What is a "living trust?" Do I need one?
How do I manage my trust while I am alive?
Will a living trust avoid estate taxes?
Will a living trust protect my assets from creditors?
Will a living trust allow me to qualify for Medi-Cal while still leaving my assets to my children?
I have a disabled child on public benefits. What is a Special Needs Trust?
If I have a trust, do I still need a will?
What about those "Trust Seminars," then?
What is a "living trust?" Do I need one?
A living trust (sometimes called a “revocable living trust” or an “intervivos trust”) is yet another method for the orderly winding up of a deceased person's affairs, but without the involvement of the court (i.e., no probate.) A will and a trust are merely tools to accomplish a single objective: passing your assets to your beneficiaries upon your death. It is important to remember that (with infrequent exceptions) the only reason for establishing a living trust is to avoid probate. Other goals, such as minimizing estate taxes or ensuring that your wishes are carried out, can just as easily be accomplished through a will.
Nobody needs a living trust, despite what your neighbor may have told you or what you may have heard at a seminar put on by folks who really only want to sell you an annuity or long-term care insurance. A living trust has both advantages and disadvantages, compared to a will. Its advantages include no court supervision, privacy, faster and smoother (usually) operation than probate, and an overall monetary savings. Its disadvantages include no court supervision, extra bookkeeping or accounting problems during your lifetime and the fact that it is more expensive for you than having only a will. In addition, a trust is a very complex document and few laymen fully understand it.
I always explain to my clients that a living trust is of no benefit to you. We prepare a living trust to benefit our intended beneficiaries (usually our children), by speeding up the process and minimizing the cost after our death. In return, we pay considerably more to have a trust prepared instead of a will, and we have to make sure for the rest of our lives that our trust is in order.
As an example, a will for my wife and myself might cost in the neighborhood of $250 - $500. A living trust (and its companion documents) might cost us $1,500 to $2,500. But if we have a $500,000 estate, attorney’s fees for probate would cost our children $13,000 – a cost which could be avoided if we did a trust. So by setting up a trust, we have caused a savings of possibly $10,000 to $12,000. However, we never see that savings, because it only occurs after our death.
Therefore, if I have no children, and all of my estate is going to charity, I may not care whether or not a probate is necessary after my death. I might prefer the cheapest and easiest solution for me.
In short, whether to establish a living trust depends on how you, personally, view the pros and cons. You wouldn't allow a stranger or a family member to tell you that you should be a dog person or a cat person, or that you should drive a Ford or a Toyota. If someone tells you that you should have a living trust, that person either doesn't have the full story or is trying to sell you something. Be careful and consult a qualified estate-planning attorney.
I like to compare a trust to setting up a family company. My wife and I give all of our assets – our house, our investments, our major bank accounts – to the company, so that we no longer have title to them. When the last of the two spouses dies, if he or she doesn’t own anything, there is nothing to probate. Everything is owned by the trust.
During our lifetimes, however, we are the trustees of the trust (or the president of the company), so we have not lost control over the assets. When the first of us dies, the surviving spouse becomes sole trustee. Our trust declaration names a successor trustee (or two or three, in order of preference) to take control after the death of the second one of us. As I explain to my clients, “if the president of General Motors dies, they don’t stop selling cars. They name a new president and business continues as usual.”
This successor trustee is commonly one of our children, or my brother-in-law, or my nephew – whomever we can trust to carry out our written wishes. Our trust declaration states specifically who is to receive all of our assets, and the successor trustee is charged with carrying out that plan. Our successor trustee takes control of all of the assets owned by the trust, pays our creditors, files my final personal income tax returns and distributes the remaining assets to the beneficiaries we have named.
While a probate in California typically takes from six to ten months to complete, a trust distribution can theoretically be made within 30 to 90 days after death.
How do I manage my trust while I am alive?
Serving Alameda County for over 30 years
You need to make sure that all of your major assets are in your trust – not just at the outset, but for the rest of your life. Some people find this to be what in legal terminology is known as "a hassle."
For instance: You have a Certificate of Deposit (CD) at ABC Bank. When it matures, you realize that XYZ Bank, just down the street, is offering a higher interest rate. So you walk your money down the street and open a new account. It is very important that you remember (and your attorney will not be there to remind you) to open the new account not in your own name, but in the name of the trust.
Also, some banks and lending institutions will not loan money to trusts. Your attorney (I certainly hope) will have deeded your real property into your trust when you established the trust. However, if you later refinance your mortgage or take out an equity line of credit, many lenders will require you to deed the house back to yourself before they will loan money against it. They do not warn you that it must be deeded back into the trust immediately after the loan escrow closes. If you do not remember to do this, the property will probably have to go through probate – even though you have a trust.
Will a living trust avoid estate taxes?
If your estate is large enough to trigger federal estate taxes, you need to do some advance planning to maximize your deductions and exemptions. This planning can be done by way of a trust or a will. Any tax planning that can be done through a trust can also be done through a will, although some advisors counsel that a will then becomes so complex that you might as well establish a trust.
The subject of estate tax is too complicated to go into here, particularly since nobody knows what Congress will do with the tax rates and the "lifetime exemption" within the next couple of years or so. However, if your estate is in the $1 - to - $2 million range or over, you definitely should consult an attorney to make sure that you are using all legal methods to minimize estate taxes.
Will a living trust protect my assets from creditors?
The simple answer is “no.” A living trust is what is known as a “legal fiction.” In other words, it is useful for probate purposes, but everybody know that while you are alive, you have total control of your assets. And if you have control of your assets, your creditors can require you to use them to pay your debts.
On the other hand, if someone else sets up a trust for you, the assets of that trust can usually be protected from your creditors. As an example, one of your three children may be totally incompetent when it comes to money matters. You may decide that you want two-thirds of your estate to be given outright to two of your children on your death, but one-third should be held in trust until the “problem child” reaches the age of 50 or so – or even until he or she dies. Since the money does not belong to the child – it’s your money – you can shield it from the child’s creditors so long as it remains in the trust.
(Of course, as soon as the trustee pays $100 to the child, the creditor can then try to grab that $100.)
Will a living trust allow me to qualify for Medi-Cal while still leaving my assets to my children?
Again, the short answer is “no.” The legal theory is that, if you have exhausted your assets, the taxpayers will pay for your medical care. However, they will not pay for your medical care while allowing you to pass a sizeable estate on to your children. Whether this theory is “correct” or not is a political opinion, and not a legal opinion.
There are, however, some limited exceptions to the rule stated above. You might be able to pass your house (usually your major asset) to your children if you start planning early enough. Also, you may ask the court to allow you to “shelter” more of your assets than allowed by Social Security regulations if you are what is known as an “at-home spouse” and your husband or wife needs to go on Medi-Cal. For help in this area, you should consult a qualified elder-law attorney. My office will be happy to give you a referral to a competent attorney in your area.
I have a disabled child on public benefits. What is a Special Needs Trust?
If you have a child who is disabled and receiving public benefits, you probably do not want to leave that child a large inheritance. If you do, he or she will be disqualified from public benefits until the money is spent, and then will have to reapply for such benefits as SSI or Medi-Cal. Instead, you will probably want to establish a Special Needs Trust.
Under a Special Needs Trust, the portion of your estate that would otherwise be distributed to the disabled child will instead be managed by a successor trustee for the rest of the child’s life. The successor trustee will be instructed to use the funds to supplement public benefits, but never to give enough money to the child at any one time as to cause him or her to lose those public benefits.
Thus, a gift of a portion of your estate can make life a little easier for the disabled child for many years after your death. Also, a carefully drafted trust contains further provisions designed to shelter those funds in case future changes in the law attempt to invalidate Special Needs Trusts.
If I have a trust, do I still need a will?
As mentioned above, all of your major assets are placed in your trust at the time it is established. But you may receive an asset later by gift or inheritance and forget to place it into the trust. Or you may have an interest in some asset of which you are totally unaware. You want all of your assets – whether or not they are in the trust at the date of your death – to be funneled through the trust to your beneficiaries in an orderly fashion.
Therefore, an important part of a trust package is what is known as a “pour-over” will. This will does not say, “I leave everything outside of the trust to my favorite niece (or my three children.)” Instead, it says, “I leave everything outside of the trust to my successor trustee, to be distributed as part of my trust.”
If you have kept your affairs up to date, the total value of all of the assets outside the trust will be less than $100,000.00. In that case, the terms of your will can be followed, but probate will not be necessary. Of course, if the total value exceeds $100,000.00, that part of your estate may still have to go through probate, but the bulk of your assets – being in the trust – will not.
What about those "Trust Seminars," then?
I’ve gone to a couple of these seminars. From an attorney’s standpoint, they’re pretty frightening.
One of them was even presented by an attorney, although she was only about two years out of law school. Among the startling “facts” she presented to the audience were the following: 1) Seventy percent (!) of all wills in California are challenged; 2) If you have a living trust, it can’t be challenged; 3) If you don’t have a trust, the government can take more than 40% of your assets; 4) If you take all of your liquid assets and buy a lifetime annuity, you can enrol in Medi-Cal and still leave thousands (or millions) of dollars to your children. There were many more similar statements, all about the horrors of probate, the high cost of long-term convalescent care (and how to get around it by signing up with her company) and the magical wonders of a living trust.
All of these statements were false.
At the end of the seminar, she passed around a worksheet (somewhat similar to the one I have provided elsewhere on this site), quoted a “special” price and indicated that if we were interested in a living trust, a representative would call on us at home to show us the benefits of long-term care insurance.
Aha! This company was using trusts as a way to get a salesman into my door to sell me an expensive insurance policy.
Over the years, I’ve frequently been asked to review the products produced by many of these “trust mills” or to help a surviving spouse carry out the terms of the trust after the death of the first spouse. Very few of them are worth the price my clients paid. Just a few of the many common problems I find with them are the following:
● They are frequently pre-printed, with only two or three pages of information specific to the clients tacked on almost as an afterthought.
● Or they are obviously produced by a word processing program on a computer, with a few names and percentages plugged in to make them look customized.
(As one wise estate-planning attorney once wrote, “competent estate planning requires more than a word processor.")
● Because they are almost all the same, they often contain lengthy sections which the clients don’t need and don’t understand. Or they are missing some very important elements which would take more time to prepare individually than the “trust mill” is willing to invest.
● Commonly, they are mailed or shipped to the clients with written instructions about how to sign them, further written instructions about how to record the deed to the house and further (and further, and further) written instructions about changing the title to bank accounts, etc. Many clients find their eyes glazing over at the lengthy list of instructions and fail to follow through with many of them.
● Their office is usually somewhere far away from the Bay Area. The client never meets the attorney and all communication is by telephone or mail. Imagine trying to amend such a trust. Particularly when the attorneys on the company’s staff come and go and you never get to speak to the same one twice. Imagine trying to get help when your parents die and their estate-planning “attorney” is in Southern California, but he left the firm five years ago.
● Most of them are really in the business of selling you long-term care insurance or an annuity. (The commissions on both of these products are very lucrative. They could prepare your trust for free and still make a bundle. Have you ever wondered how much they spend for a full-page ad in the San Francisco Chronicle to promote their seminars? Few legitimate attorneys can afford such an expense. But, then, we’re not selling insurance.)
On the other hand, a local estate-planning attorney with whom you can establish a comfortable relationship will meet with you in person to determine exactly what you need (and what you don’t need) in your trust. This meeting will typically last an hour or more, during which s/he will explain to you options or tactics that may not have occurred to you, will offer various suggestions for solving a particular problem, will listen patiently while you and your spouse debate over whether to include a particular charity or the “black sheep” child and will be available to talk to you on the telephone three days later when you call to say you have changed your mind about a particular provision.
Of course your attorney will use a word-processing program to produce your trust. (It certainly beats the old days when I personally typed my rough drafts, cut them up with scissors, taped them back together in a different order and gave them to my secretary to type up in final form.) But every line, every paragraph and every page will be tailored to your needs – and your needs alone.
Further, your attorney will make sure that deeds transferring real property are properly recorded, without putting the burden on you. S/he can’t transfer your bank accounts or investment accounts for you, but will make sure that you understand that this must be done, and will probably draft a letter for you to sign instructing the bank to change the title on the account.
And, finally, your personal, local estate-planning attorney isn’t trying to sell you a product.
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But I can’t step off of my soap box without a word about cut-rate trusts. I have seen newspaper ads offering living trusts for as low as $395.00. I have also reviewed the work produced by these folks. I have only one caution in this area: You get what you pay for.
The brief articles on this page are for informational purposes only. They are not, nor are they intended to be, legal advice. They do not, nor are they intended to, establish an attorney-client relationship. You should consult an attorney for individual advice regarding your specific situation.
Copyright©, 2009 - 2012, Steven C. Dimick