Mary Owens: Exploring the benefits of a living trust
The need for an estate to have a trust is one of the most frequent questions I receive from clients. There is a common misconception that the sole purpose of a trust is to avoid probate.
While is it true that assets held in a trust usually avoid the probate process, it is equally true that a trust is far more useful than just the sole purpose of avoiding the public process of probate proceedings. Let’s explore the other benefits of a trust.
Assistance with the aging process
As we get older, most of us need assistance with our bill paying and managing our investment assets.
Without a trust, one of the most frequent ways folks arrange for assistance is to have a family member or other trusted friend become a joint account holder on bank or investment account with the aging individual.
While this sounds like an easy solution on the surface, it creates far more problems than it solves and adds significant risk to the financial well being of the aging person.
A gift tax return may have to be filed
A joint account holder has equal rights to the funds in the bank or investment account. Moving the assets from a single name into a jointly owned account is considered a gift.
Unless the joint owner is a spouse, a gift return would be required to be filed if the total funds being transferred to the new joint owner exceeded the annual gift tax limits.
The transferred assets are subject to creditors claims of the new joint tenant
If the new joint owner is not financially responsible, it is possible for creditors to levy the joint account for judgments of the new joint owner. All assets owned previously that were placed into joint tenancy with another person can be seized by creditors, taxing authorities and others.
It is even possible to have the account be seized for back child support and alimony. I am frequently told, “my child is ever so responsible, he or she would never let this happen.”
I can’t count the number of times I have heard this only to later learn of financial issues neither the parent or the child could imagine could happen.
Everything from the unexpected disability of the child, a change in their financial condition or “mom wouldn’t mind if I paid this bill out of her account.” The most damaging non-financial aspect of such an event, is the strain that it puts on the family relationships.
At death an unintended disproportionate estate distribution may occur
If the assets are placed in a joint tenancy account, at the death of one of the tenants, the remaining tenant legally is entitled to all assets in the account. If there is only one child, this is usually not a problem. But if there is more than one child, tempers can fly with the remaining children because the account can create a disproportionate distribution of assets.
Legally the child who is the joint tenant is not required to share and share alike with the remaining siblings. If they do share the joint tenant remaining balance with their siblings, a new gift has just occurred. And if the gift is over the annual gift tax limits, a gift tax return should be filed by the surviving joint tenant.
How would a trust avoid these problems?
Assets held in a revocable living trust are owned by the person who created the trust (known as the grantor) until the death of the grantor. Usually the grantor is the initial trustee of the trust. The initial grantor/trustee has all the rights over the assets that he or she had before they went into the trust. Once an initial grantor/trustee needs some assistance, there are several options available to them to get the assistance with the bill paying and asset management.
Option one: Appoint a trustee delegate to the account whose sole authority on the account is to be able to sign on checks or obtain information on the account. A trustee delegate is not a trustee and can be removed at any time by the initial grantor/trustee.
If concerns arise about the credibility, credit stability or integrity of the trustee delegate, the person can be removed quickly, without delay or court intervention. This option is utilized by a grantor/trustee that is not yet willing to give up any long-term control to the chosen successor trustee named in the trust.
Option two: The grantor/trustee becomes a co-trustee with the successor trustee named in the trust. In this situation, the new co-trustee cannot make decisions without the consent of the grantor/trustee. This situation is usually applied when more significant assistance is needed by the grantor/trustee but, once again, the grantor/trustee is not yet willing to give up all control over the assets.
Option three: The grantor/trustee resigns as the trustee and appoints the successor trustee named in the document with the successor trustee assuming full control of the assets. This situation is used when the grantor/trustee needs significant assistance and no longer wishes to be involved, or is unable to be involved, in the management of the assets within the trust.
These three options provide better protection to the grantor/trustee
A trustee delegate, a co-trustee and a successor trustee are not owners of the assets of the trust. Judgments, liens and debts filed against them as individuals do not expose the assets of the trust to seizure by creditors, taxing authorities, and others.
A trustee delegate, a co-trustee and a successor trustee are all fiduciaries, and as such, cannot use the assets for their personal benefit. If they do, they can be required to repay those assets to the trust.
Additionally, since the assets are not owned by them, they are not entitled to the assets at the death of the grantor except as outlined in the trust document. By not owning the assets, unintended disproportionate distributions are avoided. Transfer of assets into a revocable living trust by the grantor/trustee do not create an immediate gift.
Therefore, filing of gift tax returns would not be required unless the grantor/trustee intended to make gifts.
Lastly, the family harmony has a much higher chance of being maintained in a trustee relationship. Beneficiaries can request the successor trustee to provide an accounting of transactions, reducing the appearance or suspicions of inappropriate use of funds. In most cases this is a requirement of the trustee.
Next month I will discuss the benefits of a trust when unexpected incapacitation occurs with the grantor/trustee.
A well written trust, combined with a durable power of attorney and health care directive, can reduce the stress and grief for the family. Without such documents, the family is frequently involved with a court system process that is even more burdensome than probate.
Mary Owens, principal/branch manager, RJFS, 426 Sutton Way, Suite 110, Grass Valley, 530-272-7500. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Owens Estate and Wealth Strategies Group is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax, legal or mortgage issues, these matters should be discussed with the appropriate professional. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Mary Owens and not necessarily those of Raymond James.
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