Last week, we began a simple explanation of why it’s so important for you to establish an estate plan even if the total value of your assets is small enough to pass untaxed by the federal ($5 million exemption) and the state (Maryland: $1 million exemption) governments. We discussed the most commonly employed means of protecting your estate: the will. Today, we will introduce you to a second that you should really give some thought regardless of whether you consider yourself “rich:” the trust.
The Revocable Living Trust
Another basic of estate planning is the revocable living trust. The revocable living trust has several goals, but a basic one is to avoid probate. Probate is a court-supervised legal process intended to make sure a deceased person’s assets are properly distributed. Probate typically means (1) expensive legal fees and (2) mazes of red tape. Also, if your estate goes through probate, your financial affairs become public information. (So yes, a second reason to use a revocable living trust is privacy.)
Effectively, probate is like trying to cross the four-and-a-half mile Chesapeake Bay Bridge on Memorial Day weekend: It consumes money, sanity, and nobody involved can really fathom why they thought Ocean City was worth it. (Or perhaps your family vacations are a bit more idyllic than all that.) The difference is there is no convenient detour allowing you to discreetly bypass the bridge when it’s bumper-to-bumper; there is when it comes to probate. Enter the revocable living trust.
You establish the revocable living trust and then transfer legal ownership of certain assets (such as your home, your cars, your antique furniture, and your coin collection) to the trust.
In the trust document, you name a trustee to be in charge of the trust’s assets after you die, and you specify which beneficiaries will get which assets from the trust.
The trustee could be your CPA or attorney, a financial institution, or a trusted friend or relative.
Because the trust is revocable, you can change its terms at any time, or even unwind it completely, as long as you are alive and legally competent.
For income-tax purposes, the existence of the revocable living trust is completely ignored as long as you are alive. As far as the IRS is concerned, you still personally own the assets in the trust. So you continue to report on your Form 1040 the income generated by the trust’s assets and any deductions related to those assets (such as mortgage interest on your home).
For state-law purposes, however, the living trust is not ignored. Done properly it avoids probate. Let me know if that interests you.
But don’t call me if you’re stuck on that damn bridge.
Good luck and good hunting.
(Entry originally posted March 25, 2011. Updated today.)
If you have any questions about setting up a living trust or planning your estate, you can find out how to reach us at our website: TheFisherLawOffice.com. You can also find us at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice.