"Living Trusts"

Every week I have clients come to me asking if they should set up a "Living Trust." I first ask them if they understand what a living trust is supposed to be. Usually, they tell me they do not. I next ask them what it is they hope they can accomplish with such a living trust. With this question, they invariably tell me the following:

1. They don't want they government to take their property/They don't want their estate taxed heavily.

2. They want to get everything out of their name for liability protection/medicaid protection.

3. They want to avoid probate, the high costs of probate and probate lawyers, and they don't want individuals to see what's in their estates because probate consists of public records.

While I do have clients that might benefit from such living trusts, after explaining it to them more in depth, they often decide that a standard will and testament will do just fine.

Before you invest in an expensive set of trusts, ask yourself these questions:


1. Just what is a "living trust," exactly? A trust, like a corporation, is an instrument created on paper that takes on a legal life of its own. Basically, someone (the trustor or grantor) gives property for the benefit of someone or some group (the beneficiary or beneficiaries), but the property is held by someone else (the trustee). The most standard trusts are set up to take care of the beneficiary (be it a child, an old person, or whatever) by letting someone with presumably better judgment handle the property for the beneficiary. A "living trust," however, is a subset of this where the grantor, trustee and beneficiary, at the time the trust is set up, are often the same person--you've just created a legal entity to hold it. The idea is that you still get the benefit of it and control it, but you designate how it will go at your death, or who will handle your property for you if you become unable. That's pretty much all it does.

2. Will a Living Trust protect me from the government taking/taxing my property? Probably not. First, some people believe that if they don't have a named beneficiary or will that at their death, the government will take their property. This is incorrect--their "heirs" (as determined by state law) will take their property. The benefit of planning your estate yourself (by will, trust or whatever means) is that you, not the state, get to control who your estate gets left to. As for estate taxes, if your estate is large enough to be subject to taxes (I'll talk more about this in a second), whether your property is controlled by a trust or by yourself or by a will doesn't effect the taxes. It's how you plan your estate (both during your life and at death) that will effect what taxes the government may or may not take.

A secondary question you should ask is, "Am I even subject to estate taxes anyway?" Do you and your spouse's assets, including life insurance policies, come close to $1.5 million? Currently, estates must be almost $2 million to be taxed anyway.


3. What kind of asset protection am I looking for? First, if you've already got a potential claim coming against you (a lawsuit or you've been in an auto accident, etc.), it's too late to get property out of your name anyway--state laws prevent transfers of property to avoid creditors. Second, if you do want asset protection, their are better methods of doing this other than so-called living trusts: corporations, limited liability companies, even family limited partnerships can provide better asset protection than a trust in which you are the grantor, trustee and beneficiary all rolled up into one.

4. What probate issues will I avoid, and are they worth avoiding?
First, let me put some of these probate fears in perspective.
a. The costs: probate fees in the state of North Carolina will usually run, at worst, a couple of hundred dollars. More of my clients than not probate their deceased's own estate without having to resort to a lawyer.
b. The publicity: One of the few completely true statements that trust-sellers always make is that your estate is public record and everyone can know what you owned. When I meet with my client and he tells me that, I then ask him, "If you and your wife are both dead, does it really matter to you if people know what your estate is?" They inevitably tell me, "No." More practically, I go to my local courthouse almost every day, and I can tell you from my experience that I've never seen someone lurking in the courthouse to look up someone's estate file just to see what the deceased owned.

5. Do I really want to go through the hassle of putting all my property in a trust? For it to work like it's supposed to, you'll have to re-title everything--cars, houses, land, etc.--into the name of the trust. Do you want to have to do that? And what if you forget and leave something out? Well, your estate might just have to go through probate anyway!

I'll give you one example that makes my point. A married couple in their early 60s came to me to amend their trust. They'd purchased it for $3,000 from a seminar. It was basically a computer print out form, in a black spiral-bound notebook, with their names in it.

I asked them out of curiosity why they bought a trust, and they gave me all the reasons listed above. After some discussion with them, I determined that their estate was probably less than
$300,000, they had no liability issues, and that with some simple planning, the first spouse's estate was so simple it wouldn't have needed probating anyway. They'd been sold something they really didn't need!

And the worst yet--they had me do a will for them too!

Granted, there are individuals with sophisticated estates who probably could use a trust; but most of the individuals I know who've bought them just think they've got a sophisticated estate.

Before you go through the expense and trouble of setting up a so-called living trust, talk to your attorney, or a tax professional. You might just find that it's unnecessary. If you have any further questions, or would like to set up a consultation, contact me at wldeaton@vnet.net .