Reader question: I am very anxious to learn if a Living Trust can be used in Alabama. If possible, I’d like to use this strategy for leaving my assets to my two children when I pass on. I have been told it is a way to also avoid probate. Can you help? M.C.
Answer: I believe what you are referring to is a Revocable Living Trust. This is a trust that you set up during your lifetime but retain the right to make any changes you wish while you are alive and competent. At death, the trust becomes irrevocable. In most cases, after you have signed the revocable trust documents, you’ll want to transfer all of your assets into the name of the trust. To the extent that you accomplish this, at your death, the trust assets will not be subject to probate. In most cases, transferring assets into your trust is a fairly simply matter. For example, changing your bank account to your revocable living trust simply requires presenting the bank with evidence of the existence of your new trust and then completing a bank form showing change of ownership. You will continue to use your Social Security number for tax purposes and any interest or dividend income will continue to be reportable on your personal tax return. Transferring real estate into your trust is slightly more complicated but can easily be accomplished with the assistance of your attorney. The biggest single mistake people make when using a revocable living trust is not transferring their assets into the name of the trust. To the extent you fail to do so, those assets may be subject to probate. Because this is often the case, you’ll need a will in addition to your revocable living trust. This will is often called a ‘pour-over’ will because it says that any assets not already owned by your trust will pour-over to your trust at death. The costs associated with drawing a revocable living trust is a bit more than your typical will because it takes more time from the attorney particularly if he or she helps with transferring assets into your trust. These costs may be more than offset based on eliminating or minimizing probate costs at death.
For those of you who are not familiar with probate, it is a court administered process whereby, at death, a probate judge makes certain that your debts are paid and your assets are transferred to your heirs according to your last will and testament. If you die without a will, called dying intestate, the probate court, based on the rules established under state law, determines for you who will receive your assets.
If you own property in more than one state, the revocable living trust can avoid you having to probate your estate in multiple states…potentially saving a lot of money, time and aggravation!
One added advantage of a revocable living trust is that it maintains the privacy of your financial assets. Probate is a public process where anyone who is willing can review your probate documents by visiting the probate court. With technology today, often this can be done on-line.
Reader question: Is there a way for my children to avoid a large tax as the beneficiaries of my IRA? M.C.
Answer: Yes. If you have named them as the beneficiary, at your death they can elect to ‘spread out’ payments over their life expectancy. There are two rules you and they should pay attention to:
1. Minimizing required minimum distributions. If your IRA names multiple children as the beneficiary, then the life expectancy (per IRS Single Life Expectancy tables) of the eldest child must be used by all children unless each child separates his or her share into an Inherited IRA in his or her own name by December 31st of the year following the year of your death. This normally is not a big issue unless there is a large disparity between their ages.
2. Securing the Stretch. In order to get the ‘stretch’ discussed above, each beneficiary must begin taking at least the required minimum distribution by December 31st of the year following the year of your death. If a child misses this deadline, then he or she must withdraw all of the funds (and pay the income taxes) by December 31st of the fifth year after the year of your death.