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Robbins: Do you want or need a trust? Maybe

A question I am often asked is, “Do I want a trust?” Or, “Do I need a trust?”

As there are about as many kinds of trusts as there are flavors at a Baskin-Robbins, it is a difficult question to answer. What I have learned, however, is that most times when the inquiry is posed, what it distills down to is more limited: “Do I need or want a revocable trust?”

Other times, I am not asked at all. A client simply says to me, “I want a trust.” When I ask why, I often get answers like, “A friend of mine has a trust.” Or, “A friend told me that I need one” or “I read somewhere that it’s a good idea.”



Yeah. Maybe.

So let’s explore. Or, better yet, let’s hearken back to school days and “compare and contrast” the benefits of a revocable trust versus a will and vice versa.



Whether you use a trust or will-based plan, both can accomplish the same goals: the transfer of assets (with or without some type of restrictions and/or subtrusts) or tax planning objectives (estate tax avoidance, income tax planning, etc.).

A will-based plan ensures that, upon the testator’s or testatrix’s death, the decedent’s estate must go through probate. This is owing to the fact that court approval is required for the personal representative under the will to have the legal authority to transfer assets on behalf of the decedent. This does not apply to assets that are jointly held or are subject to a beneficiary designation.

A little extrapolation before we go on. First of all, a “testator” is one who makes a will. A “testatrix” is the female version of a testator. “Probate” is the judicial process of administering an estate. An “estate” is all one’s stuff. A “personal representative” is the person who the testator or testatrix names during his or her lifetime to be the one who will usher the estate through probate. “Jointly held assets” are, for example, real property held in joint tenancy.Since both owners already own the property, on the death of one, the asset is already “transferred” to the survivor. “Beneficiary designations” occur in instances such as life insurance policies where a person is named in the insurance contract who will be the one to collect the benefits upon the insured’s demise.

Whew!

An example here might help.

Say Joe Schmoe owns real property in Minturn. Upon Joe’s death, t’aint no one who has legal authority to sign a sales contract from Joe or a deed transferring his property to a buyer. Joe’s wife, Mrs. Schmoe, submits his will to the Eagle County District Court, the county in which Joe resided at the time of his death. Letters testamentary will be issued by the court stating that his widow, Angela, has legal authority over Joe’s estate. She can now sign the sales contract and deed to the buyer.

While Joe is alive, if he becomes mentally incapacitated, Angela would need a financial power of attorney to manage financial assets solely in Joe’s name. A power of attorney is a document whereby one person is given legal authority by another to act on the second person’s behalf within a certain sphere. A financial power gives the designated person the authority to act on the grantor’s behalf regarding financial matters whereas a medical power of attorney gives the designated person authority to act on his or her behalf regarding medical decisions if and when the grantor cannot act on his or her own.

In a revocable trust-based plan, the trust that is created will be the owner of Joe’s assets. At law, the trust will have a legal existence separate and apart from Joe. It is as if Joe and the Trust are different legal beings. Therefore, if the revocable trust is the owner of Joe’s assets at the time of his death, no probate (court approval) is required because his successor trustee already has the legal authority over those assets owned by the Trust.

OK, a little more ‘splainin’. A “revocable” trust is different than an “irrevocable” trust, the difference being — perhaps not surprisingly — that in the first, the trust may be revoked or changed during the grantor’s lifetime and in the second, it is set in concrete. The “trustee” is who manages the trust, in the case of a revocable trust, it will be the grantor (the person establishing the trust). The successor trustee is the person named in the trust who will take over its management if and when the grantor becomes incompetent or dies.

You may ask: “What is there to “manage?” Say Joe transfers the Minturn property into the trust. Bills will have to be paid; utilities, taxes, and the like. “Management” simply means doing those ordinary things necessary to maintain and provide for the property in the same way Joe would do if it were Joe and not the trust that owned it.

Employing the same facts as in the first example, Joe owns the Minturn property. At the time of his death, Angela is the successor trustee. As such, Angela has the immediate legal authority to sell the property — no court approval is required since the trust still owns it, the only difference being that Angela, and not Joe, is now at the helm.

If Joe is alive and becomes mentally incapacitated, his disability trustee, Angela, has the authority to manage those assets that are owned by the trust and a financial power of attorney is not necessary.

Trusts can be very useful if out of state property is solely owned in one person’s name. If Joe owns property in Phoenix at the time of his death, not only does Angela have to open his estate in Colorado, but would also need to open his estate in Arizona to transfer the real property there (called “ancillary probate”). If a trust owned the Phoenix property, no probate in Arizona would be required.

A potential drawback to a revocable trust-based plan is if the ownership of assets is not transferred to the trust during the grantor’s lifetime, she or h may end up in probate despite the grantor’s best intentions. As such, in a trust-based plan, you also have a will that states the beneficiary is the trust. This belt-and-suspenders approach assures that, in the event an asset is not transferred to the trust during lifetime, it will be poured into the trust at death. Any assets transferred to the trust from the will would, however, have to go through probate.

One final bit; a revocable trust uses the grantor’s social security number for tax reporting, so no additional tax filing would be required. IRS Form 1040 would still be the return to file for his personal tax return. Upon the grantor’s death, when the trust becomes irrevocable, then a new tax ID number would be required from the IRS.

Do you want or need a trust? Well, yeah… maybe.


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