APRIL 2013 NEWSLETTER

ARE LIVING TRUSTS AN ESTATE PLANNING TOOL OR SCAM?

Although Living Trusts are an important estate planning tool to consider they are not a cure-all estate planning tool. They are not an absolute necessary estate planning document and, even with a living trust, other estate planning documents are required to sufficiently administer a person’s estate. Nonetheless, sales agents and trust mills market living trusts as an essential estate planning tool. They push these products onto susceptible consumers in a wholesale fashion without regard to whether a specific consumer actually benefits from a living trust. In reality, estate planning requires attention to individual needs and specific tailoring. Living trusts may or may not be part of those specific needs.

Living trusts, also called inter-vivos trusts, are legal documents which act as central vehicles for asset management. An individual, called a grantor, places his or her assets in the trust. A trustee manages the assets and oversees their distribution to beneficiaries. Usually, assets, like real estate or stocks and bonds, are titled in the name of the trust, and then on the death of the grantor, the trustee distributes the property to beneficiaries named in the document.

Living trusts may be useful estate planning documents for you. Their usefulness, 3 however, depends on your specific estate planning goals, assets, and other information. The most celebrated claim of a living trust is that by using one, a person may avoid probate of his estate.

Probate is a formal, court supervised process in which a person’s estate is administered and distributed. When a person dies with a will, that will is admitted to the public record. Creditors are notified and may make claims against the estate. Meanwhile, it may take 6 to12 months to complete probate of a simple estate and large estates with property usually take longer to finalize the probate of the estate and make final distributions to beneficiaries. The federal and state taxing authorities will usually take 2 to 15 months to complete an audit of the estate tax report depending on the size and complexity of the estate. By avoiding probate, the estate may be settled more quickly and efficiently, and beneficiaries may receive distributions sooner.

More specifically, for example, if you own real estate in several different states, you may want to establish a living trust and title the real estate in the name of the trust. Then, when you die, you may be able to avoid having to probate your estate in the different states where the real estate is located. If you desire to keep information about your estate as private as possible, avoiding probate should be a goal.

The value of avoiding probate, however, is often inflated. Probate fees and time depend on the size of your estate and if your estate is small, probate fees may be less than the cost of drafting a living trust. Probate may not be an issue anyway if your assets contain beneficiary designations or are payable on death accounts. Such kinds of accounts pass to the named beneficiary automatically by operation of law; they are not subject to administration.

Furthermore, probate is often described as a lengthy time consuming process. In reality, if you estate is well organized, whether you have a living trust or not, probate may take less than a year regardless of a living trust or not. Probate may be desirable if you anticipate that your beneficiaries and heirs will fight with each other, or if you anticipate third party claims against your estate. A court would oversee the administration during any controversies.

Living trusts are also touted as tax-saving vehicles. However, they do not shield your estate from federal or state death taxes. Federal estate taxes and state inheritance and estate taxes may, and almost certainly will, apply upon your death even if you have a living trust.

Finally, a will is still necessary even with a living trust. You will need a pour-over will to transfer any property not already titled under the trust to the trust upon your death. Establishing a living trust may be a waste of time and money. You should seek legal advice from an attorney, who reviews your entire estate plan and your legal, financial and personal needs, to determine whether you need a living trust.

It is because you need legal and professional consultation in creating an estate plan that trust mills are problematic. In fact, wholesale marketing of living trusts is so problematic that attorneys general of many states have published consumer alerts notifying the public of trust mills who sell them. Trust mills usually consist of non-lawyer salesmen, including insurance agents, financial planners, stockbrokers and others. They promote their products either door-todoor or over TV, radio or in workshops. Bill Lockyer, former attorney general for California, believed that thousands of people had been swindled by living trust scams.

Salesmen pressure consumers into purchasing their estate planning toolkit consisting of the living trust and other documents. They often misrepresent the usefulness of living trusts as a one-size-fits-all approach to estate planning. They promise that by drafting a living trust and transferring assets, the client will have a cure-all for his or her estate plan. The salesmen charge significant fees, running into the thousands of dollars.

On top of misrepresenting the usefulness of living trusts, sales agents obtain and misuse the consumers’ personal, confidential financial information. The sales agents sell themselves as estate planning experts or trust advisors. In reality, they are usually not attorneys or experts in estate planning. In the process of selling the living trust, the agents have consumers fill out questionnaires related to their finances and assets. They often try and sell the consumers various other financial products like life insurance, annuities or other cash heavy investments, which the consumers do not need. They may not advise the consumer of potential legal or tax consequences of creating a living trust and transferring assets to it.

The bottom line is that these sales are scams. Only consultation with an experienced disinterested licensed attorney, who sells zero products or investments, will determine whether you need a living trust.