If I Have a Living Trust, Do I Still Need A Will?

The answer is, Yes. You still need a Will to transfer assets that may not have been transferred to your trust during your life. The type of Will that transfers the assets to your trust is called a "Pour-Over Will." Once you establish a living trust, you still need to remember to transfer your assets into the trust. Assets that are not in your trust, do not have beneficiary designations or are not jointly titled with another individual will be subject to probate.

Most people understand that there is no tax liablity (not under the current Tax Code anyway) when one spouse dies and the assets pass to the surviving spouse; however, they do not realize that they have lost the first spouse's available tax credit.

You can pass your assets under the marital deduction if you meet one of the following conditions:
(1) Your property is currently titled jointly with your spouse. One example of this is a deed titled as "Joint Tenants with Right of Survivorship;" or

(2) Your spouse is the primary beneficiary of life insurance, annuities and retirement plans; or

(3) Your Will transfers everything to your surviving spouse.

It does not matter how your assets pass to your surviving spouse; if they do, they are passing under the marital deduction, and you are not using your available credit.

How to Preserve the Credit
One way to preserve the credit and help ensure that your spouse receives income and principal is by setting up a credit shelter trust. You can use your credit by transferring assets outrigth to someone other than you surviving spouse (i.e., a child). Most couples do not desire this because the child receiving the assets has no legal duty to share with the surviving spouse. In addition, unexpected gift tax problems can arise.


What is an Alimony Trust?

An Alimony Trust is a trust set up where the paying spouse pays or transfers to the trustee of the Alimony Trust money or property from which the receiving spouse will be supported after divorce or separation. The receiving spouse is named as the beneficiary of the Alimony Trust.

One reason for setting up an Alimony Trust is to make sure support for the receiving spouse continues even when the paying spouse has run into financial difficulties. Suppose a paying spouse owns a Certificate of Deposit and uses the interest from that CD to pay some or all of the alimony owed to the receiving spouse. If the paying spouse runs into financial difficulties he or she might be tempted to cash the CD out to be their own bills, leaving the receiving spouse to apply to the court for help with alimony.

However, if the same CD had been put into an Alimony Trust the paying spouse could not cash the CD out and the receiving spouse's alimony payments would remain steady.

Under an Alimony Trust, the paying spouse does not receive an alimony deduction for income reported by the receiving spouse from the trust. Nor does the paying spouse pays taxes on the trust income received in lieu of alimony. The paying spouse does not pay taxes on any trust income unless the divorce instrument or trust instrument fixes an amount or portion of payments as child support.


Avoid Probate: What is a Trust?

I had several clients ask about setting up trusts last week and was surprised at how little they knew about what a trust is and what a trust does. I have done work for them in the past and just assumed they knew more about Estate Planning than they did. It served as a reminder that sometimes as an attorney I get "institutionalized" when it comes to what I do for a living. By "institutionalized" I mean I often get so caught up in practicing Estate Planning Law that I begin to assume everyone knows what I know about it. I thought back to how much I knew about Estate Planning before I went to law school and even several years after law school. Not much. So for the likely many of my readers who don't know what a trust is, here goes.

A Trust Is...
A trust is bascially a set of instructions that specifies how you would like your assets to be managed and distributed to your beneficiaries. A trust is created by a legal document that names an individual or institution to manage the assets placed in the trust. In general there are two types of trusts:

(1) Trusts that are implemented while you are alive (i.e., revocable living trusts or inter vivos irrevocable trusts). When you establish a living trust, you reregister your assets to the trust, and the trust becomes the owner of your assets. You can name yourself as trustee. When you die, the trust assets avoid probate; and

(2) Trusts that are created through your Will after you pass away (i.e., testamentary trusts).

Why Create A Living Trust?
There are two basic reasons to create a living trust. First, to maximize your ability to control the management and distribution of your assets. There are many advantages to retaining control over your assets through a living trust. Some of these advantages include naming someone to manage your assets in case you become incapacitated, controlling when your assets will be distributed to your heirs, and maintaining privacy of your finances even after you have passed away.

The second reason to create a living trust is to prepare for possible tax consequences. The IRS treats transfers of assets for individuals at death as either nonmarital or marital. A nonmarital transfer is taxable, a marital transfer is not.


What is an Accelerated Death Benefit?

One of my client's recently obtained guardianship of her aged mother.  Her mother was recently moved to a nursing home due to health problems.  She is not expected to live longer than a year. My client approached me about getting help paying for the cost of the nursing home and otherwise caring for her mother.  We went through her mother's finances and discovered that she took out a life insurance policy that contained an Accelerated Death Benefit clause.  An Accelerated Death Benefit clause allows the insured to collect part of her death benefits before she dies if certain circumstances exist.

Accelerated Death Benefit
An Accelerated Death Benefit clause in a life insurance policy allows the insured to received a percentage of the policy’s face amount, discounted for interest, prior to the insured's death.  As in the case of my client's mother, the benefits kick in when the insured becomes terminally ill, needs extreme medical intervention, or must reside in a nursing home. The payments made while the insured is living are deducted from any death benefits paid to beneficiaries.

Use of the Accelerated Death Benefit has allowed my client to give her mother the kind of care she needs without draining her bank account and having to sell off sentimental property.
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