Chapter 1: Basic Concepts
Hi, welcome to Doug Marks Law. This is Chapter One in a video series that will talk about estate planning and help my current clients, new clients, and people who are considering becoming clients to understand a little bit of the background with respect to estate planning and what they need to know before we get going on trusts and wills, financial powers of attorney, healthcare directives, living wills, and healthcare powers of attorney.
So, the idea here is for new clients, before I spend a lot of time working on their case, we can save some time and money by them watching this video.
So, what is the trust itself? The trust is the agreement. It's the entity that's set up by the agreement between a couple of different parties. And those parties would be a grantor, the person who sets up the trust and puts assets into the trust. Then the trustee--the trustee would be the person who administers the trust. Then the beneficiaries--the beneficiaries would be the people who receive the benefits of the trust. So generally, they'll be the ones that get money out of the trust.
If you set up a trust, you or you and your spouse, set up a trust, you would be the grantors, because you're setting it up, and you have the ability to change the trust. You would also be the trustees, co-trustees generally, because during your lifetime, you'll be administering the terms of the trust in the way that you want, or according to the terms of the trust, which you can change at any time. When you pass away, or one of you passes away, then the other one would be the sole trustee, if you want it that way. You can set it up any way you want, but generally the surviving spouse would become the sole trustee. And then once the surviving spouse passes away, then your successor trustee would take over. And that's really when the terms of your trust start to get administered, they start liquidating, they started distributing, and doing whatever your trust tells them to do.
Then to begin with, we talked about the beneficiary as being a third party to a trust, and when you first set it up, you'll be the beneficiary, too, because you would be receiving the benefit of the trust. After you die, then the beneficiaries can become your children or somebody else. And I'm really oversimplifying a lot of things here, but that's generally what most people are looking at when they form a trust.
So why do people do trusts? To answer that question, I need to give you a little bit of background on wills and what happens to your property when you die. If you die without a will or a trust, then there's nobody--say you own a house and you've passed away--there's nobody there now to sell the house, because you can't sign the deed transferring the asset to somebody else. So, state laws have set forth procedures by which money and assets are passed on to third parties.
If you have a will, then that's the authority for how that property is going to be passed on. You go into court, and you ask for an order acknowledging the will and allowing you to transfer that property to whoever's set forth in the will. If you don't have a will, then the state will make some assumptions about who you would have wanted to give it to, generally your children or your surviving spouse first and then your children. So that's called intestate succession. “Intestate” means you died without a will. So, if you, if you have a will, as I said, it would go through the will. You would have to go into court and probate the will, meaning prove that the will is valid and then administer your assets depending on what the will says.
When you have a trust, you put your assets into the trust and the trust, even after you die, it remains in existence. You just change trustees, generally. One trustee passes away and the other trustee now is the sole trustee. So, the actual ownership of the asset never has to change. That's why for assets that are in the trust at the time of your death, you don't have to go through the probate process because it's already in the trust.
So let's talk about the benefits of using a trust. The first benefit really relates to privacy. When you go through probate, you have to say what assets are being transferred. Those are generally public records. So, if somebody wants to find out what assets you had, or maybe they're involved in litigation with one of your children and they do an asset search, or they search the records and they find out that your child is about to receive a hundred thousand dollars or a piece of property. If they're in litigation with that child of yours, they're going to be less likely to settle for just the limits of insurance, because they know that there's another asset that's coming in, and that's just a sample of how a trust can protect your privacy.
Another reason for doing a trust is the convenience at your death. Instead of going in through the probate process, you can just pass the property. The property just passes under the terms of the trust. So, it's a lot simpler. It costs more to get it set up during your lifetime, in attorney's fees, because it's more complicated because you are answering a lot of the questions about what you want to have happen with your assets. But at the time of your death, you don't have to go through court at least for the trust assets. So, it's much more convenient.
Another reason people want to do trusts is because it can dictate with a great deal of detail what you want to have done with your assets, not only at your death, but at the time of your incapacitation. Maybe you develop some kind of a disease or a condition where you can't describe what you want to have happen with your assets. It could be very complicated. And so you can describe all those things in a trust. Then when you're incapacitated, your trustee, who takes over while you're incapacitated, can still administer all of your assets in the way that you want.
One other thing that I failed to mention about trusts and the benefit of trusts and that is that it can give protection from creditors, not for you, but for the people who inherit from you.
So instead of handing over a big inheritance to a child, you can say, “I want a certain amount of money or a certain percentage of my estate to go to this child every year.” And that way it's protected from that child's creditors until it gets distributed to them. So, say you're going to give them a million dollars. If you just give it to them outright, then that whole million dollars is subject to creditor claims, or maybe they're in a divorce or something like that and, or litigation, and that could be subjected to those claims. Whereas if you say I'm just going to give them 10% of that every year, then the 10% goes and that potentially could be subject to creditor claims, but the rest would be protected.
Many parents have disabled children who they need to make provision for. And a trust can allow that, and it can let you really get specific on the terms related to how you're going to distribute assets to a disabled child. So, you can set up a special needs or supplemental needs trust for that child. And then the trustee can distribute money or assets as needed after you're gone to, or on the benefit of that child.
It's really important to remember and sometimes people will get this confused when you do a revocable trust. The trust itself, won't do anything with regard to your taxation or your tax liability. There are some marginal benefits because you can preserve some of the elections that you can make even in a revocable trust, but generally the IRS considers a revocable trust to be nothing more than you. You use your social security number. It's a disregarded entity. It's not going to get you any tax benefits just because you've put it into a revocable trust. And the reason is you can take it out at any time without notice to anybody. You know, it's basically you. So, it's important to remember revocable trusts aren't really going to give you any tax benefits. One of the things that I do visit with clients about is the changing tax laws, because you do get to a certain level of income where you do need to think about the tax liability, and if you die, then your heirs, over a certain limit, which is, right now it's well over $11 million per individual, but that could change at any time and it likely will change substantially. It will substantially be lowered. I'm guessing, we just don't know. But it's one of the things that I visit with clients about if their assets are in the millions, then we need to seriously consider doing an irrevocable trust or taking some other action to avoid some of the tax liabilities that would otherwise hit them.
It's also important to remember that just because you have a trust doesn't mean that you don't need to do a will at all. The way to handle that is to do a pour-over will. So, when you set up your trust, you put your assets into it, you deed your house, your property into it, you do a general assignment of your assets and so most of your assets would go into the trust at the time that you set it up. Then when you pass away, there will likely be other assets that you've received that weren't assigned to the trust at the time you set it up. So, what we do is what's called a pour-over will, and the pour-over will just says, “I've got this trust and everything that's in my probate estate at the time that I die, I want to go into the trust.” It's a simple document. It just pours everything over into your trust. And then your trust, which is the document that'll say how you want to divide your assets among your children or other people, that's the one that will govern, even with respect to the assets that were in your name at the time of your death.
One of the things that's really cool in Idaho law and a lot of other states I understand, is that we have something called a personal property memorandum that you can do. And this is true of a will or a trust as long as the will or trust is drafted to incorporate it. But it's a document that you can use to list specific items of tangible personal property.
So, you can’t give cash away or real estate that way, or titled vehicles, things like that. But if you have a piano or a specific book or some china, things that you want to give to a specific person, then you can just write down what the asset is and who you want it to go to on this memorandum. You don’t have to think through everything at the time that you draft your trust. You can do that later with a memorandum. As things change, you can add or take away from, or change that memorandum of personal property.
So along with the trust and the wills and the assignments and the memorandums, I always prepare for each client and if there's a spouse for the spouse, a financial power of attorney. A financial power of attorney is where you designate, if you're unable to communicate your desires, you're incapacitated or disabled, and can't express what you want, then this person who holds the power of attorney can act on your behalf. So, what you're doing is you're just giving them the authority. It doesn't come into effect until you're in that condition, but you're giving them the authority to act on your behalf for financial purposes. And on that document, there's a list of all the things that you are allowing them to do, and certain things that you don't allow them to do.
For example, you don't want them typically to be able to change your trust or gift away all of your assets and things like that. Then you would also have a successor financial power of attorney. So, if that person, that you originally designate can't do it, then you have a successor listed on this power of attorney. The power of attorney is a separate document listing the first and the second person.
Along with the financial power of attorney, you'll also want to do a healthcare power of attorney, which is very similar to the financial power of attorney, except that it’s for healthcare reasons. If you're unable to make your own decisions regarding your healthcare, then this power of attorney, the person who holds the power of attorney, is able to make decisions for you. And again, you would have a successor power of attorney in the event that your first choice is unable to or unwilling to perform that service for you.
Then in conjunction with that, I also draft what's called a healthcare directive. Some people call it a “do not resuscitate”, but this is where you get to choose if your death is imminent or you're in a persistent vegetative state, what you want to have happen. I ask most people, “what do you want to have happen?” A lot of times they'll say, “I want them to pull the plug. If I'm done, I don't want to prolong it.” This is where this document is where you say that. It really helps your family. It takes away that decision from them. If you're in that state, it's an awful thing. It can tear families apart for them to have to decide whether they're going to pull the plug and let you go.
So, here's how my process works, and it's not always the same, but in general, this is how it works. If the client, will listen to this video and try to understand it, then with any questions they can get to me and ask those questions. Then I would send a questionnaire that asks them for details, their name, address, who they want to serve as their trustees, who they want to serve as their power of attorney, just a ton of questions, how they want to distribute their property at their death, all kinds of questions that need to be answered. Then as clients go through that questionnaire, they typically have questions, and we'll talk through that process, or they can fill it out and send it back. Then as we go through, I'm resolving questions and concerns, and once I have that questionnaire back, then that allows me to go ahead and prepare an initial draft of a trust and wills and the other documents.
I email that to the client, let them have a look through everything. Then again, they usually have more questions. Then we get together in person. I also need to confirm, and I do this with each client, that they have the capacity to understand what they're doing. Sometimes people will be on their deathbed before they're doing their trust or their will, which can be tricky, because I have to confirm that they actually understand what they're doing and that what we're doing in the trust and the wills is actually what they want.
So, we meet together. I check out their ID, make sure they are who they say they are. We have the witnesses come, we check their ID, and then sign all the documents together, and I'm oversimplifying. But sign all these document and work through them as we go. Then, I take everything away. I take the originals and then my staff will scan the originals and I'll give you back a nice leather-looking binder that will have all the trust documentation. It will be in a three-ring notebook binder, but I'll scan it and also give it to you electronically and give you the originals back. I don't keep the originals.
I ask people not to put them into a locked deposit box. The safety deposit box at a bank is a bad idea. You need to have it somewhere where people can and will find it when you pass away. That's typically somewhere on the desk or let kids know. And if you want to, you can send the electronic versions to your kids or your powers of attorney, however, you want to do that.
Once everything is signed, then we need to fund the trust. And that's a whole different area that I'll discuss in a separate video. But in essence, the bottom line is most people need to put their house into the trust. Most people don't want to put their vehicles into a trust because there are some liability issues, and they typically will be changing vehicles before they pass away. Other assets we talk about specifically, but typically the largest asset that you want to put into a trust is the real estate that you have. So, we'll do a deed. I'll draft a deed that will convey the house into the trust, and I'll get that deed recorded. And that will be part of the recorded or the scanned trust that you get back when all is said and done.
Well, thanks for sticking with me through to the end here. I appreciate it. If you're a current client, I look forward to taking the next step with you. If you're a potential client and just thinking about doing your will. Please give me a call. My number is (208) 290-1396. Or you can email me firstname.lastname@example.org. Look forward to seeing you.