Estate Planning for Self-Storage Operators: Avoiding Probate With a Living Trust
Copyright 2014 by Virgo Publishing.
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Posted on: 08/19/2012



 

By Jim Jones

“Planning is as natural to the process of success as its absence is to the process of failure.”

~Robin Sieger, author of Natural Born Winners

Everyone has an estate plan. Your current plan either benefits your family or benefits lawyers and the government. Which plan do you have?

Using a few legal documents, self-storage operators can create an effective estate plan, and prevent up to 50 percent of their estate from being lost to unnecessary probate costs and wealth-destroying “death” taxes.

What Is Probate?

Probate is the legal process by which a court distributes the assets of a deceased person according to the last will and/or state law. The court first determines the validity of the will, and then resolves all claims from creditors and competing claims from heirs.

There are three main reasons why you want your estate to avoid probate:

  • It’s expensive. Up to 10 percent of your estate can be lost to probate costs alone. Costs may include court fees, legal fees (to the executor of the estate or to resolve disputes), appraisals and accounting services.
  • It’s a lengthy process. While it’s possible for an estate to be “probated” in six to 12 months, it’s also common for the process to take years.
  • It’s an invasion of privacy. Your entire estate will become a matter of public record during the probate process. Anyone can go to the courthouse and learn what assets are in the estate, their value, and to whom the assets are to be distributed. There are instances of dishonest people searching probate records trying to identify and claim the assets of an estate.

Why Some Attorneys Recommend a Will

Many attorneys recommend their clients create a will without a living trust. This ensures the estate will go through probate. Why? Because attorneys don’t always have their clients’ best interest in mind. The attorney wants to collect the legal fees associated with probate and, in some states, the attorney receives a percentage of all the assets that go through probate. Probate is time-consuming, costly and public. The only person that benefits from your estate going through probate is the attorney.

Can You Use Joint Ownership to Avoid Probate?

You can avoid probate by holding assets in joint ownership, but there are several problems with this approach. For example, a couple built a farm worth several million dollars. An estate planner advised them to own the farm in joint ownership with their four children to avoid probate. A few years later, the parents and one of the adult children were killed in a car accident. The farm did avoid probate, since the assets went to the three surviving children as joint owners, but the spouse and children of the child that died were disinherited.

Furthermore, whichever of the surviving three children who outlives the other two will eventually own 100 percent of the farm. The descendants of the other three children will lose everything. Even a will doesn’t ensure the deceased persons’ wishes are followed because property held in joint ownership, in almost every instance, goes to the surviving joint owner(s).

Need another example of the danger of joint ownership and using a will as an estate plan? A couple, Ed and Mary, had three children. After Mary died, Ed remarried and had a fourth child, Tom, with his second wife. Ed’s will specified his desire for the estate to go equally to his four children. However, all of Ed’s assets were owned in joint ownership with his second wife, and upon Ed’s death, she, as the joint owner, became the sole owner of the estate. She instituted a plan to have all the assets go to her only child (Tom) on her death, completely excluding Ed’s other three children. Ed’s wish for his assets to go equally to all four of his children went tragically unfulfilled.

Setting Up an Estate Plan

The key document to an effective estate plan is a revocable living trust, which enables you to avoid probate, keep your estate private, and reduce or eliminate estate taxes. It also ensures your assets quickly transfer according to your wishes upon your death. With a revocable living trust, no court action is involved, and the property is distributed privately.

Other documents frequently used in conjunction with a revocable living trust include a living will, pour-over will, medical power of attorney, durable power of attorney, and irrevocable life-insurance trust.

Setting Up a Living Trust

A living trust is a legal document created during your lifetime and is revocable, which means you can amend, alter or cancel the trust at any time prior to death. Setting up a trust is a simple process.

First, you name the trust. Typically, it’s named after the individual or couple setting up the trust, such as “The John and Jane Doe Living Trust.” Next, you specify where you want your assets to go upon your death(s). Once you sign and notarize the living trust, it’s a legal and binding document. You are not required to file with the state, you do not need a Tax ID number, and there are no filing fees or tax returns.

A living trust provides no income-tax savings, and for income-tax purposes, it’s as if it doesn’t exist. However, if the size of your estate is above the amount exempted from estate taxes, the trust can be structured to reduce or eliminate estate taxes.

Once the trust is notarized, you need to fund the trust. “Funding” the trust is the process of transferring ownership of your assets to the trust. For titled assets (bank accounts, cars, stocks, etc.), you change the ownership of the asset to the name of the trust. For real estate, new deeds are filed with the county recorder where the property is located. For assets without title (jewelry, artwork, antiques, etc.), you simply list the items on the Schedule “A” of the Trust. You would also write a description of the items, such as "American Heritage billiard table, brown leather couch and diamond wedding ring."

You can also fund the trust indirectly by transferring your interest in other entities. For example, if you hold assets in family limited partnerships or LLCs, the trust can hold your interest in these entities. It’s important to remember any asset not funded in the trust will pass through probate.

The vast majority of Americans don’t have an effective estate plan in place when they die and, by default, subject their heirs to the frustrations and costs of probate. Setting up a revocable living trust enables you to pass assets to your heirs efficiently, and is one of the most loving things you can do for your family.

Jim Jones is the director of legal services for the American Society for Asset Protection. To receive the complimentary 80-minute audio CD, “Advanced Lawsuit Protection, Tax Reduction, and Estate Planning Strategies,” send your name and mailing address to jim@americansocietyforassetprotection.com . For more information, visit www.americansocietyforassetprotection.com.