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Archive for June 2016

Avoid Probate While Funding Your Living Trust

What Does Funding My Living Trust Mean and How Do I Do That?

How to Fund Your Living Trust

Funding your trust is the process of transferring ownership of your assets from you to your trust. To do this, you physically change the titles from your individual name (or joint names) to the name of your trust. You will also change most beneficiary designations to your trust so those proceeds will flow into your trust when you die.

Avoid Probate While Funding Your Living TrustAvoid Probate

This is important, because if you have signed your trust document but haven’t changed titles and beneficiary designations, you will not avoid probate. Your trust can only control the assets you put into it. You may have a really good trust document, but until you fund it (transfer your assets to it), it doesn’t control anything. If your goal in having a living trust is to avoid probate at death and court interference at incapacity, then you must fund your trust now while you are able.

Some people are surprised to learn they aren’t finished when they sign the trust document. When you sign a will, that’s all you have to do. But the process of changing titles when you have a will occurs after you die, and is handled by the probate court and attorneys. Whey you fund your trust, you are changing the titles now so there will be nothing for the courts to do when you die — or if you become incapacitated before then. So you can take the time to do this now or you can pay the courts and attorney to do it for you later.

Who transfers what?

You are ultimately responsible for making sure all of your appropriate assets are transfered to your trust but, in most cases, you will transfer some and your attorney will transfer some. Most attorneys will transfer your real estate, then provide you with instructions and sample letters for other assets. Ideally, your attorney will review each asset with you, explain the procedure and help you decide who will be responsible for transferring each one. For some assets, a short assignment document will be used; others will require written instructions. But most can be handled by mail or fax. Once you understand the process, you may decide to transfer many of your assets yourself and save yourself some on legal fees. (There may be a few assets your attorney advises you to leave out of your trust; if so, make sure you understand why and what will happen to them.)

What if you forget to transfer an asset?

If you forget to transfer an asset, it can still be part of your living trust plan. Along with your trust document, your attorney will prepare a short “pour over” will that acts like a safety net. When you die, the will “catches” any forgotten asset and sends it into your trust. The asset will probably have to go through probate first, but then it can be distributed according to the instructions in your trust.

While the funding process is not difficult, it will take some time and it’s easy to get sidetracked or procrastinate. Make a list of your assets, their values and locations, then start with the most valuable ones and work your way down. Remember why you are doing this, and look forward to the peace of mind you’ll have when the funding of your trust is complete.

Family Partnership

The Family Limited Partnership: How to Transfer Your Business (and Other Assets) to Your Children Without Losing Control

A family limited partnership will let you remove your business, and any future appreciation on it, from your estate now, and still keep some control. It is especially useful when the business might otherwise have to be liquidated to pay estate taxes. Stocks, real estate or insurance can also be used instead of a business.

Family PartnershipHere’s how it works. When you set up a family limited partnership, you transfer the assets into the partnership in exchange for partnership shares. You keep the general partner shares and, over time, you can gift limited partnership shares to your children, removing the value of the gifted partnership interests from your estate.

Though you have a fiduciary obligation to the other owners, you control the family partnership as the general partner; you determine how the assets are managed, when income is distributed and how the partnership is run. Limited partners (typically your children) are passive — they have no say in how the partnership is managed. Profits and losses are allocated among the partners, but no income is distributed unless you, as the general partner, decide to do so. Also, the agreement can be written so that shares cannot be sold or transferred without your approval.

Because there is no market for these shares, their value is often discounted. (What would someone pay for minority shares in assets over which they have no control?) So you are able to transfer these assets to your children and remove them from your taxable estate at a discounted value — all without losing control.

If you gift shares in increments of $14,000, there is no gift tax. Larger gifts can be applied to your federal unified gift and estate tax exemption. (State taxes may also apply.) And since you are making gifts based on current value — not the appreciated value when you die — this lets you, in effect, freeze the value of the gifted assets at the time the gifts are made.

A family limited partnership gives you more control than a corporation, in which even minority stockholders (either your children or their creditors) can have substantial voting rights and can force sales, distributions or even liquidations. The assets also have some protection from future lawsuits and your children’s creditors; if a creditor is awarded a limited partnership interest, the creditor has no more rights than the previous limited partner.

Benefits of a Family Limited Partnership

  • Asset TransferAssets of substantial value, and any future appreciation on these assets, are removed from your estate, reducing the size of your estate and saving estate taxes.
  • The assets are often transferred at a discounted value.
  • The assets can be gifted over time to family members as annual tax-free gifts (no gift tax).
  • Limited partners (other family members) have no say in how the partnership is managed.
  • Assets have some protection from children’s creditors and future lawsuits.
  • As general partner, you keep some control:

o You control how the assets are managed and how the partnership is run;

o You decide if any income is distributed;

o Shares may not be sold without your approval.

Planning for the transfer of your family business is an important piece to your overall estate plan.  It is worthwhile to spend some time learning about estate planning and the ways a comprehensive estate plan can benefit you and your family. Find out more on what estate planning is here.