INTRODUCTION: The following material is taken from a booklet I prepared for Petra Financial Advisors, Inc in 2002.  It is copyrighted by Petra and you can get a nicely printed booklet from them that contains all of this information by contacting them at either www.petrafinancial.com or 888 636 6300.  Your personal advisors may also have material that bears on the subjects contained in these articles.  Be sure to ask them first. 

The following material is admittedly long, and to the layman, seemingly involved and complex.  Yet my attorney friends probably think it is incomplete and less than thorough.  There is a tug and pull between trying to be complete and thorough, while at the same time maintaining the reader’s patience and commitment to read what has been written.  I hope that I have balanced these two objectives.  You don’t have to read all of the related sections at one time.  You can read each section separately and independently of each other.

This material is a product of 26 years (as of 2002 when it was first written) in the financial planning and investment advisory field.  It is a mix of knowledge obtained through experience and learning.  Often what you learn is tempered greatly by first hand experience.  Elegant solutions to estate planning situations that reside on paper create real life consequences.  It is those consequences that led to the writing of this booklet.  In the Financial Management section of this website you will find an essay on the subject of complexity and its impact on our ability to managed our personal affairs as we age.  The impact of the complexity of your estate plan will fall on the surviving spouse.  That is what this series of articles is all about.

If when you have finished this series of articles, you still do not have a sense that you grasp it all, do not despair.  That is why you have advisors.  Print out the articles you have questions about and show them to your financial planner, accountant and estate planning attorney.  Your attorney’s input and advice are critical to reaching the best decisions about all of the issues raised in these articles; especially as they apply to your particular situation.  Do not act on anything thing in these articles unless and until you have discussed all of the issues thoroughly with your attorney.

Part of the original preparation of these articles back in 2002 was to ask others to review each article.  I asked attorneys and my then clients to review each article.  I asked attorneys for their professional insights and comments.  I asked clients to review the readability of the articles and for their personal reactions to what they had read.  In the process, I received valuable input from each of them, and in many cases, their input led me to change some of the suggestions contained in the articles.  One client asked, “If there is so much hassle caused by trusts why do I even want one in the first place?”  That is a good question.  I will try to answer that question in this introductory article.

The first reason usually given for having a trust is to avoid probate.  Depending on the state you live in, this may or may not be an important reason.  Many estate planning attorneys in states like Texas and some East Coast states, do not recommend trusts for this reason.  In those states, probate is not an expensive or a long and involved process.  However, it is still public.  So those who want to avoid creating a public record of their financial affairs, at death, will still want to avoid probate.  A trust is a good and useful way to avoid probate.  I have a friend in Washington State whose husband died over a year ago.  She is still receiving unsolicited calls that have be triggered by the public filing of her husband’s estate after his death.

The second reason for having a trust is to avoid or reduce estate taxes.  Currently, in 2011 everything you leave to a spouse avoids estate taxation.  Furthermore, you can leave up to $5,000,000 to others without any estate taxation.  If the first spouse to die leaves everything to the surviving spouse there would be no estate tax at the first death.  When the surviving spouse dies, the first $5,000,000 is not taxed as the estate goes to the ultimate heirs.  To this $5,000,000 amount is added the difference between what the first spouse left and $5,000,000.  As an example, if when the first spouse died he or she left a $2,000,000, the surviving spouse could leave up to $8,000,000 estate tax free. The net result is that through to the second death, the two spouses can leave a total of $10,000,000 without any estate tax due.  It used to be that the use of trusts in your estate planning could double the amount that could left estate tax free.  Now you could leave $10,000,000 estate tax free with or without a trust.  The estate tax bracket on the first dollar above the exemption amount is 35%.   

These were the two most common reasons (probate avoidance and estate tax avoidance) for setting up a trust as part of your estate planning.  Estate tax avoidance will begin to play a lesser and lesser role in this decision as time goes on.  If probate avoidance is a concern a trust can be set up during your lifetime.  The trust is then called a Living Trust or Intervivos Trust.  It can also be set up at your death by the action of your Last Will and Testament.  The trust is then called a Testamentary Trust.  A Testamentary Trust, however, will not avoid probate.

There is still another significant reason to set up a trust and this reason requires a Living Trust.  We are now living to the age of our incapacity.  When I first wrote this series of articles in 2002 I was working with the daughter of a client who had developed Parkinson’s disease and dementia.  She and her mother had just put him in an Alzheimer’s Skilled Nursing Home.  The client’s wife was in good health, except for back problems that had been aggravated by caring for her husband.  He was no longer competent to manage his financial and personal affairs.  The wife was emotionally tired and unwilling to take over these management duties.  If they had had a Living Trust, she could have taken over as trustee when her husband became incapacitated with the option to resign in favor of a successor trustee when she no longer wanted the burden.  This process would have all been laid out in the trust document.  There would have been no need to go to court to transfer financial management of their personal affairs from one to another and then on to a successor during their joint lifetimes or anytime thereafter.

It is possible to pass the reins of control by the use of a Limited Power of Attorney but, I believe, a trust is easier to use and implement than a power of attorney, especially with investment custodians and transfer agents for stocks and mutual funds.  Also, if the title of real property has been put in the trust (as it should), a trust is easier to use than a power of attorney with respect to that property.  Because of this third reason I almost always encouraged my clients to establish a Living Trust as part of their estate planning.  The trust should address the issues of continuing management of your financial affairs during your lifetime in the event of incapacity.