Myth #1: A living trust allows you to protect your family because you control who gets your stuff.
Myth #2: Probate is expensive often costing 5% of the gross value of your estate.
Myth #3: Probates almost always have complications such as unknown debts or beneficiary conflicts.
Myth #4: Probate is slow.
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)
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)
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)
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)
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)
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 going 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)