Just The Facts Part II
I get a lot of questions about basic estate planning concepts when people are first looking into their own planning, so I decided to answer many of them in this FAQ series. If you have additional questions or want to look at things more comprehensively, you can check out the free information at http://www.FreeTrustCourse.com, or if you are a North Carolina resident, then please call me at the office at 919-844-7993.
What is a Will?
A will is a legally binding document that addresses how your assets will be distributed at your death and also names an executor who will assist with the administration of your estate. Wills are settled in the probate court.
How difficult is it to change my will?
A will is a flexible document that can be changed at any time, as long as you are alive and competent. Usually, you have to seek an attorney’s help to change a will. The attorney may create a codicil, or he or she may rewrite the will altogether.
What is a “codicil”?
A “codicil” is a legal term for a change made to a will.
Are executors personally liable for debt owed by the estate?
No. Executors are never responsible for the debt, the estate is. The probate system protects executors from being treated improperly by creditors.
How old must someone be to assume the role of executor?
At the time you name your executor, the person must be 18 years of age or older.
Can the executor take advantage of my will to his or her own ends?
It is possible, however, this rarely happens. Executors are watched carefully by the probate system. Self-dealing is generally squelched as soon as it occurs.
What is Probate?
Probate is the state’s legal mechanism for settling your estate when you have a Will. Wills are processed through the probate court. Probate is a specific set of legal codes that allows the state, through your executor, to properly accomplish tasks like paying off debt, fielding fraudulent claims from creditors, filing and paying taxes, and distributing your assets.
It is a complex system, and it changes from state to state. Generally speaking, probate can become expensive and last months or years.
Will probate occur in multiple states if I have property in multiple states?
Yes, probate occurs in your state of residence and also in every state in which you own real estate.
Is there a way to avoid probate?
Yes, you can often avoid probate by creating a living trust. Because living trusts are legal entities that own your assets for you, they are not subject to the probate courts.
What is a Living Trust?
A living trust is a legal entity that owns your assets yet allows you to remain in complete control of them. Living trusts are also sometimes referred to as “revocable trusts”. The terms “living” and “revocable” refer to the fact that the trust can be changed or “revoked” as long as you are alive and competent.
While the living trust owns the assets, you retain all the incidents of ownership. This means that you can buy, sell, and borrow against your assets as you always have while they are in trust.
How difficult is it to change my living trust?
You can change your trust at any time with minimal legal fuss, although you must be competent and should consult an attorney.
What’s the difference between a revocable and an irrevocable trust?
The term “revocable” means that the trust you create can be “revoked” at any time. This allows you to change the trust in any way you wish until you pass away. A “revocable” trust and a “living” trust are the same thing. When you create an “irrevocable” trust, you are creating a trust whose terms are set in stone and cannot be changed after the paperwork has been signed.
Both revocable and irrevocable trusts are important pieces of estate planning. You should know about both, and use both as best fits your personal circumstances.
Having said that, the foundational element of most estate plans that use trusts is a revocable or living trust. Keep that in mind as you meet with your attorney and plan your estate.
Who are the trustors of a trust?
The trustors are the people who create the trust. In most cases, they are also the people who fund the trust. If you and your spouse are creating a trust, the two of you will be trustors.
Are successor trustees personally liable for debt owed by the estate?
- No. A trust is a separate legal entity. As such, it is responsible for its own debt.
Can my successor trustees change my trust?
- No. Your successor trustee is not allowed to alter the trust in any way.
How old must someone be to assume the role of successor trustee?
- At the time you name your successor trustee, legally the person must be 18 years of age or older, although some people consider 18 to be far too young to handle those responsibilities.
Can the successor trustee take advantage of my trust to his or her own ends?
- Not really. Your successor trustee is bound to act with “fiduciary responsibility” regarding your trust. This means that he or she is legally bound to act in the best interests of the trust and the beneficiaries.
What does the term “grantor” mean?
- Grantor is the term that the IRS uses for “trustor”-the person(s) who founds a trust.
What happens to my trust if I get divorced?
- If both of you are trustors and trustees of the trust, it will require both of your signatures to cancel the trust; you can’t opt out of it on your own. If you are worried about a divorce, it may be better to create two separate estate plans, just in case, although a joint trust with a separate property agreement is also an option.
What happens if I remarry?
- Unless you alter your trust to include your new spouse, nothing will change. That possibility is unlikely since your ex-spouse probably won’t go for it. If you remarry, you may need to create a new estate plan that covers both of you.
Do I have to take a living trust through probate?
- As long as the trust is written and funded properly, you do not have to take the trust assetsthrough probate. If your attorney tells you that you HAVE to, you should get a second opinion. (There are some times that attorneys will provide an option to “go through the motions” of filing probate forms, even with no assets in probate) and posting a formal notice to creditors in the newspaper in order to cut off any creditor claims that may pop up months or years after a person dies. A trust is a separate legal entity, therefore it does not have to be processed through the probate system.
Even if I have a relatively small estate, can I still have a living trust?
- Yes. The size of your estate does not necessarily affect the type of estate plan you choose to develop. You can have an estate of any size and create a living trust if you choose to.
Can I have a trust if I am single?
- Absolutely. There are trusts for single people as well as married people. You can have a trust either way.
Is an AB Trust Actually Two Different Trusts?
An AB Trust is like two trusts in one. One set of documents creates the trust; however, the trust itself is split in two as soon as one spouse passes away. Upon the death of the first spouse, the trust is split into an A Trust and a B Trust.
The A Trust is for the surviving spouse and the B Trust is the decedent spouse’s trust. In the trust documents you can determine which assets flow into the A Trust and which into the B Trust, but it is much more likely and, usually, desired that the surviving spouse makes this decision at the time of the first spouse’s death. A set of rules then apply regarding how the spouse is allowed to manage each of the trusts.
What are the rights of the surviving spouse as trustee?
- To some degree this depends on the trust to which your spouse is trustee. Usually, a spouse will retain all rights to buy, sell, or borrow against property in trust. That is, he or she retains all incidents of ownership. There are exceptions to this rule, but generally speaking, this is how it works.
What are the rights of the spouse to the decedent’s B Trust?
- As long as the surviving spouse is named successor trustee of the B Trust, which is usually what happens, he or she can use funds in the trust to maintain his or her lifestyle; however, there are some technical restrictions that apply. Technically, the surviving spouse can only use the principle from the trust to “maintain the quality of life that he or she has been living.” But for all intents and purposes, this means that your spouse can use these funds as he or she wishes.
What are the rights of the spouse to the A Trust?
- The A Trust is the surviving spouse’s trust. He or she has full rights to this trust.
Can the surviving spouse change beneficiary designations on the B or C Trust?
- No. The surviving spouse is not allowed to change beneficiary designations on a B Trust or a C Trust.
What does “Q-Tip” mean?
- A “Q-Tip” Trust is the “C” in an ABC Trust. If an AB Trust is like two trusts in one, an ABC Trust is like three trusts in one.
“Q-TIP” stands for Qualified Terminal Interest Property. This means that to create a trust of this nature, the surviving spouse must retain the right to any income made from the C Trust; However, he or she is not allowed to spend any of the principal in the C Trust unless specifically empowered to do so. Depending on your situation, a trust of this nature can be an excellent option included in a joint trust.
What happens to assets outside of my living trust?
- Any assets not owned by your trust will either be handled through the probate court (if they are covered in a will), or they will be managed through the intestate succession laws of the state you live in.
To help ensure that all of your assets are accounted for, you can create a “Pour Over Will.” This is a will that states that assets left out of the trust “pour over” into the trust. However, this transition still has to be processed through the probate court.
What does “funding a trust” mean?
- Funding your trust is the process by which you transfer ownership of your assets into the name of the trust. It is one of the most critical steps in creating a trust. Any assets not owned by your trust must be processed by probate.
Will I lose control of my assets with a living trust?
- No. As long the trust is properly written, you correctly transfer assets into the name of the trust, and you name yourself as trustee to the trust, you will not lose control of your assets.
Why do I have to give up ownership of my assets to the trust?
- It’s one way to keep your assets out of probate. The trust is a separate legal entity. As long as that entity owns the assets, they are not subject to probate. If the trust does not own the assets, they will go through probate. The thing is, though, that you will be the trustee, so there is no loss of control.
How does a living trust affect the way I file taxes while I’m still alive?
- It doesn’t. Everything about your financial life remains essentially the same with a living trust, as long as you are alive. You file taxes the same way that you always have.
Can I still borrow against my home (or other assets) if it’s in a living trust?
- In most cases, you can. There are a few agencies out there that still loathe to offer loans against assets owned by a trust, but these days, most organizations will allow you to borrow against your home when it’s in trust.
Do I have to have a living trust for every state?
- No, you do not have to have a different living trust in every state.
PART THREE—FINDING THE RIGHT PROFESSIONAL
How important is an estate planning attorney?
A good estate planning attorney is one of the most powerful allies you can have, but a bad one can be your worst enemy. It is essential to find a good estate planning attorney if you are going to create an estate plan that meets your needs, is legally executable, and can be properly settled.
Can I create an estate plan on my own?
You can, but I don’t recommend it. As much as I am for do-it-yourself approaches, this is not an area where I would suggest taking that course. You don’t want to take any chances with your estate plan. I once asked a very well-known estate planning attorney about do-it-yourself estate plans; he said, “The problem is most people don’t know what they don’t know. If you know what you don’t know, go ahead and try a do-it-yourself approach. If you don’t, I recommend against it.”
How do I find a good estate planning attorney?
Talk with friends and family about attorneys they used, check your state bar association and other state resources, and go to estate planning seminars.
Once you have a list of contenders, make sure that you interview each attorney. See if you can set up a free meeting and get the information you need to make a good decision.
Finding the right attorney for a Trust—Basic Planning
It is always good to sit down with an attorney and ask questions before hiring one. In order to help you find the right attorney and other professionals in putting together your life and estate plan, you and your spouse should look for the following warning signs:
- They recommend using joint property with a right of survivorship or beneficiary designations.
- They tell you all you need are wills and you shouldn’t even discuss a trust.
- They say probate is not a big deal and their firm handles probate cases all of the time.
If you notice any of the above points, then they clearly do not have the knowledge to help you and your spouse with life and estate planning. This is not to say they are bad lawyers, but I’ve often seen lawyers who are very good with real estate matters, or family law, or traffic court cases want to help when their clients come to them with another matter like drafting life and estate planning documents. The problem is they don’t realize it is not that simple.