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A Living Trust or a Will?

8 September 2008 6,020 views No Comment

You Probably Qualify to Make a Will in Texas
You must be at least eighteen (18) years old, married, or in the armed forces, and of sound mind;
A will must be signed by the testator (or “by another person for him by his direction and in his presence”); A will must be attested to by two (2) witnesses above the age of 14 who are credible, i.e., not non compos mentis; and The witnesses who subscribe their names to the will must do so in the presence of the testator.

Afraid of the Hook – Pick a Will
Formal Typed Will:
96% of the individuals who have a will have this form. A typed will may not contain handwritten strikeouts or interlineations, even if initialed by the testator.

Holographic Will:
must be “wholly in the handwriting of the testator” and signed by him/her. The down side of this will is that it is often litigated for lack of testamentary intent and is only recognized in a minority of states. Also, planning alternatives are not available to avoid or reduce estate taxes. Holographic wills are not be witnessed at time of execution.

Oral Wills (Nuncupative):
Otherwise known as a ‘Death Bed Will’, valid only as to personal property and only if made in the ‘last illness.’ If the value of the property exceeds $30.00, the oral will must be witnessed by three (3) or more credible witnesses.

Planning Takes More than a Sharp Pencil
The Internal Revenue code (IRS) provides for the imposition of the Transfer Tax to the Estate of every decedent who is a citizen or resident of the U.S. The tax rate begins at 18 percent on the first $10,000.00 and gradually increases to 55 percent at $3,000,000.00. As you can see, 40-50 percent of your estate can be lost without proper planning.

I.R.C. regulations provide for a credit against estate tax in the amount of $202,050.00. This credit is equivalent to a $625,000.00 reduction in estate taxes; the loss of one credit;

Q-Tip (Martial Deduction)
A surviving spouse, by utilizing the unlimited deduction, can defer (not eliminate) estate taxes on property they received from the first spouse to die. Thus, no estate taxes will be owed on the estate of the first spouse to die. However, upon the death of the surviving spouse, estate taxes will be owed on both the property the surviving spouse owned at death and that which they received from their spouse. If the first spouse to die leaves the property outright to surviving spouse, the property can be lost due to creditors of the surviving spouse or due to a remarriage or any other contingencies. By placing the property into Qualified Terminable Interest Property (QTIP) trust, the survivor will receive income at least annually, and have the right to principal if needed. The property while held in trust will not be subjected to the survivor?s creditors or accessible by a new spouse. The spouse whose Will created the QTIP trust, retains the control as to who will receive the property upon the survivor?s death. Thus, you can ensure that your children will not be disinherited by the survivor while not limiting the survivor?s rights to the property during their lifetime.

Generation-Skipping Trust
IRC provides for a Generation Skipping Transfer exemption of $1 million per donor which may be allocated by the individual (or their executor) to any property with respect to which such individual is the transferor. Generation Skipping does not mean we skip your child’s level from a benefit standpoint; it only means we skip the child’s level from a tax standpoint. Thus, upon the death of both parents, the child can be the beneficiary of the Generation Skipping Trust (having rights to both principal and interest), and upon the child’s death the trust will terminate and pass to the grandchildren without estate taxes being due upon the child’s death.

Inter-Vivos Trusts
During life, an owner can create one or more trusts, revocable or irrevocable, in which he/she may retain an interest until death. It makes no difference whether the trust is irrevocable or revocable (as long as the owner has not revoked it prior to his/her death, or has not revoked it by means of his/her will if the trust contains a provision allowing for such means of revocation). Once established during the owner’s life, the trust has a life of its own (completely aside from questions of federal income tax) and continues until the time of its termination as provided in its provisions, even though the time of termination is subsequent to the date of death of the owner (also known as Grantor or Settlor of the trust. This trust completely avoids the probate process, unless it provides for being ‘poured over’ into the owner’s will particular circumstances, such he successful launch of an attack by someone against the validity of the trust at any time. In effect, a ‘reverse’ pour over. This way, the attacher would not only have to contest the living trust, but also the Will. Trusts of this nature can have different purposes. Some examples are:

Living Trust

A living trust is probably the most encompassing form of inter vivos trust. Owner creating trust immediately transfer most of his/her property to the trust with someone, perhaps himself/herself, being the initial trustee.

Why Use a Living Trust?

  • Avoid the probate process;
  • Have the trust take the place of a power of attorney;
  • Protection against a future attack questioning competency, with family member becoming guardian and thereby in control of property; and
  • Possible help to protect assets from creditors.

What are the Advantages of a Living Trust over a Will?

  • Avoids Claim of Incompetency. The living trust serves as a conservatorship in the event of incapacity (incompetency) or in the place of a court in a incapacity proceeding; provide benefit for the owner and his spouse (if any) for the rest of their lives. It should fen off any attack a member of the family with the intention of taking control of the property.
  • Avoids Problems of a Power of Attorney. A living trust is stronger than a power of attorney or designation of a future guardian. A trust could proceed easily and more inexpensively than a guardianship and avoid the constant presence of a court. An individual or entity approached, such as a bank, broker or title company, would far more likely to be agreeable to dealing with the trust. There could also be the question of the recognition given in a state where property is located to the law of that state where the power of attorney was signed.
  • Protection in Case of Divorce. A living trust can possible offer protection in case of a future divorce. In the case of some non-community property states, inter vivos (living) trusts have been used by individuals in common law states with varying degrees of success to defeat the statutory shares of surviving spouses. There could also be the interrelation of forced heirship and a living trust, and thus the possibility of using trust to defeat the statutory share of a child.
  • The 65 Day Rule. A living trust has greater flexibility than an estate in timing its distributions by taking advantage of the ‘65 day rule’ of the IRC. Distributions made during the first 65 days following the end of the trust?s tax year are treated for all purposes as though made on the last day of the previous tax year to the extent that the trustee elects to do so.
  • Lower Income Tax Bracket. A living trust would be an additional separate taxpayer after death, if there is in any event a will covering some property. This would provide the advantage of perhaps keeping the overall bracket lower.
  • No Public Record. A living will is not a matter of public record.
  • Avoids Probate. A living trust avoids probate to the extent that it had been fully and properly funded. Fully funding a living trust with all the Grantor’s assets would avoid the possible need for an ongoing dependent probate administration which could be time consuming and expensive.
  • Defense Against Challenge. It is normally harder to challenge a living trust than a will as to its validity. For one thing, in the case of a living trust a contesting party must initiate the legal action. One of the greatest obstacles in setting aside a living trust is for the attacker to obtain standing to sue.

Okay, I want a Living Trust, Right?
In the great state of Texas, there are advantages for most with a will over a living trust:

  • Larger Income Tax Exemption. A larger annual exemption from income taxes is available ($600.00, as against $300.00 for a ’simple’ trust or $100 for a ‘complex’ or other trust).
  • Lower Income Tax Bracket. A will (even if it only covers some property), in conjunction with a living trust, can spread income over two tax brackets, and thus perhaps keep the overall bracket down.
    Less Preparation Cost. A will is cheaper to draft than a trust, and no immediate funding is required.
  • Easier to Read. A will is easier for clients to understand.
  • Easier to Fend Off Creditors. There is also the consideration that because of the provisions of the Probate Code, it might well be easier for the executor or other personal representative of a will that has been probated to effectively (and legally) avoid various creditors than would be the case with respect to the trustee of a living trust.
  • No Throwback Rule. An estate under a will escapes the “throwback rule” upon later distribution of income taxes to devises, legatees, or a testamentary trustee. The ?throwback rule? of the IRC applies to all trusts, even a post-death living trust, but not to an estate under a will. The estate could thus assume part or all of the income of a pre-death trust which terminates, when the estate would otherwise have little, if any, income of its own.”Throwback Rules” tax beneficiaries on distributions of income accumulated by the trust before the year of distribution as though the income had been distributed currently to the beneficiaries in the years received by the trust.
  • Takes Advantage of Tax Losses. In transactions between an estate and its beneficiaries, losses are recognized for income tax purposes. This rule would also apply to an election to treat property distributed in kind as a sale, rather than allow the basis to be carried to the distributee and carry distributable net income only to that extent.
  • An estate may still elect a fiscal tax reporting year. All trust tax years beginning after 1986 must close on December 31, whereas an estate may still choose any fiscal year.
  • An estate is not required to pay estimated taxes for its first two taxable years. Also excused is a post-death living trust, if it constitutes a grantor trust as to the decedent and if either (a) there is a pour-over will, or (b) the living trust is primarily responsible for paying debts, taxes and expenses of administration.
  • Where a charity is the residuary beneficiary of an estate, capitol gains realized during the estate?s period of administration are exempt from the income tax “charitable set aside” deduction. As a result, the only way a living trust could avoid income tax on such capital gains would be to make a current year distribution of the gains to the charity.Where a decedent had actively participated in a rental real estate tax shelter, his/her estate (but not his/her living trust) may deduct up to $25,000 or losses from that venture for the 1st two taxable years after death.

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