The Trust Centered Estate Plan

There are typically four documents that make up a “trust-centered” estate plan. They include:

1. Revocable Living Trust – A Living Trust provides instructions to the person(s) of your choice (your trustee) on how to handle your financial affairs in the event of your death or incapacity. While you are alive, both of you are trustees of your living trust and you can change the trust at any time (making it revocable). However, at the first death, the surviving spouse continues as trustee but the trust becomes irrevocable and is limited in what can be changed. A Living Trust becomes a “receptacle” for all of your assets and governs how this portion of your estate is administered during your lifetime, and how it is to be passed on to your heirs at your death. This document outlines in detail your wishes in a variety of events and circumstances that could befall you. Overall, a Living Trust offers you the following benefits:

• Allows you to avoid the probate process with its attendant costs and delays
• Allows you to take full advantage of the US unified estate tax credit which is equivalent to exempting $2,000,000 in assets at each death, for a total of $4,000,000 per married couple (in 2007).
• Allows you as much, or as little, control as possible over your estate in a variety of circumstances
• Your estate would be kept private and would not become a matter of public record for all to see
• While you are non-citizens of the US, the QDOT (Qualified Domestic Trust) could allow you to defer any estate taxes until the second death. However, if the surviving spouse needs to withdraw principal from the QDOT, estate tax will have to be paid at that time while the tax on any amounts left in the QDOT continue their deferral.
• Eliminates the need for a court hearing to determine who is to administer your estate in the event of your death or incapacity (with its attendant costs and delays)
• Alleviates your heirs from making difficult decisions about your money at an already difficult time
• Enable you to get a full “step-up in cost basis” of your entire estate at the first death
• If you make your Trust the beneficiary of your IRAs, you have the ability to “stretch-out” the tax deferral over the life of your heirs if you wish

For most Canadians, a living trust is typically new as their use in Canada is not near what it is in the US. The primary reason for this is in Canada, trusts are taxed as a separate entity and are subject to the punishing Canadian trust tax rates (top marginal tax rate for your province on the first dollar of income – starts at 39% to over 47%). Further, there is a deemed disposition when assets are moved into, or out of, a Canadian trust. In the US, the taxation of trusts is much different because they are “flow-through” entities that are taxed at your personal rates. This makes them much more effective as an estate planning tool in the US.

2. Last Will – A last will provides instructions to the person of your choice (your executor) on what do with your financial affairs in the event of your death. Please note that a last will does not typically provide any direction on your funeral or burial instructions because it is usually not opened until after your funeral when all the heirs have convened for the reading of the will. If you make your last will a part of an overall trust centered estate plan, your last will would simply be a “pour over” will that would “pour” any assets left accidentally or intentionally out of your trust into the trust to be settled by the terms of your trust.

3. General Durable Power of Attorney – This document outlines your wishes in managing your financial affairs in the event of your incapacity, and gives the person of your choice (your agent or attorney-in-fact) the power to implement your wishes. Such powers include the ability to pay your bills, vote, file your tax returns, open your mail, care for your pets, conduct routine banking, converse with your financial or legal advisors and so on, when you are unable to do so. Unfortunately, a spouse has NO LEGAL AUTHORITY to undertake these actions on behalf of the incapacitated spouse (even though many times they do).

4. Healthcare Directives – Typically, this document combines your living will, healthcare and mental power of attorney documents. Your living will outlines your wishes regarding your healthcare to physicians and other healthcare workers, your family, and the courts in the event you are unable to communicate such wishes because you are brain dead, unconscious, under the influence of analgesics or terminally ill. This document provides as much, or as little control in how far you want life-prolonging procedures to go, what medical procedures you want administered in which circumstances and alleviates your loved ones from having to make these difficult decisions in such tragic circumstances.

A healthcare/mental power of attorney gives the person of your choice (your agent or attorney-in-fact) the power to implement your healthcare wishes as outlined. Typically, this person should be a person you fully trust with your life, as they will be making the decision on whether to “pull the plug” or not (your spouse typically, but not an heir).