Table of Contents
- What happens if I do not have a will?
- What is a will and will it suffice?
- What is a living trust?--living trust defined
- What is a living will?
- What is a Durable Power of Attorney for Health Care?
- What is a Durable Power of Attorney for Property?
- Gift Giving
- Do I have to value my assets as they go into the Living Trust?
- Should my personal effects be placed inside the Living Trust?
- Should I put my safe deposit box in the name of my Living Trust?
- What assets should be placed in the Trust?
- Do I need to change ownership of my stocks and bonds?
- Do I need to transfer ownership of stocks and bonds that are held in street name?
- What about naming the beneficiaries of Life Insurance Policies?
- Should my life insurance policies be placed inside the Living Trust?
- Should I put lRAs, Profit Sharing and Keoghs inside the Living Trust?
- Can any assets be kept outside the Living Trust such as a joint checking account?
- Do I place rental properties in my Living Trust, and if so, how is the rent treated?
- Is it costly to transfer assets into the Living Trust?
- Who transfers the assets into the Living Trust?
- Can I transfer my assets from my Living Trust?
- Can I sell my assets once they are in a Living Trust?
- What do I do with the cash I receive from the sale of my home which is in trust?
- How should I name assets acquired after my Living Trust is created?
- Will my homeowners policy be affected by the land trust, and do I need to notify my insurance company?
- Will I lose my exemption on my home if it is in a revocable land trust?
- Should I transfer my mortgage into the trust?
- If I place my home in the trust, will it affect my mortgage? Can the mortgage company "call" my mortgage?
- By placing my home inside the land trust, will I cause my home to be reassessed for property tax purposes?
- Should a car go into the Living Trust?
- Do I put recreational vehicles and boats into the Living Trust?
- Can I borrow against my assets in my Living Trust?
- Can I pledge my Living Trust as collateral for a loan?
- Is there any circumstance where I should keep any assets outside the Living Trust, so they can be probated?
- Do I need to liquidate the Living Trust assets in order to distribute the assets?
What happens if I do not have a will?
The State of Illinois prepares your Last Will and Testament for you as follows:
I, John Doe, of Chicago, Illinois, hereby do make, publish and declare this to be my Last Will and Testament because I failed to sign a valid Will before I died.
Article One: I give my wife one-half (1/2) of any assets which I own in my name, and I give my children the remaining one-half (1/2). This could be a financial burden upon my wife. If my wife shall encounter financial problems, I hope that my children will provide my wife with any additional support which she requires.
A. I appoint my wife as Guardian of my children. However, she shall be required to report to the Probate Court each year and provide them with a written account of how and why she spent the money necessary for the proper care of my children.
B. I direct my wife to produce to the Probate Court a Performance Bond to guarantee that she exercises proper judgment in the management of my children's share of my Estate.
C. My children, as soon as they reach legal age, may demand and receive a complete accounting from their mother of all her financial actions with their money.
D. When my children reach age eighteen (18), they shall have complete control over their shares of my Estate. Like any parent, I would like for my children to graduate from College. However, because nobody shall have any right to question how my children decide to spend their respective shares, I can only hope that they do not decide to spend all of their money on fancy cars and vacations rather on College tuition.
Article Two: If I have no children, I give my wife all my assets which I own in my own name. If my wife shall subsequently die without a Will, all the assets which she owned in her name, including any property which she inherited upon my death, shall be distributed to her parents, brothers, and sisters, in equal shares.
Article Three: Should my wife remarry, and also die without a Will, her second husband shall receive one-half (1/2) of everything which my wife owns to her name, including any property that she inherited upon my death. If I had made a Will during my lifetime, I would have provided for the ultimate distribution of my Estate to my children, and thereby, excluding my wife's second husband.
A. Should my children need some of this share for their support, the second husband shall not be required to provide any support for my children with his share.
B. The second husband shall control the distribution of his share. He may even decide not to leave any of his assets, including any assets which he inherited from my wife, to my Children.
Article Four: Should my wife predecease me or die while any of my children are minors, I do not wish to exercise my right to nominate the Guardian of my children.
A. Rather than nominating a Guardian of my preference, I direct that my relatives and friends get together and mutually agree upon a Guardian of my children.
B. In the event that they fail to agree on a Guardian, I direct the Probate Court to make the selection. If the Court wishes, it may appoint a stranger acceptable to rather than a family member or friend.
Article Five: Under existing law, there are certain legitimate avenues open to me to lower death taxes. Since I prefer to have my money used for governmental purposes rather than for the benefit of my wife and children, I direct that no effort be made to lower my taxes.
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What is a will and will it suffice?
A. Will is a legal document created by law to assist the Probate Court in the payment of your debts including taxes and finally in the distribution of your assets to your heirs and legatees upon the termination of the probate estate. There are administrative fees and costs such as executor’s and attorneys’ fees as well as court costs. The system has been simplified by the use of independent administration which eliminates court strict supervised administration over the procedure, unless a problem or lawsuit arises.
Will the will suffice? Maybe, but only if you have a small estate without complications -- not over $50,000. Just like joint tenancy is not a substitute for a will, there can be serious tax and other consequences.
- loss of control - need signature of joint owner
- easy to unintentionally disinherit heirs
- exposure to lawsuits and joint owner’s debts
- ultimate probate upon death of surviving joint tenant owner
- guardianship upon disability
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What is a living trust?--living trust defined
A living trust is a document much like a will covering the administration of your affairs while:
1. You are living and able to act or while, or
2. You are living and unable to act or disabled and incapable of acting and/or
3. Upon your death.
All of your substantial assets are placed in the name of the trust, thereby eliminating the necessity of probate and thereby saving probate fees and costs depending upon the selection of the trustee.
The trustee can be yourself, making it a self declaration of trust with no fees, a Bank or Trust Company and/or an individual third party and a Trust Company or Bank which charge fees, or lastly an individual family member or trusted friend.
The trustee administers the trust, pays your bills, invests your surplus funds and liquidates assets when necessary to cover your expenses and upon your demise, distributes your assets to your designated beneficiaries after paying your debts including federal state taxes where the trust value is over $1,000,000 and there is no surviving spouse and/or no charitable remainder. All of this is done without probate fees and expenses, except for Bank or Trust Company fees and then you could use a family member to eliminate those fees. The flexibility of a trust is much greater and a trust protects you during your life a well, so in the event of an illness, you are still protected from probate!
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What is a living will?
A living will is a document in which a person can express his or her desire to have death delaying procedures withheld or withdrawn in the event you are suffering from a medical condition which the attending physician has determined to be terminal. It is very limited and you cannot appoint anyone to make such a decision except your physician and then only where he or she determines that your condition is terminal. It will not be effective if you have an active effective Power of Attorney for Health Care.
It is worthwhile if you live alone, have no children or that they live at a distance. It gives your doctor a guideline, but there is very little flexibility and is not much better than the health surrogate act which permits even a friend to make the decision if you become ill without a Power of Attorney for Health Care.
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What is a durable Power of Attorney for Health Care?
A Durable Power of Attorney for Health Care is a document in which a person called the principal, namely you, can delegate to another person, including a trusted friend or family member, the power to become your agent, who will act for you for any health care decisions you are unable to make. It may be used instead of or together with a living will. Your agent, who does not have to be an attorney, will speak for you and make health decisions according to your specific wishes when you are physically or mentally incapacitated.
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What is a Durable Power of Attorney for Property?
A Durable Power of Attorney for Property is a document in which you as principal can delegate to another person, including a trusted friend or family member, the power to become your agent who will act for your for any type of property decisions where you are unable to make them. The agent, who does not need to be an attorney, will speak for you and make decisions according to your prescribed wishes even when you would be physically or mentally incapacitated.
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Gift Giving
A brief summary of some of the rules for making gifts is set forth below:
1. There is no federal gift tax on gifts of a present interest of $11,000 or less. There is no gift tax on gifts made between a husband and wife as long as they are both citizens of the United States. (We will discuss this particular issue in more detail below.) The important point of the $11,000 gift exclusion is that it applies to as many gift recipients as your choose. Also, the joint gifts by a husband and wife can be up to $22,000 without paying any gift tax. If the gifts are $11,000 or less per recipient, there is no need to file a gift tax return. If the gifts exceed $11,000 per recipient, a gift tax return must be filed so that a married couple may split the gifts in order to get the two $11,000 exclusions.
2. In addition to the $11,000 annual exclusion, there is a federal gift (and estate) tax credit available to each individual for property which may pass without the payment of tax during life and on death. The amount of property protected by this minimum tax level is $1,000,000. The important point to remember is that the $1,000,000 is a number which combines taxable gifts made during life and taxable bequests made at death. Thus, if gifts in a year exceed $11,000 per recipient, the amount of excess will be charged against the credit shelter amount of $1,000,000. It is the reduced balance of the $1,000,000 credit shelter amount that is left to protect against taxes in the estate tax return. This exemption amount will increase gradually over the next few years as follows:
2001 Tax Act: The Gift Tax
2001: No Changes
Top gift tax rate remains at 55% for cumulative lifetime transferred more than $3 million; gift tax exemption remains at $675,000.
Effective 2002-2009
Increased gift tax exemption, lower gift tax rates.
- Top gift tax rate is gradually reduced from 55% in 2001 to 45% in 2007.
3. The marital deduction has been expanded on gifts between husbands and wives where both are citizens of the United States. Under the present law, one spouse can give to the other an unlimited amount of property without a gift tax being charged on it. This unlimited marital deduction is designed to provide the greatest security for the surviving spouse in the belief that the tax on the death of the surviving spouse will be much larger and make up for the lost estate tax on the first death.
4. If one of the spouses is not a citizen of the Untied States, special rules apply. Basically, there is no unlimited marital deduction on gifts or bequests made by a spouse to a non-citizen spouse. There are two situations that are exceptions to this exception. They are as follows:
(a) A spouse can give his or her non-citizen spouse up to $100,000 in gifts each year without having to pay a federal gift tax and without reducing his or her $675,000 credit shelter amount. In making this gift, however, a federal gift tax return would have to be filed.
(b) A bequest to a non-citizen spouse may be protected by the deferral of the federal estate tax (on amounts in excess of $1,000,000) if the gifted property is transferred into a "Qualified Domestic Trust." Under a Qualified Domestic Trust, the bequest into trust on the first death is taxed at the time of the second death. The rules on Qualified Domestic Trusts are quite complicated, but they can save estate taxes.
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Do I have to value my assets as they go into the Living Trust?
Valuation of your assets before putting them into a Living Trust is important particularly when a husband and wife are each creating Trusts. For estate planning purposes, it is wise to equalize both the husband's trust and the wife's trust.
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Should my personal effects be placed inside the Living Trust?
This is a personal decision based upon the value of your personal property (such as furniture, appliances, furnishings, antiques, artworks, china, silverware, glass, jewelry, books, wearing apparel, and so on) and how you wish to have it ultimately distributed to your heirs. By transferring all of the personal effects into the Trust, you eliminate any future conflict among the heirs.
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Should I put my safe deposit box in the name of my Living Trust?
It is not necessary to put your safe-deposit box in the name of the Living Trust. However, such an action is good preventive medicine. Therefore, to be on the conservative side, you may wish to put your safe-deposit box in the name of the Trust.
What assets should be placed in the Trust?
All bank accounts (savings, certificates of deposit, money market, etc.), securities (stocks, bonds, mutual funds) and special items of value.
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Do I need to change ownership of my stocks and bonds?
Absolutely! All of your assets must be recorded in the name of your Living Trust in order to avoid probate.
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Do I need to transfer ownership of stocks and bonds that are held in street name?
Yes, stocks held in street name also should be transferred. Simply have your brokerage account changed to the name of your account to the trustee of the Living Trust.
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What about naming the beneficiaries of Life Insurance Policies?
The insurance agents should be notified to change the beneficiary to the then acting trustee of your trust.
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Should my life insurance policies be placed inside the Living Trust?
Your Living Trust should be the beneficiary of all of your life insurance policies. By making your Trust the beneficiary of all policies, you will avoid probate, regardless of who may die simultaneously with the insured person. If your Trust is not the beneficiary of your life insurance policies (and you and the beneficiary die simultaneously), the insurance money must go through probate before the money can pass from the now-deceased beneficiary to any heirs.
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Should I put lRAs, Profit Sharing and Keoghs inside the Living Trust?
The Living Trust may be the contingent beneficiary of IRAs, Profit Sharing and Keoghs. Your spouse should probably be named as primary beneficiary giving the spouse all roll-over privileges. Since circumstances differ in each situation, consult your advisor.
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Can any assets be kept outside the Living Trust such as a joint checking account?
All assets in an individual's name over $50,000 are subject to probate. Small or convenience accounts need not be placed into the Trust. Upon the demise of the survivor, any asset under $50,000 can be handled through a Small Estate Affidavit and placed in the Trust.
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Do I place rental properties in my Living Trust, and if so, how is the rent treated?
Yes, you should put your rental properties into your Living Trust. The rental income will be recorded on your Form 1040, just as before, as will the depreciation expense on your rental real estate.
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Is it costly to transfer assets into the Living Trust?
Except for real estate deeds, transferring assets into a Living Trust should have no cost. Legal counsel should transfer real estate deeds, unless you specialize in this particular area. The cost of transferring deeds should be nominal (less than $200). You can transfer all other assets by letter of transfer, and no fee should be charged. Stocks and bonds typically should be transferred by your stockbroker, as a service to you, without fee. In some instances, there may be a small charge to transfer stocks and bonds into the name of your Trust. Overall, the cost of transferring your assets into the Trust should be minimal.
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Who transfers the assets into the Living Trust?
With the exception of your real estate deeds (which should be transferred by legal counsel), you can easily transfer the assets into the Trust yourself by using the appropriate transfer letters.
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Can I transfer my assets from my Living Trust?
The grantor is the individual who places the assets into the Trust, and this same individual (or individuals) has the absolute right to also transfer those assets from the Trust or do whatever is desired with those assets.
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Can I sell my assets once they are in a Living Trust?
You have exactly the same control over your assets--the right to buy, sell, or transfer the assets when they are in the Trust as you did when the assets were outside the Trust.
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What do I do with the cash I receive from the sale of my home which is in trust?
Until you are ready to make another investment, you should place the proceeds from the sale of your home in a savings account that is already in the name of the Living Trust. It is extremely important that you do not place such a large amount of money in your checking account--which is usually outside your Living Trust. If you do so and you and your spouse die, those funds in your checking account outside your Trust must go through probate!
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How should I name assets acquired after my Living Trust is created?
Acquiring assets after you have a Living Trust is done just as easily as before. Simply tell your real estate broker, stockbroker, or bank officer to record title to the asset in the name of your Living Trust.
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Will my homeowners policy be affected by the land trust, and do I need to notify my insurance company?
Your homeowners insurance agent should be notified of the change of ownership to the land trust.
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Will I lose my exemption on my home if it is in a revocable land trust?
No, you will not lose your homeowners exemption by placing your home in the name of a land trust.
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Should I transfer my mortgage into the trust?
Transferring your mortgage into the Living Trust is not necessary, because liabilities follow assets. You are transferring your assets, not the liabilities associated with those assets.
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If I place my home in the trust, will it affect my mortgage? Can the mortgage company "call" my mortgage?
This possibility does exist. Therefore, we recommend writing to the mortgage company to obtain permission to transfer the title. Generally this does not present a problem since in most instances, the same individuals continue to maintain control of the real estate.
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By placing my home inside the land trust, will I cause my home to be reassessed for property tax purposes?
No, your home will not be reassessed by placing it in a land trust. This transfer is exempt from the transfer tax.
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Should a car go into the Living Trust?
No. In the event of an automobile accident, your entire trust would be subject to any lawsuit that may be filed against you.
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Do I put recreational vehicles and boats into the Living Trust?
Yes, such items should be put into the Living Trust, because they are usually of substantial value. Putting such items into the Trust acts as a precautionary measure against the possibility of probate.
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Can I borrow against my assets in my Living Trust?
Whether your assets are inside or outside your Trust, your ability to borrow money against them (that is, use the assets as collateral for a loan) has not been affected in any way.
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Can I pledge my Living Trust as collateral for a loan?
Pledging your Living Trust as collateral for a loan does not satisfy lenders. You may pledge your assets, but not your Trust. Think about the question from the viewpoint of the lender: if you have control over your Living Trust and pledge your Living Trust as collateral, the lending institution has no assurance that you would not withdraw those assets from the Living Trust, leaving the lending institution with a Living Trust that contains no assets.
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Is there any circumstance where I should keep any assets outside the Living Trust, so they can be probated?
Only in a rare situation should it be necessary to keep assets outside the Living Trust in order that they can be probated. If you think that your estate might ultimately be subject to a liability suit, then it might well be appropriate to leave certain assets outside the estate, which can then be probated. Although such situations are infrequent, this approach is appropriate for successful real estate developers, some doctors, and some very well-known people of high public exposure.
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Do I need to liquidate the Living Trust assets in order to distribute the assets?
No, liquidation of the Living Trust assets is not required. Preferably, the assets will be distributed directly to the heirs, rather than selling the assets and then distributing the resultant cash.
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Copyright © 2002 Owens Owens & Rinn, Ltd. All rights reserved.
Revised: February 28, 2002
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