Many unmarried couples (either same sex or opposite sex) use joint tenancy with right of survivorship as a way to transfer their respective ownership shares to their partner. Most estate-planning laws are oriented toward “traditional”
families (a married couple, 2.53 children, and so on). If you’re in an unmarried relationship and you co-own your home with your partner, joint tenancy with right of survivorship may be an ideal way to protect your partner’s right to stay in the home after you die (and vice versa), even though the law doesn’t recognize your relationship in the same way as — and with the same rights of — a married couple.
Setting up a living trust
Book 5, Chapter 4 examines trusts in-depth, but here we look at the popular living trust as a will substitute form. A living trust is created while you’re alive (thus, the word living), unlike a testamentary trust, which is created at your death through your will. (Technically, a testamentary trust is similar to a will because it provides for property transfers at your death.)
You place certain property called trust principal into a living trust. (You may also see the word corpus referring to the property used to fund the trust, which often makes people nervous,
considering how similar that word sounds to corpse — makes sense because both corpus and corpse come from the same root meaning “body.”)
When you create a revocable living trust, you can be in charge of your own living trust. When you die, the revocable living trust becomes irrevocable (meaning you can’t “undo” the trust — more on that in Book 5, Chapter 4) — and the trust principal (again, the property that you have placed into the trust) then passes to your beneficiaries without having to go through probate.
By making a trust revocable, you can dissolve the trust at any time up until death or until the trust document makes the trust irrevocable (such as in the event of your incapacity).
Roles for everyone!
The best way to examine a living trust is to look at the parties and roles involved. Living trusts involve the following roles (note that one person can play more than one role, as
explained later in this chapter):
Trustor (or settlor) Trustee
Successor trustee
Income beneficiaries (or current beneficiaries) Remainderman (a “special class” of beneficiary) Designated person managing minor beneficiaries
Don’t panic at the legal jargon. In a typical trust, the trustor (or settlor) creates the trust, and the trustee has the legal interest in managing the trust for the income beneficiaries who will have beneficial interest or right to use the trust property. After the beneficiaries receive their portion of trust, the remainderman is the trust beneficiary who receives the remainder or what is left over.
Book 5, Chapter 1 discusses two main types of property interest: legal, the right to manage
property, and beneficial, or the right to benefit from the property. Trustees have the legal interest to transfer and manage property in the trust while beneficiaries have the right to use the property.
The successor trustee is the person you name to become trustee when you die (or become incapacitated) if you’re currently the named trustee. Think of your successor trustee as the personal representative of your trust. Look for a successor trustee who has the same attributes recommended for a personal representative earlier in this chapter. Typically, people name a spouse, child, or trusted friend as successor trustees.
You need to appoint someone (usually referred to as a guardian or a custodian) to manage the property of minor beneficiaries — those beneficiaries who aren’t of legal age.
The paperwork — ugh!
The actual living trust document varies just as wills do. (Work with your attorney to make sure you get all the necessary information correctly on paper.) The variations may include
Designating the trustor and the initial trustee Defining trust property
Naming a successor trustee
Defining ways to revoke or amend the trust
Administering trust by trustee during trustor’s lifetime
Administering trust by the successor trustee after trustor’s death or incapacity Defining trustee’s power
Restricting beneficiary assignments (spendthrift clause)
The trust sets forth in detail how the trustor must handle the trust after you’ve died.
Advantages of living trusts
So why the frenzy over living trusts? Living trusts are a convenient way to avoid additional probates if you have real property like a house, vacation home, or income-producing investment property located in more than one state.
Real property must be probated in the state where the property is located. More than likely, your entire probate process will be slowed down because of the need to administer more than one probate and the increases in fees and costs.
Some states consider real property held in a living trust to be intangible personal
property, enabling your estate to avoid ancillary probate. If you have real property in more than one state, check to see how your state views real property held in a trust.
Privacy (as compared with probate) is another advantage of a living trust. As with other will substitute forms, your trust is a private agreement — a contract between the trustee and trustor.
However, some county recorder offices require the filing of trusts as part of the public record.
To retain the privacy of trusts, your attorney can draft a separate document called a memorandum of trust, which identifies the most basic information of the trust. Therefore, your trust usually doesn’t become public record as your will does in probate.
However, if your state has an inheritance tax, the trust’s details may be required to be filed with the state through an inheritance tax return or other document. You may need to include the amount of trust principal and the identification of beneficiaries or remainderman.
The real attraction of living trusts stems from the advantages offered beyond the typical will substitute form advantages. Living trusts offer unique advantages:
Better planning
Better protection from probate Better prediction of the future
Ability to name alternate beneficiaries Ability to name guardianships
In preparing a trust, you place property into the trust (called funding the trust), and that property is thereafter known as your trust principal. By thinking through what property to include in your trust principal, you examine what property you have.
Unlike joint tenancy, where ultimately the last surviving joint tenant holds the property that
can become part of the probate estate, living trusts provide you with better assurance of
avoiding probate. In the earlier example, if Tom and Meghan own a house as joint tenants and Tom dies, Meghan, as the surviving joint tenant, now owns the house individually, making the house part of her probate property.
But instead of joint tenancy, suppose Tom and Meghan use a living trust to hold title as co-trustors and co-trustees to the house for both of their lifetimes. If Tom dies, Meghan still owns the house in trust, and the house is not part of the probate estate. Upon Meghan’s death, the house passes from the trust to the designated beneficiaries without being subjected to probate.
And what does predicting the future have to do with living trusts? Plenty, sort of. A living trust provides you with a peek into your estate’s future and how it will be handled. If you establish a trust as the trustor and name someone other than yourself as the trustee to manage your trust, you can preview how he or she handles the management of the trust property and determine if
adjustments in your estate need to be made. No need for guesswork on how he or she will perform when you’re dead, when you can’t make any changes (for obvious reasons). You can preview the future now.
If your trust is set up to make distributions while you’re alive, you have the opportunity to see how both your trustee and beneficiaries may handle the trust principal distributions, affording you the opportunity to make adjustments if needed.
A living trust also allows you to name alternate beneficiaries if something happens to your primary beneficiary. You can’t name an alternate with other will substitute forms like joint tenancy or, as discussed later, payable on death accounts.
A living trust can also be set up to provide for you in case you become incapacitated and unable to care for your own affairs. This advantage is part of the reason living trusts are touted for the
elderly. In such a case, you can avoid the necessity of a court-appointed guardian or conservator, or at least assist those persons in carrying out their duties.
Another method of avoiding guardianship or conservatorship is by the popular durable power of attorney, usually in addition to a living will.
Disadvantages of living trusts
Keep this adage in mind when you’re planning your estate: No good will substitute goes
unpunished. Disadvantages exist no matter what road you choose, even with living trusts. These disadvantages include
Funding
Ongoing maintenance
Longer creditor claims period
The upfront funding of the living trust is a deterrent to many people. Remember, to hold title as
joint tenancy, all you have to do is change the title to property with the appropriate wording. It’s not so simple with living trusts.
Living trusts require you to execute a trust document. But beyond the paperwork, the next step in the process is the trust’s actual funding. You as trustor must transfer your property’s title to the trust. So what’s the problem? Every time you acquire property — from stocks to real estate — you must transfer title of the property into the trust. For active investors, transferring your property’s title to the trust can become a hassle. (Then think about other property, such as cars, furniture, collectibles, and so on, which can be even more of a hassle!)
If you forget to put property in your trust, the property is treated as if it was never part of the trust and is handled through probate if you have a will, or intestate succession laws if you don’t have a will. For example, if you’re the beneficiary of someone’s life insurance or if you receive property that was formerly held as part of a joint tenancy — and you forget to take care of this property for living trust purposes — then that property isn’t part of the living trust.
Trusts require monitoring to make sure that everything is proceeding in accordance with the terms of the trust. Don’t just sign a trust document and put it away. The only way to achieve the
advantage of previewing the future is to monitor the trust on an ongoing basis, which takes time and may not be for everyone.
Another living trust disadvantage is the potentially longer period for creditors’ claims. Why? In some states, trusts don’t protect property from being subject to creditors’ claims. Consequently, trustees may delay distributions to beneficiaries and remainderman until they’re certain all claims have been paid. Remember, no probate for trust principal exists, so consequently no probate process exists for the controlled processing of creditors’ claims.
If a trustee doesn’t perform certain required duties after the trustor’s death, he or she can have substantial personal liability. This reason is why trustees often delay property transfers until they’re certain all creditors have been paid.
Focusing on the costs of living trusts
You may have noticed that the costs of living trusts haven’t been mentioned as either an advantage or disadvantage. Why? Because the costs to set up a living trust can vary greatly. As with your will, you can prepare a basic living trust with preprinted legal forms or, alternatively, with an attorney.
Accordingly, the costs can range from a few dollars if you go the do-it-yourself route to more than
$1,500 for each living trust that an attorney prepares. Because a living trust is considered a contract between the trustor and trustee, you shouldn’t mess around with a contract that may contain glitches. A living trust requires careful preparation and thinking. So just like with your
will, if you decide to try to create a living trust on your own (which, again, we don’t recommend), at least have an attorney review it before execution.
Interestingly, the promotion and marketing of living trusts as part of estate planning has been anything but subtle. Some financial advisers hype living trusts especially to older citizens — giving sales pitches on how living trusts are the solution to all the world’s ills, and bombarding them with offers of expensive how-to seminars, workshops, and books on living trusts. Before exploring any of these options, make sure you understand what is being offered and what it will cost you. Although these preparations are touted as cost-saving, you’ll probably find it less
expensive to work one on one with an attorney on your living trust instead of buying an expensive, boilerplate sales pitch.
Identifying Some Less Common but Worthy Will Substitutes
Beyond joint tenancy and revocable living trusts, you have some other options for will substitutes available. Although not as common as the first two methods, the ones discussed here still provide you with the opportunity to use will substitutes in your estate planning.
Tenancy by the entirety — the spouse’s option
Tenancy by the entirety — also called interests by the entirety — is related to joint tenancy.
Similar to joint tenancy, the property’s co-owners have a right of survivorship feature that enables property to automatically transfer at the death of a co-owner to the surviving co-owner. Different states have different rules for tenancy by the entirety, so make sure your attorney advises you as you consider this type of will substitute.
There is one distinguishing characteristic of this form of will substitute: Only spouses can use it.
Unlike joint tenancy, which can have any number of unrelated parties, a husband and wife are the only persons eligible to hold property as tenancy by the entirety. The surviving spouse becomes the sole property owner.
Tenancy by the entirety follows general guidelines for marital life. Always tell your spouse what you’re doing. Accordingly, one spouse can’t transfer his or her interest in the property without the consent of or notification to the other spouse. (Remember, a joint tenant can transfer his or her share to another person without the consent or notification of the other joint tenants.)
Some states don’t allow property to be held as tenancy by the entirety. Specifically, tenancy by the entirety isn’t recognized in most community property states (Arizona,
California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), and even some common law states don’t allow it. Where tenancy by the entirety is available, a divorce changes property ownership from tenancy by the entirety to tenants in common. If you decide to explore using this will substitute form, check with an attorney to see if your state
recognizes it.
Joint tenancy bank accounts
A joint tenancy bank account is a form of joint tenancy where two or more people take title to property — in this case, a bank account — with the surviving joint tenant receiving the proceeds from the account.
With joint tenancy, a joint tenant can sever the joint tenancy without the consent or notification to the other joint tenants. Here, the bank account joint tenant can sever the relationship by
withdrawing funds from the joint account.
Gift taxes may come into play with joint tenancy bank accounts. Before you use this will substitute form, talk to your accountant and attorney to understand the implications. Don’t just ask the person at the bank who helps you fill out the forms.
Savings bonds
Yes, the same savings bonds that, along with green stamps, Hula-Hoops, and first-run shows of Leave it to Beaver, are often thought of as icons of days long ago. But savings bonds actually are a form of will substitute.
Savings bonds can be issued in two ways:
Alternative payee Beneficiary payee
When you use the alternative payee option on a savings bond, payment of the bond can go to either co-owner of the bond (you or your alternative) similar to the joint tenancy provision of right of survivorship. After one of you dies, the surviving payee is the bond’s sole owner.
By using the other option — a beneficiary payee — you and another person have a similar
relationship to a beneficiary named in your will. If the savings bond is yours, the beneficiary you have named receives the bond’s proceeds after your death.
If you have a stash of savings bonds locked away in your safe deposit box or some other safekeeping place, double-check to see what the estate-planning impact is of each individual bond when you’re inventorying the contents of and determining your estate’s value (see Book 5, Chapter 2).
PODs — payable on death accounts
They may sound rather morbid, but payable on death accounts (PODs) are a simple will
substitute form that keeps personal property out of probate. You fill out a form at your financial
institutions and designate your account beneficiary. After your death, your beneficiary provides the financial institution with a copy of the death certificate and proof of identity and then collects what is in the account. (Doesn’t get much simpler than that.)
Because your beneficiary receives the account proceeds at your death, periodically
review the accounts for two reasons. First, verify that the named beneficiary is still who you want to receive the proceeds. Remember you can change your mind at any time while you’re alive. Second, some accounts may also grow faster than others, causing disproportionate proceeds to different beneficiaries that you may not be aware of without reviewing the account.
Your beneficiary doesn’t have beneficial interest in the account and thus can’t withdraw money from the account until your death. You have the flexibility to change your mind and name a different beneficiary, or you can even decide that you want to use the funds in the account. Easy come, easy go!
Deeds
For real property like your house, a deed is a weapon in your will substitutes arsenal available for your use.
A deed is the legal evidence of real estate ownership. Deeds, like wills, have several legal requirements to be valid, including being in writing with an accurate legal description of the property.
You can write wording into a deed to create a will substitute for your real property. Work with your attorney to make sure the wording in your deed accurately reflects the type of will substitute you want to set up.