What is a "GOOD" Estate Plan?

Will your Living Trust do what it should? 

When I began my career in the financial industry some 35 years ago, "estate planning" usually meant 

you had a will. Few attorneys and hardly anyone in the insurance industry did estate planning, it seemed 

too simple and besides, no one ever wants to talk about dying anyway. Right?

As the tax laws became more and more complex, as estates grew in size (partially due to  inflation) and 

as individuals everywhere became less content with the public court system, the field of estate planning 

began to take on more significance and living trusts took on more importance. The reason is quite simple. 

The Living Trust is an estate planning tool which accomplishes the two primary estate planning objectives: 

avoiding probate and minimizing (or eliminating) estate taxes.

To the unskilled eye, a Living Trust looks like a boiler plate document and the perception arose that 

anyone can do it. Just fill in a few blanks. Lawyers and non-lawyers throughout the United States got 

on the trust bandwagon. Seminars popped up overnight, offer their enticing "sales  pitches": Avoid 

probate, eliminate death taxes, and disinherit the government. Even K-mart started selling do-it-yourself 

trusts off the shelf.

Now that the dust has settled somewhat. People are now asking the important questions: "Should 

everyone have a Living Trust?" "What is the difference between a GOOD trust and a not-so-good 

trust?" "Is my trust current under the new law changes and will it do all that it can do"?

Most trusts are designed to avoid probate. That is because the trust doesn't "die" when the estate 

owner dies. It's a separate legal entity which continues uninterrupted if the estate owner's assets are 

placed in it before the estate owner dies. Many attorneys and trust owners have failed to properly 

place assets into their trusts. Most states allow only a small amount of assets outside a trust to pass 

into the trust without probate- $10,000 to $50,000 (varies from state to state). Some states require 

a probate on EVERY asset outside a trust. A trust won't avoid probate unless it is FULLY funded! 

Probate means, the use of the court system to "settle" an estate, which involves fees, court fees, 

legal fees and a huge amount of TIME delay. Estates in probate often take 2+  years to "settle".

Some assets avoid probate even without a trust- such as an annuity or a life insurance policy with a 

named beneficiary or a joint bank account with a "right of survivorship." Clients often ask if those 

arrangements (i.e. joint tenancy on the title or use of beneficiary designation) are better than a living 

trust or a least as good as a living trust. If the only goal of the estate owner is to avoid probate and if 

the estate is not significantly large, these techniques may be useful. However, there may be NO 

substitute for a well drafted living trust.

In today's world, one of the major pitfalls in estate planning is the use of joint tenancy for married 

couples, when the estate is or will be over the tax-free limit (in 2004 that's $1.5 million, per person). 

Even though the surviving spouse avoids probate and death taxes, when the first spouse dies, the 

tax credit of the spouse who died first is LOST FOREVER! The result is that the final heirs (usually, 

the children) may end up paying UNNECESSARY death taxes! For this reason, couples should 

be cautious about using joint tenancy as an estate planning cure-all estate plan. A Living Trust is a 

much better tool for avoiding probate because it has none of the drawbacks of joint tenancy. And 

it takes full advantage of the tax exemptions as well.

In addition to avoiding probate, a Living Trust has numerous other benefits, some to the estate owner 

during life, some to the surviving spouse, if any, and many to the ultimate heirs of the estate. In order 

to fully understand the role of the Living Trust in estate planning, let's take a brief look at estate taxes.

NOTE: this brief summary is NOT intended as legal advice, a professional should be consulted  

regarding specific tax or legal questions. Tax laws affecting non-U.S. citizens are another issue.

First, the federal law, which affects estates of all U.S. citizens, covers all assets anywhere in the 

world (not just in the U.S.). The federal estate tax law gives each person's estate a $1.5 million 

exemption from estate taxes; it is unimportant whether there is one heir or numerous heirs. In 

addition to the $1.5 million basic exemption there is ALSO an unlimited exemption for assets 

which pass to a surviving spouse or to charities.

NOTE: the unlimited marital deduction is also available when assets are held in trust for a surviving 

spouse, as long as strict rules are incorporated into that trust.

Estate assets in excess of $1.5 million which pass to persons other than a spouse or charity are 

heavily taxed (beginning at a 41% tax rate). In most cases taxes are due within nine months after 

death, IN CASH!

Second, each state has its own tax laws affecting estates of individuals who are residents of the 

state at the time of death and/or affecting real estate interests located in that state. Some states 

impose a separate death tax; some states accept federal estate tax credit (payable out of the 

federal tax collected) in that case, those states collect no separate tax. A few states impose an 

inheritance tax on the heirs themselves (payable after the federal and state taxes are paid).

Therefore, I'd say spending a little on a properly drafted Living Trust was more than justified, 

if the  taxes could have been avoided, wouldn't you? Besides, WHO would you rather get 

YOUR money. The government, a charity or your loved ones?

So, what are the other benefits of a Living Trust (other than avoiding probate)?

1. AVOIDING estate taxes. A Living Trust does NOT avoid estate taxes. Estate taxes 

apply to the SIZE of the estate, regardless of whether the assets are in a living trust. However, 

a living trust can be designed to PRESERVE two tax credits for a couple (married or unmarried) 

so that $3.0 million can pass FREE of federal estate taxes when both spouses or partners are 

deceased. Because the living trust is one tool able available to accomplish this planning objective, 

it is sometimes mistakenly thought of as the one and only way to avoid death taxes. However, 

estate tax planning can also be accomplished with a will (subject to probate of course). But why 

subject your family, heirs and assets to the added costs of probate, unnecessary attorneys fees, 

long time delays and public scrutiny when it can be avoided by using a Living Trust?

2. CREDITOR PROTECTION. Unfortunately, a living trust does not protect assets from 

creditors (or in a divorce) while the estate owner(s) is living. HOWEVER, FULL creditor 

protection IS available for a surviving spouse or other heirs, after the death of an estate owner. 

Many trust designers OVERLOOK the value of creditor protection, yet widows, widowers,

 children and heirs almost always appreciate its benefits. The law of trusts provides a unique 

opportunity to transfer the control and enjoyment of wealth without sacrificing long term protection. 

Anyone who has experienced the relief of holding on to an inheritance after a divorce, a law suit 

or a personal bankruptcy can happily vouch for the results of proper planning. When assets 

are placed in Trust for a beneficiary they have the right to the income

but not the principal and can therefore be protected from most creditor claims.

3. Lasting Benefits. What it means to have a "good estate plan" depends entirely upon the 

goals of the estate owner. An unmarried individual without children who intends to leave all 

of his or her assets to charity may not be concerned at all about death taxes or probate; in 

such cases, a simple will may be the very best plan. On the other hand, an individual, married 

or single, with or without children, who wants to protect his or her estate for the benefit of heirs 

or their favorite charity, in every way possible, may want to have a living trust. When the estate 

owner's objectives are to reduce or eliminate death taxes, to provide creditor protection (to the 

maximum extent allowed by law), to protect against divorce or bankruptcy, and to preserve 

the estate assets for the maximum duration of time, a properly drafted living trust may be the 

best planning tool.

Summary of Living Trust benefits:

* Avoids probate at death, including multiple probates if you own property in other states

* Prevents court control of assets in the event of incapacity

* Brings all your assets together under one plan

* Provides maximum privacy (non public)

* Quicker distributions of assets to beneficiaries

* Assets can remain in trust until YOU decide when beneficiaries will inherit them

* Can reduce or eliminate estate taxes

* Can be changed or cancelled at anytime by the creators

* Difficult to contest by family or others

* Prevents court control of minor's inheritances

* Can protect dependents with special needs

* Prevents unintentional disinheriting and other problems of joint ownership

* Can be effectively used to disinherit

* Professional asset management if desired

* Plus, most Trust packages also contain other supporting documents as well:

   * Health Care Power of Attorney

   * Living Wills

   * Durable Power of Attorney

   * And Last Will & Testaments

   * and some (like ours) even offer more!

* Peace of mind!

Don't be fooled by the label "living trust" alone. Many living trusts are NOT drafted (worded 

properly) to fully achieve all potential estate planning objectives. Many trusts are designed 

solely to avoid probate; some may incorporate some tax savings for the first generation heirs, 

but few go beyond the basics and therefore, leave out many potential benefits that could be realized. 

Such as:

* tax benefits for qualified retirement accounts

* Generation Skipping Trust Protection Provisions

* "Stretch IRA" Provisions NOW allowed in Living Trusts

* Power of Attorney with Gifting Provisions

NOTE: the newly proposed Bush's RSA Retirement Savings Accounts and LSA Lifetime

Savings accounts may change a lot of investing and Estate Planning strategies. E-mail 

me for updated details on these NEW RSA and LSA retirement plans.

If you’d like more information let’s chat.  Got a Question?

For an excellent article dated June 28, 2002 on the “Combined Federal and State Estate 

Taxes will decline for the vast majority of Estates even when a state “decouples” from the 

Federal Estate Tax Cut” GO HERE  

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DISCLAIMER: The information provided here is NOT meant to be taken as Legal advice. 

I am NOT an attorney and this is NOT to be mistaken for giving legal advice. I am merely 

providing information that has been provided to me from several legal sources and adding 

my own comments to that information for a better understanding.