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Why setup a trust?
Old 01-10-2012, 09:26 AM   #1
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Why setup a trust?

So my sister and her DH had just setup a trust on advice of a lawyer "friend". I'm on tap to be the executor of our mothers estate, and also look over her investments while she ages. Since I am on tap for the finances my sister asked that I talk to mom about setting up a trust.
A few details, my mom has about $500K of investments and a paid for house (about $150k). Her investment accounts all have assigned befenficaries. Her intent is equal share to her 3 kids. She has also put the house in a "Transfer on Death" or TOD status. Her understanding is that will avoid probate.
My understanding is that a trust can be used to solve several problems or situations:
1) Pass assets without cost of time of probate
2) Somehow sometimes used to pay less inheratance tax
3) Care for mom should she become not able to make financial decisions
4) Other specific cases, like fund and continue care for children needing special care.
My analysis has lead me to believe:
1) Would be covered with the TOD or beneficaries, I can take the time to probate anything left that is not transfered and I have verified her investments have the proper benif designation.
2) Mom's estate would not be subject to death tax due to $5M limit for federal and her state
3) She has a living will including POA whereby my brother is empowered to make medical decisions, my bother and sister are both co-owners on checking account, and I have a general POA and she signed POA forms from here investment house.
4) Mom doesn't have any special case like this.
So does anyone see something I don't understand (keep it on point, I know this is a open line) or something I'm missing? We had considered a trust for us and came to same conclusion, not really needed.
Finally, how does a trust affect the death tax, if you are over the exemption?
Thanks for any information not already covered.

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Old 01-10-2012, 09:45 AM   #2
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In the situation you describe, I cannot think of anything I'd consider huge that a trust would solve. Some probably lesser things to consider:

1) assets in a trust generally avoid being subject to a probate fee, which varies by state but could be thousands of dollars in your case
2) the probate process is usually completed within a year, but some cases drag on years if there are disputes, whereas for a trust the remaining trustee(s) simply take over management of trust assets immediately
3) though your case is not presently subject to Federal estate tax, who knows what estate tax rules Congress may invent in the years ahead
4) your state might have a lower estate tax exemption than the Feds, perhaps it does not impact you now but what about if asset values, say, double over the next 10 years?

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Old 01-10-2012, 10:04 AM   #3
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My understanding that in order to liquidate or distribute a trust, the waiting period for covering expenses, etc., is usually at least a year where as probating a will usually can be done in six months or barring any disputes. This is just my understanding and may not be correct.
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Old 01-10-2012, 10:23 AM   #4
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My mom said she had an easy time when Dad passed away because of their trust (in California). It can be simpler.

The tax advantage that we were after was ensuring that both me and DW utilized our estate tax exemption amounts. They used to be (and will be returning to soon AFAIK) $1M, which hopefully we'll be over since it is never adjusted for inflation, and not transferable. The surviving spouse could/will inherit everything tax free, but when they pass only their one $1M exemption was/will be applied. The $1M from the first spouse to go is lost and totally wasted. A trust can be set up to preserve the first spouse's $1M exemption, such that $2M can be passed on after both spouses are gone, tax free.

The current estate tax at $5M with an exemption that transfers to the surviving for a total of $10M after both spouses pass is much better. Hopefully it will stay that way in the future.
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Old 01-10-2012, 10:34 AM   #5
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I think you're covered. There's not a huge estate with the accompanying huge probate costs. You don't have any need to keep the probate process private, as some celebrities attempt with trusts. And you're covered with TODs & POAs.

I'd keep the POAs up to date (every year) and make sure that she sets up online access to all her accounts. Then when she's ready to turn things over to you there won't be any new paperwork.

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