Myth #5: If you don’t have a Living
Trust, all of your financial information will become public record
when you die.
Myth #6: With a Living Trust, there is
nothing that needs to be done when one dies.
Truth: So what is the reason to use a
Living Trust rather than a Will?
I've written 1000's of Living Trusts. That's not surprising; I've
been doing it for the last 36 years. I hear all the time that one
must have a living trust. That may be true, but it isn't always
necessarily true. And the reasons the hucksters give are flawed at
best and just wrong at worst. Here are a few myths that they spout
followed by the truth. Keep in mind that I am writing from a
California perspective as that is where I live and practice. The
laws and practices of other states may differ.
By necessity we are going to be discussing probate. So let’s define
our terms. Probate is a court process in which the title to the
decedent’s assets is passed to those designated in the decedent’s
Will or, if none, then according to state law (typically the closest
relative as defined by the particular state’s law).
Myth #1: A living trust allows you to
protect your family because you control who gets your stuff. Without
a living trust who gets what is left to the vagaries of the Probate
Court (actually the vagaries of the state’s laws determining who is
the closest relative).
Truth: The above is true, except that it leaves out the important
fact that one does not need a living trust to accomplish this task.
A Last Will and Testament (Will or Wills) also determine who gets
your assets and if a trust really is needed one can be inserted into
the Will. (back to
top)
Myth #2: Probate is expensive often
costing 5% of the gross value of your estate.
Truth: Here's a link to the Probate Cost Chart on my website (if you
want to see the actual statute there is a link on the chart to the
statute). First, you should note that the 5% is a combined fee for
the attorney and the Executor. It's true that at the lower levels of
estate value the cost can be high (actually at the $100,000 level it
is 4% for the executor and another 4% for the attorney). But there
are so many other ways to avoid Probate and a living trust is
generally just overkill for a $100,000 estate. Yes, a living trust
will allow more flexibility than these other procedures but for
$100,000 it usually isn't important enough to have that flexibility.
And the fee reduces down to about 2.5% or less each for the attorney
and for the executor for greater than $500,000 estates. Could the
fees be higher? Yes, of course. Where there are complications,
extraordinary fees are allowed by the court. But most of the
probates I have handled have rarely involved extraordinary fees.
Could the fees be less? Sure! Often times a beneficiary is acting as
the executor. That beneficiary may not charge if he just feels
acting in this capacity is a family duty.
Second, a Living Trust isn't going to avoid all of that fee anyway.
Here’s my FAQ on the comparison of costs to settle an estate through
Probate vs. using a Living Trust. After all, just because you have a
Living Trust does not mean that when you die everything can be
resolved in 30 minutes (yes, I've heard that myth, too). For reasons
discussed in Myth #6, the attorney is still going to be necessary
and he is still going to charge as will the executor (although in a
Living Trust setting he is called the successor Trustee). So you are
not going to avoid that fee, although you will probably avoid some
of it. (back to
top)
Myth #3: Probates almost always have
complications such as unknown debts or beneficiary conflicts. This
will be avoided with a Living Trust.
Truth: Some probates do have complications, but as I have said, most
of the probates I have handled have rarely involved complications or
extraordinary fees. What the hucksters have failed to tell you is
that a well drawn Will is just as effective in avoiding beneficiary
conflicts as a Living Trust. The complications to which they refer
are generally experienced when there is no Will or when the Will is
poorly written (such as when the person wrote his own Will).
(back to
top)
Myth #4: Probate is slow. It takes
anywhere from 1-2 years or more to complete the process With a
Living Trust an estate can be settled quite quickly.
Truth: There is some truth here. Most smaller probates take around
10-14 months to settle. Settling an estate with a Living Trust (and
thereby outside of the Probate Court) is going to take about 4-6
months. Of course, if there is a house or other real estate to sell,
in the present economic environment (late 2011) it is simply going
to take longer to find a buyer. This delay could cause the entire
process to take longer than my estimates. Here’s a link to my FAQ on
the subject of Does it Really Take less Time to settle and Estate in
Which a Living Trust Was Used. (back to
top)
Myth #5: If you don’t have a Living
Trust, all of your financial information will become public record
when you die.
Truth: Actually, that is really sort of true. However, there is
rarely a Probate when one spouse dies and leaves everything to the
other spouse. So in that situation, nothing would become public
record. And, remember, at the time your information becomes public
record you will be deceased. Do you care if your financial
information will be public record at that time? If you are leaving
it all to the children or other loved ones, will they care? If your
child is wealthy and is inheriting a small amount from you, probably
not. (back to
top)
Myth #6: With a Living Trust, there is
nothing that needs to be done when one dies.
Truth: There are always loose ends to tie up when someone dies. No
matter how simple the estate, there are always some loose ends to
tie up. And that is why I said in Myth #2 that even with a Living
Trust, an attorney is going to be required (and will need to be
paid). Similarly, for the successor Trustee; unless he is your child
and wants to work for free, he is going to be doing things and needs
to be paid.
In fact, (with one exception) all of the things that an Executor or
an attorney (in a Probate) need to do, their counterparts with a
Living Trust will also have to do. They are gong to have to identify
and gain control of all of the assets, liquidate those assets if
necessary, deal with the taxing authorities (IRS and state for
income taxes and county for property taxes), creditors, and the
beneficiaries. The only thing that the Living Trust
attorney/successor trustee won’t have to deal with is the court.
Now, I will admit that, long ago, when I was a young attorney (and I
suspect that many young attorneys tend to believe this today), I had
a very simple perspective. I was of the mind that when someone died
and a Probate was necessary my primary focus was on navigating my
client through the thicket of the Probate Court procedures. And if a
Living Trust were used, that primary focus was unnecessary. A lot of
years have gone by and I now realize that that is probably the least
of my concerns. My focus, now, is, amongst other things, minimizing
taxes for my client, making as sure as possible that beneficiaries
receive the information that will make them feel comfortable that
they are winding up with their appropriate share, and cutting off
liability for my client (the executor or trustee). And these
focuses, are the same whether a probate is necessary or not.
(back to
top)
Truth: So what is the reason to use a
Living Trust rather than a Will? There are a number of them. Here
are a few. If you lose mental competency, a Living Trust names a
successor to take over your financial affairs and this will
generally occur without a court order, guardianship, or
conservatorship. A properly drawn Power of Attorney can do this,
too, but generally not as smoothly as a Living Trust.
Living Trusts are useful when you are trying to accomplish more than
one thing in your distribution. For example, assume goal #1 is that
you want to leave everything to your child, but if your child dies
before you the assets should go to his spouse. Goal #2 is to avoid
probate. We could accomplish #1 with a Will but that would require
Probate. We could accomplish #2 with beneficiary designations on
bank accounts and other forms of title on real estate but, in most
cases, we would not be able to accomplish the flexibility of goal
#1.
Again, I want to remind you that on smaller estates the Power of
Attorney approach for a mental incompetency is probably just fine
and the flexibility that Living Trusts can add may well be overkill.
In my mind, small means less than $300,000 in net worth, maybe
$500,000. Bottom line, above these values, Living Trusts make sense.
Below these values, not so much!
(back to
top)
