Living trusts, also called revocable trusts or family trusts, are not for everyone. There are lawyers who will bombard you with a litany of scare stories, insisting that having a trust is the only way to go. Here are some of the scare stories: Probate is a disaster and takes years; the Government will get your property; you will lose the estate to taxes; and the probate fees will eat up the entire estate unless you have a trust. There may be some truth to all of these, but the answer for you is certainly not a one-size-fits-all estate plan.
What is a Living Trust?
A living trust is a legal entity you set up to hold your assets to avoid probate and in some cases where people have a substantial estate, a trust can be used to minimize estate taxes.
Let’s take a realistic look at some of the issues surrounding living trusts.
Should you avoid probate at all costs?
Not always. If the value of the estate is low, then a small estate probate can be less expensive than a trust.
How expensive is probate?
If an estate goes through probate, the probate fees, including the personal representative’s fee and the attorney fee can be expensive. However, if you are under 60 and healthy, the probate expenses will occur in the distant future, paid by your children, but the cost of paying a lawyer for the trust is paid now by you. A will costs less now, and allows you to invest the saved money for later.
Won’t attorney fees in probate eat up the entire estate?
Valid creditor’s claims, medical bills and unpaid back taxes are much more likely to eat up the assets of the estate than attorney fees and the statutory personal representative’s fee. Attorney fees are paid at the end of the probate, and must be approved by the judge.
Doesn’t a living trust save on taxes?
A living trust will not save your family money on income or estate taxes. A trust is tax neutral.
How do I choose a lawyer?
Not every lawyer gets along with every client and the opposite is equally true as well. It is a personal professional relationship. Choose someone that you think you can get along with, by asking them hard questions up front. Choose someone who has experience, will promise to answer your calls, and someone who will explain their fee structure. Call several lawyers and compare services and prices. If someone will not talk to you on the phone, thank them for their time, hang up and call another.
At what age should you consider creating a living trust?
If you are in your late 60’s, 70’s or 80’s and have substantial assets, sometimes a trust makes sense. Just as often, it does not make sense. Each situation is different. A living trust is more expensive to create, and the savings to your family, if any, will only be realized after death. Therefore, if you create a trust at too young an age, any savings are far down the road, and you are spending money that would be better invested. Money spent on a trust is money out of your pocket now, whereas probate fees are paid out of your children’s inheritances. If you are in your 80’s, the savings to your family from a trust will be realized much sooner, and buying a trust might make a whole lot more sense.
Isn’t a trust easy to administer?
Not really. A Living Trust is not so simple to set up or administer over your lifetime. If you set up a trust, you have to pay attention to it for the rest of your life. All your assets must be legally transferred into the trust for it to be effective. If you leave out an asset, or buy a new asset and fail to put it into the trust, your family could end up with an unnecessary double administration after you die: A probate administration for the assets outside of the trust, followed by a trust administration for the assets inside the trust. A double administration will not save your family money.
Will my family be able to administer my trust after my death without a lawyer?
A successor trustee should get professional advice after the death of the person who created the trust. Sometimes not much needs to be done, but sometimes a lot needs to be done. Let an expert help you. The trustee should make sure he or she does not miss any important legal issues. The trustee is personally liable for mistakes, so hiring a lawyer is useful to make sure the trustee does not get sued later by disgruntled heirs or creditors. Administering a trust in some simple cases can be pretty easy and cost effective, but in other cases a trust administration can be just as costly as a probate. If the plan in the trust calls for the creation of a credit shelter trust after one spouse dies, the successor trustee should definitely hire an attorney to help set up the credit shelter trust after one spouse dies.
What about joint ownership with right of survivorship?
With a spouse, yes. Joint ownership of assets with a spouse avoids probate. Beneficiary provisions on life insurance and annuities also avoid probate. Beneficiary provisions are safe to use. However, please never put your children’s names on your real estate, or financial accounts as joint owners. If your children get sued, divorced, bankrupted or get in trouble with the IRS, your assets might be garnished by your children’s creditors!
Isn’t a trust private after death?
A living trust administration after the death of the creator of the trust is private and is performed informally, outside of the court’s review. This can be very desirable, and is an advantage for high net worth people. However, I have seen situations where unscrupulous trustees take advantage of the informal and private procedures of trust administration to hide assets, and even to steal assets from beneficiaries. In a probate, it is unlikely that a personal representative will be able to steal assets, since the court record shows all of the critical information, and each beneficiary is given a formal right to contest the probate. If you create a trust, only choose the most trustworthy person you know to be a successor trustee.
