Wednesday, December 01, 2004
Estate Planning www.legacyannuities.com
" How You Can Save Thousands Of Dollars Using Living Trusts! Discover The Little Known Secrets Your Accountant And Attorney Will Never Tell You!"
How To Avoid Making The 6 Biggest Mistakes When Setting Up A Living Trust!
Let me ask you a question:
Do you really know what a living trust is? Do you really know what it does, and doesn't do?
If you're not sure, then keep listening, so you will finally know the Truth About Living Trusts!
See, there are all kinds of myths about how Living Trusts work, and what they can do for people.
Now, let me start off by telling you that Living Trusts, when set up properly, can be one of the best financial tools available! Notice that the key here, is that they must be set up correctly.
If you establish a trust arrangement, and it hasn't been done properly, it may be worse than having no trust at all!
If you discover that your trust arrangement isn't exactly right, you are fortunate in that most cases, the problems are easily fixed. If you haven't yet set up anything, then this report will provide you with the information you'll need to use as a guideline to make sure you have things done the way you want!
Before we get into all the details, I'd like to share a brief story with you, which will illustrate the points we'll be talking about in a few minutes. Bill and Sarah's story will highlight the need to understand how to use Living Trusts properly.
*******
Bill and Sarah had been married for 47 years. They met in college, when Bill was a senior, and Sarah was a sophomore. They got married as soon as Bill graduated, when he took a job as an entry level clerk in the accounting department of a giant manufacturing company.
Sarah finished college with a degree in Political Science. She was going to start law school, but decided to wait after they had their had their first baby girl, Jamie. Then, they had a son, Jerry, which delayed Sarah going to law school for several more years.
As time went by, Bill kept moving up in the financial end of the company. By the time the kids were in high school, he had moved up to first vice-president of accounting, and was making big money. His insurance benefits, and his retirement package were outstanding.
(Now, remember that this was the era when working for a large company actually meant something. Not like today, when job security is an illusion, at best.)
Anyway, after Jerry got old enough to go to Jr. High, Sarah did finally go to law school. She spent four years studying, and passed the bar the first time she took it. She then got a position with the State's Attorney's office as an assistant prosecutor. After a while, she started her own firm with an associate from the State's Attorney's office.
Now, you'd have to say that they are a very fortunate couple. They raised a great family, had emotionally and financially rewarding jobs, and a secure retirement. You could say they lived the American dream, could you not?
Now, as with any family, the last financial detail they got around to taking care of was the managing of their estate.
It's understandable how people don't want to prepare for their death. Let's face it, this is not a fun topic to discuss or address.
But, as morbid as it is, it must be discussed and addressed.
Basically, they had drawn up wills years and years ago, and had not done anything more definite since.
When Bill and Sarah both decided to retire, they realized they needed to really get their estate in order.
They called their attorney and accountant that they had used for, gosh, decades, to meet with them to discuss what they should be doing.
They met with the attorney first, and later with the accountant. (As you'll see in a minute, this was their first big mistake.)
The attorney suggested a Living Trust, combined with a will, and some testamentary trusts that would help with estate taxes down the road.
The accountant agreed that strategy was sound, and they moved ahead to get the documents signed and in place.
That was about four years ago, next month. Bill and Sarah were sure that things were taken care of. They felt the Living Trust would assure their assets would be distributed without the expense and delays of probate, and that the other wills and trusts would save big money on estate taxes.
Then, the tragedy occurred just last month. Bill and Sarah were coming home from the golf course, and were crossing the intersection that leads from the country club to the main road. A truck delivering beer to the bar, was going too fast, skidded on the slippery pavement, and crushed their car.
They were both killed instantly.
Of course, the kids and the grandchildren, and Bill's sister, and Sarah's two brothers were in a state of shock. And, as is normal, the grieving was deep and profound. There's no point in going into all of that. We all know how the family's tragic loss affected everyone emotionally.
Then there was the next disaster. The estate.
See, Bill and Sarah had used their family advisors to help them set all this up. But, they did not coordinate the tax and legal issues, and also made all kinds of assumptions that were, well, plain wrong.
Remember when I said that the fact of them meeting with the CPA separately from the attorney was a big mistake? See, the CPA assumed the attorney had addressed some critical tax issues, and the attorneys had assumed the CPA had addressed some legal issues, and well, the results of this lack of communication were simply devastating.
For example, the kids ended up having to wait almost 17 months to receive the distributions from the estate.
The legal and accounting fees ended up being over $97,000!
The estate and income taxes cost the family over $235,000!
Plus, certain wishes Bill and Sarah had, were not carried out, because the documents weren't set up to do those things.
What a mess.
I know that everyone was trying to do the right things. But, trying, and succeeding, are two very different things!
*******
Is this story so unusual? Unfortunately, the answer is no.
See, handling an estate is one of the most complex transactions you'll ever have to deal with. First of all, there is almost always a very sad emotional burden to have to deal with. And second, there is the fact that the laws and tax rules are basically a nightmare to understand and coordinate.
Our next discussion has to be the explanation of what a Living Trust is, what it is supposed to do. Then we'll move into the problems that we see so often with these trusts.
First of all, let's define a "Living Trust". A Living Trust is a document that allows you to change the ownership of certain assets to the trust. In effect, you change the owner of a stock or bond, for example, from you as an individual, to the trust as the new owner.
You're basically switching the title from personal ownership, to ownership by a trust, with you serving as trustee, in most cases. (Your spouse can serve as co-trustee as well.)
The reason these trusts are called "Living", is that they are set up to hold your assets while you are alive. This is different than a "Testamentary" trust, which only kicks in upon death.
They are also totally revocable. That means that you, as trustee, can decide to cancel the trust, or switch things around, any way you choose, without any problems.
You might be wondering why someone would transfer the ownership of their assets to a trust. Why would someone go through all this trouble, if the whole deal can be changed any time?
Well, the answer is simple in concept, yet sometimes very difficult in practice.
See, when you own an asset personally, or in joint tenancy, and you pass away, that asset becomes part of your "probate" estate. This means that the ultimate disposition of your assets is supervised by a judge. The system is designed to assure that the wishes of the deceased have been carried out properly, and that no one has messed around with those wishes.
Probate, being a public forum, has some unpleasant side effects that go with this noble effort of protecting a family's wishes:
1. The executor of the estate has to file your will at the courthouse, where it becomes public information that everyone, and anyone, can see. Some people do not like the world knowing their financial affairs.
2. The usual costs associated with probate can run anywhere from 3% to as high as 10% of the estate! These fees are usually paid to lawyers and court costs. Some people do not like wasting this much money.
3. Creditors are notified to make claims against the estate, estate tax returns have to be prepared and filed, any questions or problems with the disposition of the assets must be resolved, etc., etc. This process can take as little as nine months after the death, and is frequently much longer. Some people don't like making their family suffer through all these endless delays, especially if there is a business involved, or whatever.
So you can see that while probate has good intentions from the public's point of view, it is not very desirable for most of us. The solution? A Living Trust.
See, when you transfer your assets to the trust as the owner, here are the benefits that can be seen:
1. At the death, the trust property will either be distributed to the family, or held in trust for them, based on however the parents wanted things to be handled. All these distributions are done without any court supervision!
2. If you should become mentally or physically unable to manage your affairs, the successor trustee will take over the management responsibilities. The new trustee will not have to obtain probate court approval, or be subject to court supervision!
3. The arrangement can be amended or canceled anytime. This is not a permanent arrangement that can't be switched later on!
What the trust does, is provide for the management of your assets in the event of a lifetime disability, and substitutes for a "will" at death.
The biggest benefit of these trusts is that there are no court proceedings, expenses or delays! One time, for example, one of our clients passed away, and her entire estate of over $750,000 was distributed to all nine children and grandchildren in less than 30 days, with only $2,000 in legal fees!
Now that's all the good news. Now you can see why so many people are interested in these trusts.
But, it's time for us to look at some specific mistakes that people make when setting up their estates, particularly with Living Trusts. While these problems are the most common, they are by no means, the only ones that can come up and bite you. We just wanted to cover the most frequent problems we see on a regular basis.
1. Establishing a Living Trust, and have it do little or nothing to eliminate the probate process! This is the most common mistake I see. And, it is a huge one!
Remember that the main benefit of a Living Trust is to avoid the expenses, publicity, and delays of court supervised probate. Now, if you set up a Living Trust, and you either forget, or just don't get around to transferring some or all of the assets; those assets left out of the trust end up going through probate anyway!
Yes, I've seen people spend big money to set up a sophisticated trust arrangement, and then either pass away or become disabled before transferring assets into the trust. So what they've done, is in essence, waste a lot of time and money, without a penny of financial benefit to their family.
You cannot do this. If you bother to set this type of arrangement, please make sure to have the right people get the assets out of your name, into the name of the trust! (By the way, this transferring process needs to be guided by competent professionals!)
2. Thinking a Living Trust will save you income and estate taxes. I can't tell you how many times people come into the office and want to discuss Living Trusts, thinking they will save either income or estate taxes.
Listen. A Living Trust cannot save you one nickel in either of the two worst taxes in the world, income and estate taxes. Many people are under a major misconception that these trusts can save taxes. This simply isn't so.
There are many, many ways to save income and estate taxes with other types of set-ups. We have two other FREE reports that explain how to save thousands of dollars of income and estate taxes. I'll give you the name of those reports, and a 24 hour recorded message line to order them for FREE, at the end of this report!
So, please understand, that Living Trusts are NOT to be used as a tax planning tool!
3. The fact that a Living Trust speeds up the distribution process, is always better than going through probate!
Not always! Sometimes, there are advantages to going through probate.
We had one client who owed a lot of money. A lot of money. When she passed away, the Living Trust distributed the assets, and almost nothing went through probate. Well, under certain laws, the trust assets were still open to creditors attack, far after the estate would have been closed if it had gone through probate. So, in this case, believe it or not, this family would have been better off having the assets in the name of their mom.
Now, keep in mind, that this situation is not as uncommon as you might think. There is almost no way for you to be able to know which way to go with this sort of thing, without proper legal counsel!
4. Naming the wrong beneficiaries that are tied into the trust. Most people name their family members as beneficiaries of a trust arrangement. But, most people also have other assets, particularly retirement plans, that also have named beneficiaries.
One time last year, we got a referral from a client. This lady's husband had died, and named their Living Trust as the beneficiary of his IRA. (Which was very sizable!) Anyway, they thought that the IRA distributions that are required after age 70 1/2, would be spread out over the wife's expected lifespan.
But, they had a rude awakening when they got a notice that she had to pay $63,456 in taxes, immediately upon his death. See, there is a little known trap that makes the full IRA value taxable, when the Living Trust is named as a beneficiary. There was nothing we could do for her, because he had already passed away.
But, if you have such a beneficiary designation, you better check with a professional who can tell you how to adjust what you're doing to eliminate this horrible tax trap! DO NOT TRY TO FIX THIS YOURSELF!
5. Having a Living Trust replaces a need for a will. This is another very common, and very wrong way to think about Living Trusts!
You must have what is known as a "Pour-Over" will set up in conjunction with your trust. What this will does, is two-fold. First, it handles any assets whose titles haven't been transferred to the trust. So, if you forgot to transfer the title on a stock or whatever, it would end up being distributed through the probate process.
Also, some assets don't have a "title". Like a piece of jewelry, or a painting, etc. Personal belongings that are left to family members, pretty much have to be subject to probate, and must be included in the Pour-Over will.
The Living Trust is an additional estate planning tool, not a replacement for a will!
6. Having assets in joint tenancy eliminates the need for a Living Trust. This final misconception is a biggie.
Let's look at a real simple asset like a CD. (Although we don't think people should own too many of these, but we won't get into that now. At the end of this report, we'll give you some information on a FREE report we have on how to beat today's miserably low CD rates.)
If you own a CD in both names, as joint tenants, with the rights of survivorship, (JTWROS) you may not think you need the trust. After all, the asset will be immediately retitled into the sole name of the surviving spouse, so why bother with a trust?
While it's true that the asset will not go through probate when it's set up in JTWROS. This may be the worst way to own any asset. Not because of probate, but because of estate taxes!
See, when you own assets in JTWROS, you will completely forfeit the marital deduction on that asset. This can cause enormous additional estate taxes.
For example, one of our client's mom passed away a few months ago. Our client, her son, had no involvement with his mom's money. Well, it turned out that his folks had all their money in CD's, (first big mistake) and all of it was JTWROS. Because they had blown the marital deduction on the second spouses death, their kids had to pay just over $184,000 in estate taxes that were totally unnecessary.
If they had made a few simple changes to their planning, none of those taxes would have been paid.
Is that sad, or what?
There is another benefit to avoiding JTWROS, and putting the assets into a trust. If, for some reason, you become physically or mentally impaired, and can no longer manage your affairs, the trust will have provisions for who and how the assets will be managed.
No court appearances. No hassles.
So, in the last example, if my client's mom had become incapacitated before she got sick, she could have named her son in the trust to manage her affairs for her. He wouldn't have had to hire lawyers to apply for conservatorship, and so on.
If the CD's are held in joint tenancy, then none of these protection and tax savings opportunities exist! (Just one more reason not to have too many CD's in personal ownership!)
As you can see, a Living Trust, when used properly, is one of the best planning tools around. But, and this is the big but, they must be set up very carefully.
If you think that you might be a candidate to establish a Living Trust, or you have one and you aren't sure if it is being used to its fullest advantage, I've got a suggestion for you.
Think about all the advantages of correctly setting up a trust. Think about things like:
They are very inexpensive to set up and to manage!
They can eliminate the publicity of probate!
They can speed up the distribution of your assets by several light years!
They can save you literally thousands of dollars in legal fees and court costs!
They can provide for the simplest way to transfer the management of your assets in the event of a disability!
If used in conjunction with other types of trusts, they can save thousands and thousands of dollars in taxes! (Not by themselves, mind you, but as part of a coordinated financial plan!)
Yes, A Living Trust has no comparable tool when it comes to the benefits obtained, with total flexibility and control!
Now, in our opinion, setting up a trust arrangement, cannot be viewed in a vacuum, by itself.
There are so many aspects to establishing trusts that must be addressed at the same time.
Things like tax reduction, retirement planning, overall estate planning, education funding, charitable giving, investment analysis and planning, and so on.
In other words, setting up a trust outside the context of a sound financial plan, is like building a room, without a house to go with it!
See, we are firm believers in the fact that financial planning is the best kept secret to attaining permanent financial security!
Yes, the real secret to success is:
Planning!
Yes, planning is the single, most effective technique to get what you want out of your financial life!
It worked during Teddy Roosevelt's days, it worked during Viet Nam, and it works now!
See, the reason most of us aren't going to achieve real financial security, is that we don't follow this crucial sequence, when it comes to managing our finances:
Figure out where you are today.
Figure out where you want to be.
Get a true understanding of the options you have available to you. (Not from biased sources.)
Develop a plan that will provide the right "course" to follow.
Make the changes necessary to get the plan going.
Watch your progress, and make the proper adjustments to keep the plan "on course".
Makes a lot of sense, doesn't it?
Kind of the same process you go through every day when planning a trip to the mall, or taking the kids to practice, or going on a visit or vacation, etc.
Could you imagine how you could get through your daily life without following this sequence of events?
Could you imagine how messed up you'd be if you didn't know where you lived, what time practice was, didn't know which roads led to the practice field, didn't know where the practice was going to be held, and finally, didn't know which team your kid was on?
I know that sounds stupid, because in our day to day activities, we always know all those things!
But, can you really say the same thing about your money?
Do you truly know where you are today? Are you certain you have specific goals of where you want to be financially? Can you say that you know all the choices you have available to you?
Have you set up a plan to get where you want to be?
Or, like most of us, are you winging it as you go along???
In all the years we've been helping people win the game of money, and when studying the characteristics of families who are truly financially independent, we find one common theme.
Not their age, or occupation, or sex, or income, or any of those things.
No. The one common attribute is that they make a constant effort to plan for their future.
That's it.
It may not sound very exotic or romantic.
But it's simple, and it works.
You know, usually, the most effective things in life, are the most simple and basic. These days, with our goofy government, you need to plan for your own future, more than ever!
Make sense?
I hope so. Because this topic is very important to us, and to you.
It's important to us, because we help people plan for a living.
It's important to you, because planning may be the best weapon you'll have to make sure you live the way you want! And if you are interested in setting up, or revising a Living Trust program, you better make sure that you are getting the entire picture reviewed.
Just having someone look at part of your financial life may end up being a huge mistake. Remember Bill and Sarah? Remember how an uncoordinated process cost their family a fortune in needless expenses and taxes? Remember the people who had the trust, but didn't use it properly?
I could go on, but the point is that a planning specialist like myself can give you the proper guidance and direction you cannot get from traditional advisors like accountants and attorneys.
They are looking at a narrow, tunnel-like vision of your finances.
I am looking at everything, both financial and emotional! It's the only way to go, as far as I'm concerned!
So where do you go from here?
Well, we have two ways of introducing planning into people's lives. Both are easy, and both require no pressure or any "sales" garbage.
Another way to look at this, is that a doctor cannot help a patient until he or she does a diagnosis to see what is wrong. And then prescribe treatments based on that diagnosis. So the patient can have a "map" or a plan on how to get well.
" How You Can Save Thousands Of Dollars Using Living Trusts! Discover The Little Known Secrets Your Accountant And Attorney Will Never Tell You!"
How To Avoid Making The 6 Biggest Mistakes When Setting Up A Living Trust!
Let me ask you a question:
Do you really know what a living trust is? Do you really know what it does, and doesn't do?
If you're not sure, then keep listening, so you will finally know the Truth About Living Trusts!
See, there are all kinds of myths about how Living Trusts work, and what they can do for people.
Now, let me start off by telling you that Living Trusts, when set up properly, can be one of the best financial tools available! Notice that the key here, is that they must be set up correctly.
If you establish a trust arrangement, and it hasn't been done properly, it may be worse than having no trust at all!
If you discover that your trust arrangement isn't exactly right, you are fortunate in that most cases, the problems are easily fixed. If you haven't yet set up anything, then this report will provide you with the information you'll need to use as a guideline to make sure you have things done the way you want!
Before we get into all the details, I'd like to share a brief story with you, which will illustrate the points we'll be talking about in a few minutes. Bill and Sarah's story will highlight the need to understand how to use Living Trusts properly.
*******
Bill and Sarah had been married for 47 years. They met in college, when Bill was a senior, and Sarah was a sophomore. They got married as soon as Bill graduated, when he took a job as an entry level clerk in the accounting department of a giant manufacturing company.
Sarah finished college with a degree in Political Science. She was going to start law school, but decided to wait after they had their had their first baby girl, Jamie. Then, they had a son, Jerry, which delayed Sarah going to law school for several more years.
As time went by, Bill kept moving up in the financial end of the company. By the time the kids were in high school, he had moved up to first vice-president of accounting, and was making big money. His insurance benefits, and his retirement package were outstanding.
(Now, remember that this was the era when working for a large company actually meant something. Not like today, when job security is an illusion, at best.)
Anyway, after Jerry got old enough to go to Jr. High, Sarah did finally go to law school. She spent four years studying, and passed the bar the first time she took it. She then got a position with the State's Attorney's office as an assistant prosecutor. After a while, she started her own firm with an associate from the State's Attorney's office.
Now, you'd have to say that they are a very fortunate couple. They raised a great family, had emotionally and financially rewarding jobs, and a secure retirement. You could say they lived the American dream, could you not?
Now, as with any family, the last financial detail they got around to taking care of was the managing of their estate.
It's understandable how people don't want to prepare for their death. Let's face it, this is not a fun topic to discuss or address.
But, as morbid as it is, it must be discussed and addressed.
Basically, they had drawn up wills years and years ago, and had not done anything more definite since.
When Bill and Sarah both decided to retire, they realized they needed to really get their estate in order.
They called their attorney and accountant that they had used for, gosh, decades, to meet with them to discuss what they should be doing.
They met with the attorney first, and later with the accountant. (As you'll see in a minute, this was their first big mistake.)
The attorney suggested a Living Trust, combined with a will, and some testamentary trusts that would help with estate taxes down the road.
The accountant agreed that strategy was sound, and they moved ahead to get the documents signed and in place.
That was about four years ago, next month. Bill and Sarah were sure that things were taken care of. They felt the Living Trust would assure their assets would be distributed without the expense and delays of probate, and that the other wills and trusts would save big money on estate taxes.
Then, the tragedy occurred just last month. Bill and Sarah were coming home from the golf course, and were crossing the intersection that leads from the country club to the main road. A truck delivering beer to the bar, was going too fast, skidded on the slippery pavement, and crushed their car.
They were both killed instantly.
Of course, the kids and the grandchildren, and Bill's sister, and Sarah's two brothers were in a state of shock. And, as is normal, the grieving was deep and profound. There's no point in going into all of that. We all know how the family's tragic loss affected everyone emotionally.
Then there was the next disaster. The estate.
See, Bill and Sarah had used their family advisors to help them set all this up. But, they did not coordinate the tax and legal issues, and also made all kinds of assumptions that were, well, plain wrong.
Remember when I said that the fact of them meeting with the CPA separately from the attorney was a big mistake? See, the CPA assumed the attorney had addressed some critical tax issues, and the attorneys had assumed the CPA had addressed some legal issues, and well, the results of this lack of communication were simply devastating.
For example, the kids ended up having to wait almost 17 months to receive the distributions from the estate.
The legal and accounting fees ended up being over $97,000!
The estate and income taxes cost the family over $235,000!
Plus, certain wishes Bill and Sarah had, were not carried out, because the documents weren't set up to do those things.
What a mess.
I know that everyone was trying to do the right things. But, trying, and succeeding, are two very different things!
*******
Is this story so unusual? Unfortunately, the answer is no.
See, handling an estate is one of the most complex transactions you'll ever have to deal with. First of all, there is almost always a very sad emotional burden to have to deal with. And second, there is the fact that the laws and tax rules are basically a nightmare to understand and coordinate.
Our next discussion has to be the explanation of what a Living Trust is, what it is supposed to do. Then we'll move into the problems that we see so often with these trusts.
First of all, let's define a "Living Trust". A Living Trust is a document that allows you to change the ownership of certain assets to the trust. In effect, you change the owner of a stock or bond, for example, from you as an individual, to the trust as the new owner.
You're basically switching the title from personal ownership, to ownership by a trust, with you serving as trustee, in most cases. (Your spouse can serve as co-trustee as well.)
The reason these trusts are called "Living", is that they are set up to hold your assets while you are alive. This is different than a "Testamentary" trust, which only kicks in upon death.
They are also totally revocable. That means that you, as trustee, can decide to cancel the trust, or switch things around, any way you choose, without any problems.
You might be wondering why someone would transfer the ownership of their assets to a trust. Why would someone go through all this trouble, if the whole deal can be changed any time?
Well, the answer is simple in concept, yet sometimes very difficult in practice.
See, when you own an asset personally, or in joint tenancy, and you pass away, that asset becomes part of your "probate" estate. This means that the ultimate disposition of your assets is supervised by a judge. The system is designed to assure that the wishes of the deceased have been carried out properly, and that no one has messed around with those wishes.
Probate, being a public forum, has some unpleasant side effects that go with this noble effort of protecting a family's wishes:
1. The executor of the estate has to file your will at the courthouse, where it becomes public information that everyone, and anyone, can see. Some people do not like the world knowing their financial affairs.
2. The usual costs associated with probate can run anywhere from 3% to as high as 10% of the estate! These fees are usually paid to lawyers and court costs. Some people do not like wasting this much money.
3. Creditors are notified to make claims against the estate, estate tax returns have to be prepared and filed, any questions or problems with the disposition of the assets must be resolved, etc., etc. This process can take as little as nine months after the death, and is frequently much longer. Some people don't like making their family suffer through all these endless delays, especially if there is a business involved, or whatever.
So you can see that while probate has good intentions from the public's point of view, it is not very desirable for most of us. The solution? A Living Trust.
See, when you transfer your assets to the trust as the owner, here are the benefits that can be seen:
1. At the death, the trust property will either be distributed to the family, or held in trust for them, based on however the parents wanted things to be handled. All these distributions are done without any court supervision!
2. If you should become mentally or physically unable to manage your affairs, the successor trustee will take over the management responsibilities. The new trustee will not have to obtain probate court approval, or be subject to court supervision!
3. The arrangement can be amended or canceled anytime. This is not a permanent arrangement that can't be switched later on!
What the trust does, is provide for the management of your assets in the event of a lifetime disability, and substitutes for a "will" at death.
The biggest benefit of these trusts is that there are no court proceedings, expenses or delays! One time, for example, one of our clients passed away, and her entire estate of over $750,000 was distributed to all nine children and grandchildren in less than 30 days, with only $2,000 in legal fees!
Now that's all the good news. Now you can see why so many people are interested in these trusts.
But, it's time for us to look at some specific mistakes that people make when setting up their estates, particularly with Living Trusts. While these problems are the most common, they are by no means, the only ones that can come up and bite you. We just wanted to cover the most frequent problems we see on a regular basis.
1. Establishing a Living Trust, and have it do little or nothing to eliminate the probate process! This is the most common mistake I see. And, it is a huge one!
Remember that the main benefit of a Living Trust is to avoid the expenses, publicity, and delays of court supervised probate. Now, if you set up a Living Trust, and you either forget, or just don't get around to transferring some or all of the assets; those assets left out of the trust end up going through probate anyway!
Yes, I've seen people spend big money to set up a sophisticated trust arrangement, and then either pass away or become disabled before transferring assets into the trust. So what they've done, is in essence, waste a lot of time and money, without a penny of financial benefit to their family.
You cannot do this. If you bother to set this type of arrangement, please make sure to have the right people get the assets out of your name, into the name of the trust! (By the way, this transferring process needs to be guided by competent professionals!)
2. Thinking a Living Trust will save you income and estate taxes. I can't tell you how many times people come into the office and want to discuss Living Trusts, thinking they will save either income or estate taxes.
Listen. A Living Trust cannot save you one nickel in either of the two worst taxes in the world, income and estate taxes. Many people are under a major misconception that these trusts can save taxes. This simply isn't so.
There are many, many ways to save income and estate taxes with other types of set-ups. We have two other FREE reports that explain how to save thousands of dollars of income and estate taxes. I'll give you the name of those reports, and a 24 hour recorded message line to order them for FREE, at the end of this report!
So, please understand, that Living Trusts are NOT to be used as a tax planning tool!
3. The fact that a Living Trust speeds up the distribution process, is always better than going through probate!
Not always! Sometimes, there are advantages to going through probate.
We had one client who owed a lot of money. A lot of money. When she passed away, the Living Trust distributed the assets, and almost nothing went through probate. Well, under certain laws, the trust assets were still open to creditors attack, far after the estate would have been closed if it had gone through probate. So, in this case, believe it or not, this family would have been better off having the assets in the name of their mom.
Now, keep in mind, that this situation is not as uncommon as you might think. There is almost no way for you to be able to know which way to go with this sort of thing, without proper legal counsel!
4. Naming the wrong beneficiaries that are tied into the trust. Most people name their family members as beneficiaries of a trust arrangement. But, most people also have other assets, particularly retirement plans, that also have named beneficiaries.
One time last year, we got a referral from a client. This lady's husband had died, and named their Living Trust as the beneficiary of his IRA. (Which was very sizable!) Anyway, they thought that the IRA distributions that are required after age 70 1/2, would be spread out over the wife's expected lifespan.
But, they had a rude awakening when they got a notice that she had to pay $63,456 in taxes, immediately upon his death. See, there is a little known trap that makes the full IRA value taxable, when the Living Trust is named as a beneficiary. There was nothing we could do for her, because he had already passed away.
But, if you have such a beneficiary designation, you better check with a professional who can tell you how to adjust what you're doing to eliminate this horrible tax trap! DO NOT TRY TO FIX THIS YOURSELF!
5. Having a Living Trust replaces a need for a will. This is another very common, and very wrong way to think about Living Trusts!
You must have what is known as a "Pour-Over" will set up in conjunction with your trust. What this will does, is two-fold. First, it handles any assets whose titles haven't been transferred to the trust. So, if you forgot to transfer the title on a stock or whatever, it would end up being distributed through the probate process.
Also, some assets don't have a "title". Like a piece of jewelry, or a painting, etc. Personal belongings that are left to family members, pretty much have to be subject to probate, and must be included in the Pour-Over will.
The Living Trust is an additional estate planning tool, not a replacement for a will!
6. Having assets in joint tenancy eliminates the need for a Living Trust. This final misconception is a biggie.
Let's look at a real simple asset like a CD. (Although we don't think people should own too many of these, but we won't get into that now. At the end of this report, we'll give you some information on a FREE report we have on how to beat today's miserably low CD rates.)
If you own a CD in both names, as joint tenants, with the rights of survivorship, (JTWROS) you may not think you need the trust. After all, the asset will be immediately retitled into the sole name of the surviving spouse, so why bother with a trust?
While it's true that the asset will not go through probate when it's set up in JTWROS. This may be the worst way to own any asset. Not because of probate, but because of estate taxes!
See, when you own assets in JTWROS, you will completely forfeit the marital deduction on that asset. This can cause enormous additional estate taxes.
For example, one of our client's mom passed away a few months ago. Our client, her son, had no involvement with his mom's money. Well, it turned out that his folks had all their money in CD's, (first big mistake) and all of it was JTWROS. Because they had blown the marital deduction on the second spouses death, their kids had to pay just over $184,000 in estate taxes that were totally unnecessary.
If they had made a few simple changes to their planning, none of those taxes would have been paid.
Is that sad, or what?
There is another benefit to avoiding JTWROS, and putting the assets into a trust. If, for some reason, you become physically or mentally impaired, and can no longer manage your affairs, the trust will have provisions for who and how the assets will be managed.
No court appearances. No hassles.
So, in the last example, if my client's mom had become incapacitated before she got sick, she could have named her son in the trust to manage her affairs for her. He wouldn't have had to hire lawyers to apply for conservatorship, and so on.
If the CD's are held in joint tenancy, then none of these protection and tax savings opportunities exist! (Just one more reason not to have too many CD's in personal ownership!)
As you can see, a Living Trust, when used properly, is one of the best planning tools around. But, and this is the big but, they must be set up very carefully.
If you think that you might be a candidate to establish a Living Trust, or you have one and you aren't sure if it is being used to its fullest advantage, I've got a suggestion for you.
Think about all the advantages of correctly setting up a trust. Think about things like:
They are very inexpensive to set up and to manage!
They can eliminate the publicity of probate!
They can speed up the distribution of your assets by several light years!
They can save you literally thousands of dollars in legal fees and court costs!
They can provide for the simplest way to transfer the management of your assets in the event of a disability!
If used in conjunction with other types of trusts, they can save thousands and thousands of dollars in taxes! (Not by themselves, mind you, but as part of a coordinated financial plan!)
Yes, A Living Trust has no comparable tool when it comes to the benefits obtained, with total flexibility and control!
Now, in our opinion, setting up a trust arrangement, cannot be viewed in a vacuum, by itself.
There are so many aspects to establishing trusts that must be addressed at the same time.
Things like tax reduction, retirement planning, overall estate planning, education funding, charitable giving, investment analysis and planning, and so on.
In other words, setting up a trust outside the context of a sound financial plan, is like building a room, without a house to go with it!
See, we are firm believers in the fact that financial planning is the best kept secret to attaining permanent financial security!
Yes, the real secret to success is:
Planning!
Yes, planning is the single, most effective technique to get what you want out of your financial life!
It worked during Teddy Roosevelt's days, it worked during Viet Nam, and it works now!
See, the reason most of us aren't going to achieve real financial security, is that we don't follow this crucial sequence, when it comes to managing our finances:
Figure out where you are today.
Figure out where you want to be.
Get a true understanding of the options you have available to you. (Not from biased sources.)
Develop a plan that will provide the right "course" to follow.
Make the changes necessary to get the plan going.
Watch your progress, and make the proper adjustments to keep the plan "on course".
Makes a lot of sense, doesn't it?
Kind of the same process you go through every day when planning a trip to the mall, or taking the kids to practice, or going on a visit or vacation, etc.
Could you imagine how you could get through your daily life without following this sequence of events?
Could you imagine how messed up you'd be if you didn't know where you lived, what time practice was, didn't know which roads led to the practice field, didn't know where the practice was going to be held, and finally, didn't know which team your kid was on?
I know that sounds stupid, because in our day to day activities, we always know all those things!
But, can you really say the same thing about your money?
Do you truly know where you are today? Are you certain you have specific goals of where you want to be financially? Can you say that you know all the choices you have available to you?
Have you set up a plan to get where you want to be?
Or, like most of us, are you winging it as you go along???
In all the years we've been helping people win the game of money, and when studying the characteristics of families who are truly financially independent, we find one common theme.
Not their age, or occupation, or sex, or income, or any of those things.
No. The one common attribute is that they make a constant effort to plan for their future.
That's it.
It may not sound very exotic or romantic.
But it's simple, and it works.
You know, usually, the most effective things in life, are the most simple and basic. These days, with our goofy government, you need to plan for your own future, more than ever!
Make sense?
I hope so. Because this topic is very important to us, and to you.
It's important to us, because we help people plan for a living.
It's important to you, because planning may be the best weapon you'll have to make sure you live the way you want! And if you are interested in setting up, or revising a Living Trust program, you better make sure that you are getting the entire picture reviewed.
Just having someone look at part of your financial life may end up being a huge mistake. Remember Bill and Sarah? Remember how an uncoordinated process cost their family a fortune in needless expenses and taxes? Remember the people who had the trust, but didn't use it properly?
I could go on, but the point is that a planning specialist like myself can give you the proper guidance and direction you cannot get from traditional advisors like accountants and attorneys.
They are looking at a narrow, tunnel-like vision of your finances.
I am looking at everything, both financial and emotional! It's the only way to go, as far as I'm concerned!
So where do you go from here?
Well, we have two ways of introducing planning into people's lives. Both are easy, and both require no pressure or any "sales" garbage.
Another way to look at this, is that a doctor cannot help a patient until he or she does a diagnosis to see what is wrong. And then prescribe treatments based on that diagnosis. So the patient can have a "map" or a plan on how to get well.
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