AVOIDING THE LIVING TRUST MYTH
The popularity of living trusts has exploded in recent years, supplanting the will as the estate planning vehicle of choice for estate management and distribution. A living trust often reduces the cost, hassle, and time involved in post-death administration. A living trust accomplishes these goals by avoiding probate. Living trusts therefore make good sense in most situations and I recommend them for the majority of my clients.
Unfortunately, the living trust phenomenon has given rise to a new industry. California has become overrun by "trust mills" -- companies that mass market living trusts by traveling from town to town holding seminars and promoting living trusts like timeshares or the latest diet fad. Trust mills have been especially prevalent in California for two reasons: (1) real estate prices -- and hence probate fees, which are calculated as a percentage of the estate -- are high; and (2) over-burdened local district attorneys offices either do not have the time to prosecute the unauthorized practice of law or view this as a "victimless crime."
While the quality of the "cookie-cutter," "one-size-fits-all" documents produced by the trust mills varies, the vast number of drafting errors and ambiguities I have seen in documents sent to me for review has been discouraging. Unfortunately, most errors are not discovered until after the settlor has died, when remedial action can be taken only through expensive court proceedings, if at all. Equally disturbing is the practice of some trust mills that use the preparation of living trusts as a front to peddle annuities and other financial products.
The fact is, most people can obtain competent estate planning assistance from local attorneys for about the same fee as the trust mills charge. Moreover, the local estate planning attorney is far more likely to meet with you personally, customize your trust to your particular situation, be around to answer your questions or amend your trust as the years pass, and be there at death or onset of incapacity when legal advice and planning becomes critical.
To help consumers identify competent estate planning attorneys, the California State Bar has implemented a specialist certification program to identify qualified attorneys as Certified Specialists in Estate Planning, Trust and Probate Law. Attorneys who have passed the required written examination and have met rigorous experience, continuing legal education, and peer review criteria may be certified as specialists. Only attorneys who have been certified by the State Bar may hold themselves out as "Specialists" in living trusts.
The Living Trust Myth
All the talk and excitement about living trusts has given rise to certain misconceptions about living trusts. I will refer to these myths collectively as "The Living Trust Myth."
Myth 1: "Living Trusts Eliminate Costs, Administration Chores, and Lawyers"
This is the number one myth of living trusts. At one time, many estate planning attorneys, including myself, subscribed to this myth. But then the clients for whom I had prepared living trusts over the years started dying. From my experience in handling dozens of living trusts after death, I soon learned the truth: there is work to be done and there are costs and expenses involved. Does it cost as much, take as much time, and require as much work as a probate? In most cases, the answer is no. But a living trust does not waive a magic wand over your estate making all your administration troubles disappear.
What has fueled popularity of living trusts is the public's fear of probate in particular, and its even more pervasive fear and distrust of attorneys and the court system. All too often, the trust mills and other non-attorney trust promoters exaggerate these fears to entice unsuspecting consumers into buying their living trust packages. Thus, to understand the allure of living trusts, one must first understand what probate is and why everyone is so afraid of it.
Probate is simply a court procedure whereby a court-appointed personal representative performs three distinct functions: (1) inventory and appraise the decedent's assets; (2) pay the decedent's debts and taxes; and (3) distribute the remaining assets to the decedent's beneficiaries. People often wonder, "why do we need probate?" Imagine for a moment the chaos that would result if, upon death, the decedent's relatives, creditors, and the taxing authorities all started grabbing assets and fighting over the estate, with no civilized system in place to resolve priorities. Probate is the system that developed in England in the Middle Ages to avoid such chaos. Since our laws are derived from the law of England, the probate system was been passed down to us and is still in use today.
Living trusts avoid probate because, unlike a will, the trust does not have to be proved in court and the successor trustee does not have to be appointed by the court in order to take charge of decedent's affairs. In the typical case, the administration baton is simply passed at death from the settlor-trustee to a named successor trustee with no court involvement. The successor trustee then assumes the job of carrying out the settlor's instructions as set forth in the trust instrument.
What functions does the successor trustee perform after the death of the settlor? There are three: (1) inventory and appraise the decedent's assets; (2) pay the decedent's debts and taxes; and (3) distribute the remaining assets to the decedent's beneficiaries. Do these functions look familiar? They should. These are exactly the same three functions that must be done in a probate!
In reality, the only difference between probate and post-death administration of a living trust is that probate is supervised by the court. There is a structured, formal system with rules for handling estate administration. Living trust administration is not supervised by the court. Although there are rules for trust administration, they are often ignored because most trustees and beneficiaries don't know about them. It is this apparent informality that makes living trust administration cheaper, faster, and easier. It is also this informality that can result in confusion, mismanagement, lawsuits, and potential liability for the successor trustee. In other words, it can mean a step back in time to the chaotic days before probate was invented back in Merry Old England.
To avoid these problems, the successor trustee must be knowledgeable about the operation of trusts or be willing to learn. He or she must also be well organized and committed to carrying out his or her fiduciary responsibilities in strict accordance with the terms of the trust and the Trust Law. Finally, the successor trustee must work closely with qualified professionals, an estate attorney and CPA, who will prepare required documents and tax forms and who will advise the trustee concerning the complex legal and tax issues that arise at death.
Myth 2: "Living Trusts Save Estate Taxes"
There is also a common misconception that living trusts save estate taxes. In the case of an unmarried individual, no estate tax savings result from a revocable living trust because the Internal Revenue Code requires the inclusion of the trust's assets in the settlor's taxable estate.
Even for the married couple, living trusts do not save a penny in taxes. The estate tax savings that are so often touted by the trust mills can also be obtained through a well-drafted will designed to create a Tax Savings Trust ("bypass trust") at death. The only difference between the two plans is that the Tax Savings Trust created by will requires a probate at the death of the first spouse to die, whereas the Tax Savings Trust created under a living trust document does not require a probate. In other words, tax savings is not an additional advantage of living trusts. Rather, it is the same probate-avoidance advantage already discussed above. Thus, to market the living trust as a tax savings device is misleading.
Myth 3: "Living Trusts Avoid Conservatorships"
Another common myth is that living trusts avoid conservatorships. A conservatorship is a court-supervised procedure, similar to a probate, except for a living person who has become incapacitated (the "conservatee"), rather than for someone who is deceased. It is true that no conservatorship will be needed for assets in a living trust because the successor trustee takes over without court appointment or supervision. However, under California law, a trust established on or after July 1, 1987, is subject to mandatory accounting requirements. If the trust settlor is incompetent, to whom will the trustee account? Arguably, a conservator must be appointed by the court to review the trustee's financial reports on behalf of the incompetent trust settlor. If the trust instrument is carefully drafted, this potential problem may be avoided. Unfortunately, many trust documents simply ignore this issue.
Myth 4: "Living Trusts are Private and Avoid All Court Proceedings"
A living trust is essentially a contract. A contract signed by someone who does not have legal capacity to contract, or who signed under duress or as the result of fraud or undue influence, is subject to challenge. Although the law relating to challenges to living trusts is not as well developed as the law relating to will contests, living trusts are not beyond legal challenge by a disgruntled heir.
In fact, the California Probate Code was amended effective January 1, 1998, to require the trustee of a living trust that has become irrevocable upon the death of the settlor to send a notification to all beneficiaries and to all heirs at law, even if not beneficiaries, who also have the right to a copy of the trust provisions that affect them. This law is intended to make it easier for disinherited heirs to challenge living trusts.
There may be instances where court supervision or intervention is sought by the trustee or a beneficiary. The trustee may seek the court's stamp of approval on accountings or certain proposed actions, such as the sale of a business, especially where there is a hostile beneficiary. As mentioned above, where a trust instrument is ambiguous or improperly drafted, a trustee or beneficiary may petition the court for interpretation of the trust instrument or to reform it.
A trust beneficiary may also ask for court intervention where the trustee has refused to make an accounting or where the trustee has acted in violation of the trustee's fiduciary duties. In fact, suits against trustees of living trusts for mismanagement and breach of trust may be the growth industry of the next decade for attorneys, like myself, who represent beneficiaries and trustees in trust disputes.
Conclusion
On balance, living trusts remain the estate planning tool of choice for disposition of assets after death and for effective estate tax planning. I believe in living trusts and prepare scores of such documents each year for my clients. However, I also believe in educating my clients about the dangers of the Living Trust Myth. I want my clients to make informed decisions about their estate plan based on fact rather than marketing hype.
If you are wondering whether a living trust is right for you, please call for a complimentary initial consultation. If you, or a friend or relative, had a living trust prepared by a trust mill, paralegal, or other non-attorney source, I would be happy to review it for you for a nominal fee. |