Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

ADDITIONAL INSIGHTS ON ESTATE PLANNING
(Part 3 of a 5-Part Series)
(3/17/02)

For the past couple of weeks, I've been talking about estate planning and general and some of its problems and pitfalls in particular.

This week I want to focus on some of the more common estate planning tools.

Gifting of Property

Many parents think they can avoid the problems of estate planning and probate by re-titling assets in their children's names while they are still living. They think this will make things easier for the children if something happens to them.

There is one major problem with giving property to your children while you are alive. It isn't yours any more-it's gone. It ceases to exist as far as you are concerned. What if you want or need it back? What if your child is sued? Or enmeshed in a nasty divorce? Or killed?

Giving away property is not something you should do lightly or without a great deal of thought.

Also, although it may become less of a problem if the last tax law revision sticks, your child sacrifices the right to acquire the property at its "stepped-up" basis. For example, if you bought a farm in 1960, your basis in the property is $5,000, and it is now worth $300,000, when you give it to your child in 2002, your child's tax basis in the property is still just $5,000. If your child sells it, he or she is going to pay mega-capital gains taxes to the IRS and OTC.

If instead you had left the farm to the child and it passed to him or her at your death, the child's basis in the property would be $300,000. Any subsequent sale would only result in capital gains taxes on the amount realized in excess of the $300,000 basis. This could be a powerful disincentive to gifting property if the tax ramifications are fully understood.

So how can I retain control and help my family
avoid problems at my death or disability?

An alternative that has been recommended by such diverse groups as the ABA Probate and Estate Planning Section and Forbes magazine (in its article entitled "Trust a Trust") is the inter vivos or revocable living trust.

What is a Revocable Living Trust?

A revocable living trust is an instrument you create during your lifetime. It takes effect immediately and provides for continuity of ownership and control and for the transition of management and distribution of assets. You can alter, change, amend or revoke the trust at any time. It details what you want to happen to your assets when you die just like a Will, but it avoids probate at your death.

A revocable trust keeps the court out of your business if you become incapacitated because you can identify a successor trustee to handle your affairs. Unlike a power of attorney, a trust is a legally enforceable instrument, so financial institutions must honor the decisions of your successor trustee.

It also allows you to control any assets you leave to your minor children or grandchildren without court supervision. And that control can continue almost ad infinitum. Trust assets can be retained in trust and administered on behalf of your beneficiaries for as long as you deem appropriate, rather than having them distributed to the children when they reach a magic age like 18 or 21.

How does a Revocable Trust avoid Probate and Court Supervision?

When you establish a revocable trust, you transfer all or essentially all of your property to the Trust. Usually if you are able to do so, you will want to be the sole trustee or at least a co-trustee. That means you will continue to control the assets, just in another name. Instead of signing as "John Doe," you will now sign as "John Doe, Trustee." Other than that, nothing has changed.

The beauty of this is that legally you no longer own any of this property so there is nothing left for the court to administer when you die or become disabled. While the concept sounds simple, it works-it keeps your property out of the courts, even if you own (through your Trust) property in several other states. If your property wasn't owned by your Trust, your heirs would have to probate your Will in every state in which you owned real property. Texas and Colorado are among the few states with simplified procedures that do not require a full ancillary probate, but remember they are exceptions to the general rule.

Are you saying I can retain control of all the Trust Assets?

Exactly. You retain full control. You can do anything you want that you could have done before you transferred the property to your Trust. You can buy, sell, invest, even make changes or terminate your trust-all you have to remember is that you are acting on behalf of the Trust, not yourself, and all transactions should be done in the name of the Trust with your signing as the trustee and not individually.

A Trust is legally "transparent". The Internal Revenue Service considers the transfer of assets to a revocable trust to be a non-event since you can pull the property back out at any time. Only the name on the titles changes. In actuality, you probably have more control over your property than you did before you placed it in Trust.

As the creator of the Trust, only you can make changes to it or control the sale, transfer or acquisition of its assets. This is the same control you had when you owned the property separately, so you have absolute control of your estate.

Next week I'll talk about what happens if you become incapacitated or die. Stay tuned.

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