they could give title to the land to the Church, which paid no fees to the king, while remaining on the land for as long as generations. The knights trusted the Church to continue to allow them to use the land. So the knights used the land, the Church held the title, and the king got cut out. And here we are doing the same thing today - transferring title into a trust (Church) and avoiding any fees (king).

What is the difference between a trust and a will?
Will: The primary difference is that the provisions of a will can be carried out only by a court order - a lengthy and expensive process. As was mentioned before, when your estate is probated, you will have to file a separate income tax return for the estate, as well as disclose private financial information for public record.

Trust: A trust gives the trustee the legal authority to distribute assets immediately to the beneficiaries based on the terms of the trust. No court is involved. No public notice of death is required as it is with a will. All that is required is a death certificate and a trust document that describes how things are to be distributed through the trust. Because a trust bypasses the court system, or probate, there are no fees, and there is no public record of the value of your estate, protecting your privacy.

How is a will prepared?
A document is drawn up in accordance with your wishes. It is in a certain format, is signed by you, and is witnessed by two or three people. Now you have a will.

How is a trust prepared?
You do almost exactly the same thing - a document is drawn up according to a particular format. You sign it, and your signature is notarized. The titles to all your properties are then transferred into the trust. So your deed, for example, will no longer read "Suze Orman," it will read "Suze Orman, trustee for the Suze Orman Trust."

Who should have a trust?
Almost everyone should have a trust, especially those who live in states where there are statutory probate fees. Setting up a trust is beneficial if you own a home or real estate. Even if you live in a state where there aren't statutory probate fees, a trust will usually cost less than the lawyer's fee and court fees for the probate proceedings. The court and the lawyers benefit if you do not have a trust. Even the federal government - and, in some cases, the state - benefit when estate taxes are due.

Who shouldn't have a trust?
People who can pass property and assets by a probate affidavit (see Tip below) or other informal procedure should not have a trust. For those who are in the midst of applying for Medicaid or if there is a strong possibility, because of age and financial conditions, that such assistance may be needed in the near future, a trust is not recommended as well. If you have Medicaid and already have a trust, be sure to consult an expert in this area about financial ramifications. (Remember, Medicaid is assistance for the needy. That generally indicates financial hardship, which we are trying to help you avoid!) So the answer to our question is that very, very few people should not have a trust.

What's the point of a will, you ask?
There really isn't much point. You can prepare a will as a backup in order to pass on items such as jewelry and furniture that don't have a legal title and to express your wishes regarding the disposition of your remains and memorial services.

Why don't more people have a trust?
People don't understand what a trust is and how it works because most general practice attorneys are not well versed in trusts and don't explain them in an understandable way. Traditionally, too, the terms "trust" and "estate" have always been associated with the very rich. That just isn't so anymore.

Do you need a lawyer to draw up a trust, or can you get a trust "form" at a stationery store or from a book or use your financial planner?
If all you have is a house, Nolo Press¹ has a great do-it-yourself book available. If you have more than just a house, or you aren't the type who will take the time to read a book, it would be wise to consult with a lawyer who specializes in trusts.

¹ Plan Your Estate With a Living Trust, by Denis Clifford. Nolo Press, 950 Parker Street, Berkeley, CA 94710. Orderline: 1-800-992-6656. Credit cards are accepted.

[Janet's note: You may also want to look at Suze Orman's Will and Trust Kit.]

Why do some lawyers tell you that you do not need a trust unless you have a really large estate?
Here's a little quiz: If you were a lawyer, would you rather make $750 to $2,000 to draw up a trust, or thousands of thousands of dollars to probate a will? Even an estate with a value of $100,000 will earn a lawyer $3,150 and the executor $3,150 in fees. Basically, you and your heirs could lose if you don't have a trust. Everyone else wins. Do you get it yet? The majority of people are better off with a trust.

I cannot stress this enough: If you go to a lawyer who says you need only a will, I want you to ask that lawyer these three questions:

1. If a basic trust is relevant to our circumstances, how much will it cost to have one prepared?

2. If we (you and your spouse) have only a will and we both die right now, how much will it cost our beneficiaries in probate and legal fees to transfer everything we own?

3. If we have living trust and, again, suppose we both die right now, how much will it cost our beneficiaries to obtain everything we want to pass on to them?

Now all you have to do is compare the two costs: setting up a trust versus drawing up a will. In both cases, make sure to add in any fees that would be charged to your beneficiaries after your death. So what's the bottom line? If it is more cost-effective to have a trust, maybe you should seek another lawyer, one who has your best interests at heart. On the other hand, you might want to stay with him if he can clearly explain why you do not need a trust at this point. But be sure to review this procedure every few years. You never know when your situation or the laws will change, making it more beneficial for you to have a trust.
Most importantly, don't let someone talk you out of something that may save a considerable amount of money. Ask to have these amounts put in writing on his letterhead with an explanation of what the fees are for. If the lawyer won't do it, and you decide to take this lawyer's advice and things turn out badly, it will be impossible for your beneficiaries to prove that you relied on his advice unless you have it in writing and have it updated regularly.

Can a revocable living trust be changed at any time?
Yes. It can be amended easily at any time although it may cost a nominal fee. This is why it is referred to as a revocable living trust.

What is the main purpose of a revocable living trust?
The purpose is to avoid the probate procedure! The reason that a trust bypasses probate is that you have taken the steps, while you are alive, to transfer assets from your name as an individual into the separate entity of the trust. When you die, the trust doesn't die. It simply appoints the successor trustee, whom you have selected, and gives that person the legal authority to sign over the contents of the trust to whomever you have designated as your beneficiary. The successor trustee and the beneficiary can be the same person.

Do you give up any control when you place your assets into a trust?
Absolutely none. It's like creating a corporation where you are the sole stockholder, the director, and the president. No one else makes any management decisions or has control over anything that goes on in that corporation but you. The trust works in exactly the same way. You create it, set forth the terms, and have full management and control over all the assets that are in it.

Why do people think that once they have a trust they can't make any changes?
They haven't learned about the differences between a revocable, or changeable trust, and an irrevocable trust. Actually, a trust is easier to amend than a will because it doesn't require two witnesses to institute the change. Some attorneys will provide you with an easy-to-follow form that allows you to prepare the amendment yourself.

Is there a difference between a checking and savings account in one's individual name and in the trust name?
The only difference you might encounter is with the $100,000 FDIC protection. Banks explain that if you and your spouse each have $100,000 in savings, each is protected to the full amount. They may also say that if you combine the money under a trust, they will only insure you up to $100,000. Some banks, however, will still allow both to maintain the $100,000 limits. Check with your bank.

Will the bank refinance your home while it is in a trust?
This depends on the bank. Some may want you to transfer the house back into your individual name to sign the loan. Afterward, you can transfer it right back into the trust. This is not a problem, and any title company should do this as part of the refinancing. Your attorney can transfer the house back into the trust for as little as $25 to $50.

How important is the trustee in the trust?
That's like asking how important chocolate is in a chocolate milkshake. The trustee is the person who makes all the decisions about your money while you are alive. Certainly if you are capable of setting up a trust and handling your own money, the trustee should be you. However, if you choose not to be trustee of your trust because you are incapacitated, the word "trust" becomes more significant. The appointed trustee should be someone you trust completely to make necessary decisions on your behalf and to have your best interests at heart.

Is there an advantage to appointing someone else to act as trustee of your trust while you are alive and competent?
Very rarely.

Should there be only one trustee, or can there be more than one trustee?
You can have one trustee or cotrustees. With cotrustees, all have to agree and sign on everything unless you specify otherwise. Having one or more trustees will depend on your specific family characteristics and needs. It is a completely personal decision. Your attorney should discuss all alternatives with you, explain each option, and point out the advantages and disadvantages of each so you can decide knowledgeably. Ultimately you must make the final decisions.

Can a trust benefit me while I am alive? Or can it benefit only my beneficiaries, after my death?
A trust is as much for its creators as it is for its beneficiaries. In the case of incapacity, that a trust exists can be invaluable. Here's an example: You and your spouse own a house in joint tenancy. Your spouse has a severe stroke and becomes incapacitated: he is unable to work, sign his name, or even recognize you. Because of the reduction in family income, or because a move to a one-story home would make caring for your spouse easier, you decide to sell your house. May you do so? The answer is no: Since you both own it, both of your signatures must be on the sales agreement.
Is there anything you can do? In order to sell, you will have to go to court, have your spouse declared incompetent, and have a conservator assigned. This could cost you several thousand dollars. Furthermore, after you sell the home, you will be forced to seek the court's permission any time you wish to make use of any of your spouse's share of the proceeds.
If, on the other hand, the two of you had created a trust with an incapacity clause that authorizes a cotrustee or successor trustee to sign for your incapacitated spouse, you will be able to bypass the courts and avoid fees.

Does a trust file a separate income tax return?
Not if it's a revocable trust and trustor is also a trustee. For IRS purposes, no completed transfer has occurred. It's not a real entity for tax purposes, so you just file your regular tax returns.

How often should someone update a trust?
If it is a simple revocable living trust and no estate tax planning has been incorporated in the trust, you probably won't have to make any updates in the trust unless there is an unexpected death in the family or a major change of circumstance or relationship.

Where should a trust document be kept?
Keep the document in your home where it is easily accessible to the successor trustee, or in a safe deposit box in the name of the trust. Be sure to tell the successor trustee where it is and how to get it in the event of your death.

As you have seen, a revocable living trust saves you time, public scrutiny, and money. For many of you, though, the most important feature of a trust may be the savings of thousands of dollars in estate tax. In Marcia's situation, the reason she was left in such a terrible state was that she owed estate taxes. For this a different kind of trust is needed.

Estate Tax

Estate tax differs from income tax in that income tax is owed every year on any incoming revenue.
Estate tax is owed on the net value of your estate (if that estate is above a certain value) at the time of your death if you leave your assets to any beneficiary other than your spouse. Essentially your estate is made up of everything you own: life insurance proceeds, your IRA, your cars, your jewelry, etc., less any debts you may owe on that property. If your home is worth $200,000 but you still owe $95,000 on your mortgage, only $105,000 would be included in your net estate from that property.

How much can you pass on to beneficiaries before estate tax is owed?
Currently you can give or bequeath $600,000 [Janet's note: As of 2005, the amount rose to $1,500,000.] to your beneficiaries free of estate tax. Any amount over that and your beneficiaries will pay dearly [Janet's note: Almost 50% in estate tax].

How can you reduce estate taxes by gifting?
To reduce estate taxes to beneficiaries, if your estate is larger than the allowable amount, you might want to reduce the size of the estate by gifting money. In Chapter Three we discuss the allowable $10,000 per person per year. But did you know that you can pay college tuition directly to a college in any amount, even if it exceeds $10,000, and not pay any additional gift tax? For instance, you can gift a grandchild, or anyone else, $10,000 a year plus pay her annual college tuition, which can be sizeable, and reduce the size of your estate. [Janet's note: As of 2005, the dollar amount became $11,000.]

By setting up an A-B trust while both partners are alive you can double the amount of money you can leave to your beneficiaries free of estate taxes. Getting back to Marcia's parents: Had they simply set up an A-B trust, everything would have been left to Marcia without a penny owed on the estate. She could have kept her house in Bolinas and all the money from the sale of the lots to generate income for her to live a comfortable lifestyle. Instead, she paid $235,000.

How does an A-B trust differ from a revocable living trust?
A revocable living trust is simply a vehicle that helps you transfer legal title quickly and effectively. It eliminates probate fees, court costs, time delays, etc., but it is not relevant to reducing any estate tax liability.
An A-B trust for spouses was devised to reduce your estate tax liability. It can currently shelter up to $1.2 million [Janet's note: As of 2005, $3 million.]. An A-B trust can be created as part of a revocable trust or part of a will as a testamentary trust (a trust set forth in a will that only takes on its legal existence after being authenticated as part of the probate court process). However, a testamentary trust created in a will still has to be probated and, therefore, is not advisable.
Here is how it would have worked for Marcia's parents:
When Marcia's father died, his "half" of the $1.2 million estate, or $600,000, would have passed into the "A" portion of the trust rather than directly to Marcia's mother. Marcia's mother would be the trustee of that trust. She would receive all the income the trust produced. If Marcia's mother used up all her "half" of the funds (the "B" part of the trust), she could take as much of the principal from the "A" portion of the trust as needed.² For the surviving spouse, the reality of the A-B trust should be that money is handled no differently than if it wasn't in the trust. When the mother dies, the A and B portions both go to Marcia.

² The term "as needed" is defined as an "ascertainable standard," especially for health, support, education, or maintenance.

Here is where the difference comes into play. Because money or property went directly from Marcia's father into the trust, it never became a part of her mother's estate. Any money coming to Marcia from the "A" portion of the trust had the father's credit applied to it. Her mother's half of the estate, also valued at $600,000, was allowed to pass down to Marcia using her mother's credit. In this way Marcia received the maximum amount of $600,000 from each parent. If the father had left his $600,000 outright to the mother, no tax would be due at the time of his death because there is no tax between spouses. However, at the time the mother died, the entire $1.2 million would be in her estate and she could pass only $600,000, estate-tax-free, with the result that Marcia would owe $235,000 in estate tax. The A-B trust prevents this from happening. The end result is that Marcia would have received all $1.2 million in property and owed nothing in estate taxes had her parents created an A-B trust. This is standard estate planning but requires that both partners be alive at the time the plan is created.
You may feel this is not worth investigating because your net estate is not $600,000, but you must make sure you total everything you own - the house, life insurance, pensions, retirement plans with death benefits, all proceeds payable at your death, all investments, art collections, antiques, everything. You may be surprised if you own a home how quickly everything adds up. Marcia was surprised to learn that the house and the land were valued so highly. If you have done a realistic calculation and you still feel your estate value falls short of the $600,000 figure, beware of any reduction in the estate tax exemption. If the law changes, be ready to establish an A-B trust.

Is an A-B trust just for a husband and wife?
Unmarried couples, same-sex couples, or just two friends can get the same benefit up to $1.2 million [Janet's note: As of 2005, $3 million] by establishing separate trusts, which remain intact until both partners have died.

Who benefits from an A-B trust?
Ultimately it is your children, or other named beneficiaries, who will reap the benefit of this trust. Remember, a deceased husband or wife can pass assets to the other without any estate tax at all. This is known as the unlimited marital deduction.

TIP: Because the trust is created for the benefit of your heirs, or others who will get your property after you are both gone, why not ask them to reimburse you for the cost of setting up the trust? Marcia would have gladly paid $2,500 to save more than $235,000.

Guidelines

Trusts are a sound defense strategy. But now that you are aware of them, don't march right out and set up a trust with the first lawyer you see! It is important that you choose a lawyer who knows and understands the use of trusts. I have seen many horror stories of people who sought help from an attorney to set up a trust, even paid a lot of money for it, only to discover that the trust had not been funded properly, or they had paid far too much for the service, or worse, that the provisions did not reflect their wishes, or that they were told they only needed a will.

Copyright © 2003 by Suze Orman. All rights reserved. 042405