Or maybe you do: by David Disraeli

Living Trusts are a hot topic among seniors and are used to fill up meeting rooms for attorneys, financial planners and insurance agents.  In certain instances, they can be very effective planning tools, in others, burdensome and expensive.  This article will help you decide whether a Living Trust is right for you, or if you have one, how to make the most out of it.

What is a Living Trust?

The term Living in Living Trust represents what attorneys make by selling them a living. Living Trusts help pay for nice vacations, boats, homes and college tuition. Not all attorneys however are pro-Living Trust, or sell  packaged estate plans. The technical term for Living Trust is inter-vivos trust which is Latin for while living. Unlike most trusts, his type of trust benefits you while you are alive. Another term often used for these types of trusts are Revocable trusts. Although these trusts provide benefits during their creator’s lifetime, the key factor is that they are revocable, as opposed to irrevocable. This simply means that the creator can up and decide he/she is tired of their trust and dispense with them. Therefore, the creator can revoke this instrument and it will no longer exist, or he/she can make modifications to it.

Unfortunately Living Trusts are over-marketed and misunderstood. Proponents of Living Trusts use fear to sell their ideas: fear of probate, fear of the court system and fear of lawyers. They conjure up images of loved ones spending all their time in court trying to probate an estate when a Living Trust avoids probate. They say that a Living Trust is private and a will is public record as if your neighbors are going to down to the courthouse the week after your funeral to see what you left and to whom. Let me share a little secret with you if your neighbors really care to know your business there are ways to find out right now, they don’t have to wait until you die.

Rather than keep you in suspense, let me lay out the six reasons you don’t want a Living Trust. Then we will deal with the details and finally provide you a questionnaire you can fill out in the privacy of your own home to determine what options make the most sense for you. Here are the six reasons:

 

1. Probate is no big deal (in certain states)

2. Living Trusts can be very expensive

3. Living Trusts can be a maintenance nightmare

4. You don’t need a Living Trust to avoid probate

5. There is NO tax savings or creditor protection

6. There is no way to avoid probate completely anyway

Before we go any further, let me say that in my 18 years in the financial planning profession, I have recommended Living Trusts and seen them used very effectively many times. I have also seen them used inappropriately. This booklet addresses the reasons a person would not want a Living Trust, but is not an Anti-Living Trust treatise. If you really like your attorney and don’t need a Living Trust, just send him a gift, it will cost you less.

Now, here are the six reasons explained:

 

1. Probate in General

Probate in Texas is very different from many other states. In Texas, we have a process called independent administration. This simply means that you, or the executor can probate an estate independently from the court. (If you live in a state which does not have independent administration, this section may not apply). You still need to make a court appearance and you still need a death certificate. This form of probate assumes that you have no property outside of Texas. Most people have property in only one state. Bank accounts and other financial instruments can also be probated independently. The bottom line is that people fear probate when they shouldn’t.

2. Costs of a Living Trust

Since most people create Living Trusts along with a number of other documents, the exact cost is not always clear. You still need a will to handle any assets which are not in the trust. Unless the entire estate is distributed outright at death, additional trusts will be required to handle the assets coming out of the living trust. Therefore, creating a Living Trust ALMOST always involves at least three separate documents. A couple could spend upwards of $1,000 extra to create a Living Trust which is a lot of money if you dont need one.

3. Living Trusts Can Be a Maintenance Nightmare

Unless you have a very simple estate, (in which case you won’t have a Living Trust) the trust will not be effective unless you transfer all your property into the new entity. Transferring cash involves writing a check, but real estate is a whole different story. Most people invariably forget to change a beneficiary or transfer an asset which can defeat the purpose of the trust in the first place. In addition to moving assets into the trust, you must continue to do business in the trusts name. This means that every time you open a bank account, brokerage account, buy a car or property, you must do it in the name of the trust.

 

4. Avoiding Probate

You do not need a Living Trust to avoid probate. Technically, transferring a watch would require probate. But practically, you can transfer all your assets to your spouse or next of kin without probate. You don’t need a Living Trust to do it. For example, a joint bank account will pass to the surviving tenant (which can be multiple persons) without probate. Life insurance, annuities, IRAs, pensions, all pass outside the probate system. So by titling your property differently, it is likely that you could avoid probate without the time or expense of preparing a Living Trust. Similarly Joint Tenants With Rights of Survivorship means that the bank doesn’t have anything to say about the transfer of benefits by and between tenants. They may never know one of the tenants has passed away.

( it’s a good idea to get the deceased person from the account because if the surviving tenant dies, the prior decedent will get the money.) You got it a dead person cant cash a check, because they don’t normally look like their picture I.D.

5. No Tax Savings

Many people mistakenly believe that Living Trusts will save estate taxes. They may save court costs but they wont save a nickel in estate taxes. The assets in a Living Trust are still in your estate because you have control. The only way to move assets out of your estate prior to death is to gift them. This could trigger a gift tax.(except for the annual exclusion). The confusion over this lies in the fact that most Living Trusts are combined with a credit shelter (also called bypass, or A-B trust). Under current law, spouses can pass assets to each other without any estate taxes, many spouses do. However, each spouse is allowed to leave up to $1,500,000 (in 2004 to another generation, but they lose this right if they leave it to their spouse. So later on when the last spouse dies (or on the same day), only $1,500,000 passes tax free instead of $3,000,000. So what attorneys do is create a Living Trust which will fund a bypass trust at the first death. This creates an estate tax savings of several hundred thousand dollars. Importantly it isn’t the Living Trust which creates the savings the bypass trust (which you can do with just a will).

For the same reason there is no tax savings from a Living Trust, there is no creditor protection. Why does this matter? Because we live in a society where you can be sued at any time and lose what assets you have (non-exempt assets) through no fault of your own. The same is true of your spouse or beneficiaries. For example, if you place assets in a Living Trust and you are sued, the assets are just as easy to capture as they would be in your name (because it is still revocable). The reason I mention creditor protection is because people mistake the word trust for protection. However this is a false sense of security when dealing with revocable trusts.

6. There is Probate in your Future

There is no way to avoid probate completely outside of dying with no assets. That would require dying wrapped in a paper towel because even your clothes are part of your estate. If you were in the process of inheriting money yourself, had money in the unclaimed property account, or if you just plain forgot about an asset or an account somewhere, you will need to probate your estate. This is not just a way to keep our lawyers well-fed, it is because transferring property from a dead individual requires proving that they are dead, proving that they intended to leave assets to someone or some place, and proving who has the authority to execute these instructions (hence executor). In other words, you are going through probate (most likely) one way or the other. What a Living Trust does extremely well is it makes the process of moving assets very fast (instant) and without probate. It’s just not practical to have all your belongings in a Living Trust.

Reasons you Would Want a Living Trust

Now that I’ve laid out many reasons you don’t want a Living Trust, you may want to know why you would. Wills do have some severe disadvantages. While I don’t think its worth the hype it receives, the fact is your will is a public document. For some people privacy is so important they will go to great lengths to protect it. Probate CAN be time consuming if there are problems. Wills can also be contested. This means that while your wife needs the money left to her, an interested party can tell the judge that they intend to contest the will. If this happens, the whole process stops dead in its tracks. What’s worse, this party does not have to be a relative or have any claim against the estate. Although it doesn’t happen often, it does happen and it is not pleasant. A Living Trust, on the other hand, does not need to be probated and it is extremely difficult to challenge. If it is challenged, it would take place after the beneficiaries are already enjoying the property in question.

There is one other major reason a person would consider a Living Trust and that is the prospect of becoming incapacitated or legally incompetent. Alzheimers, severe pain, accidents and a myriad of other conditions can cause mental impairment such that a person is no longer legally able to act in their own best interest. Although the word incompetent is a harsh word, it is really just a legal definition. The point here is that a Living Trust provides for the management of one’s assets in the event of incapacitation. It is true that a Durable Power of Attorney allows someone else to act on your behalf; however ,it has several limitations.

• A durable power of attorney is a blank check. You better trust whoever you appointed because they can manage your money for you until IT’S GONE! A Living Trust provides a great deal more language about what the trustee can and cannot do and instructions about other things as well.

• A durable power of attorney can be challenged by a financial institution. Consider this you get sick and your attorney in fact goes to the bank to draw out money to pay bills. The bank sees the power you signed and wonders if it has been revoked or is still valid. This is unlikely but possible, where Living Trusts don’t share the same issue. The trustee has the power to act when the creator of the trust is medically incapacitated.

Other Matters

1. Do you have successor trustees and attorneys in fact named in your documents?

2. Are their any minor children who could stand to receive property from your estate? If so do you have language to create a trust for them?

3. Do you still have confidence in the people you’ve named as trustee/executor? Are they still willing to act in this capacity?

4. Do you have a will? Durable Powers? Living Will? Bypass Trust? Medical Powers?

Living Trust Checklist

The following questions will help you determine if a Living Trust is right for you or if a will and durable power of attorney are sufficient:

1. Do you have assets over $500,000?

2. Do you have property in multiple states?

3. Are you extremely uncomfortable with your will being a public record?

4. Do you trust the person who is named as a power of attorney to handle your money?

5. Do you think someone may challenge your will?

6. Are you the type of person that would take the time to fund and keep up with a Living Trust?

Your answers to these questions will help drive the decision to create, fund, and manage a Living Trust. It is not something that can be taken lightly. Furthermore, the decision for or against a Living Trust must come in the context of a complete estate plan and evaluation. Prior to going to see an attorney, we recommend that you prepare a few items and answer some questions. This will help you make the most out a professionals time and save you money.

1. A list of account numbers along with values, title of accounts, beneficiary designations

2. List of property, the way it is titled, mortgage balance, current value

3. Copy of all current legal documents

4. Monthly income needs of each spouse

5. Names, addresses and phone numbers of all beneficiaries, potential trustees, other advisors

Key Terms

Attorney in Fact – This is the person who is named in a power of attorney to act on your behalf. It can be a person or a trust company.

Beneficiary These are persons to whom assets go to in the event of death. They can also be the people who benefit from assets in a trust

Joint Tenants With Rights of Survivorship This form of property ownership or account title means that the owners of the account, who are called tenants, share jointly and severeably in the account and at the death of one tenant, the ownership becomes that of the other tenant(s).

Tenants in Common This form of ownership means each tenant shares equally in the account or asset. At death, the ownership follows the path in the tenant’s will.

Payable Upon Death This is not an official way of owning assets but a mechanism that banks use where accounts are payable to a beneficiary at death, avoiding probate.

Conclusion

There are obviously many considerations to estate planning. Although there is no substitute for an extensive meeting with a qualified attorney, it is possible for you to draft your own documents. At the minimum, a Living Trust should be evaluated in the context of the total picture. Our offices offer recipients of this booklet a 30 minute free telephone consultation. During this consultation we can discuss your situation, examine your options and review your current documents. If you choose to move forward, we will recommend several local attorneys.

 

 

Contact us at 512.350-4159