12 Common Questions About Living Trusts…and the Answers!

 

A Special Report By

Kenneth S. Jacobs

Attorney at Law

(707) 829-7303

 

In my over a decade of specializing in Wills, Trusts & Probate Law, I thought I had heard just about every question there is about Estate Planning.

 

Then, a few months ago, I got a call from a gentleman who wanted me to look over his Living Trust.  This is a common request, so we made an appointment.

 

We sat down at the conference table, and he showed me his “Living Trust”.  I put the term “Living Trust” in quotes, because his “Living Trust” was actually his 25 year old Will, on which—boldly across the top of the first page—he scratched out “Last Will and Testament” and wrote in “Living Trust”.

 

He wanted to know if this was “legal”.  He said a friend told him it was OK!

 

I don’t mean in any way to insult this well-intentioned, but admittedly under-informed individual.  I just want to illustrate one very important point: 

 

Estate Planning is complicated:  Do not rely on well-meaning advice from sources such as friends, magazine clippings, your law student niece, or rumors when dealing with something as important as planning your estate.

 

A mistake can be very, very costly!

 

          Accordingly, to assist people in understanding the basics of Living Trusts, and to hopefully avoid some common mistakes, I decided to put together this Special Report.  This report contains 12 of the most common questions people ask me about Living Trusts.

 

          So on to the questions…and the answers!

 

 

Question One:  Which is better for me: A Will or a Living Trust? 

 

This depends on the size of your estate. 

 

Generally, any estate with a gross fair market value in excess of $100,000 will benefit from a Living Trust.  This is because the primary purpose of a Living Trust is to avoid probate. 

 

Estates with a gross value of $100,000 or more usually require probate.  Thus, if you have an estate with a gross fair market value of more than $100,000 you are probably best served with a Living Trust.  An estate under $100,000 can get often by with a simple will. 

 

Note that the “gross value” is the full fair market value of the estate, and not just the equity.  In other words, a $400,000 house with a $300,000 mortgage is in fact a $400,000 probate!  Also, please remember that the amount where a Living Trust becomes beneficial is $100,000...not $2,000,000.  $2,000,000 is the estate size (in 2007) where estate taxes are due.  People often confuse these two numbers.

 

Question Two:  Why do I want to avoid probate?

 

There are essentially four reasons to avoid probate:

 

1.  Probate is expensive.  Fees and costs often eat up 5 to 10 percent or more of the value of your estate.  Note that fees are based on the gross estate, not just the equity. (Fees just went up in 2002!)

 

2.  Probate is time consuming.  With probate there is often a six month to two year delay until your heirs receive their inheritance.

 

3.  Probate is public.  Anyone can look in your court probate file to see the intimate details about your family and finances.

 

4.  Multiple Jurisdictions.  Probate is usually required in every state where you own real estate.

 

Question Three:  Can I avoid probate by putting my child on the deed to my home?

 

Yes.  However, there are some grave dangers involved with putting your child on your deed.  One, he or she becomes an owner of the house, and has the right to sell and mortgage.  Two, your child's creditors could take the home to satisfy your child's debts, bankruptcy, divorce or lawsuits.  Three, your family looses the advantage of receiving the stepped-up cost basis on your home at your death. 

 

In short, putting a child on a deed may cost your family many thousands of unnecessary tax dollars, and could even cost you your home!

 

Question Four:  Is a Living Trust difficult to set up?

 

No.  With your attorney doing most of the work, your involvement is often as little as reviewing and signing the legal documents, making a few phone calls, and a trip to the bank. 

 

What is more difficult, however, is understanding your Living Trust.  One of the most—or possibly the most—important part of an attorney’s job in preparing you Living Trust is to educate the client as to what exactly he or she is signing.  Always demand that your attorney answer all of your questions!

 

Question Five:  Will a Living Trust cause me to lose control of my property?

 

No.  A Living Trust is generally a "revocable trust" with you as the trustee.  This means you have complete control.  Also, just like a will, you can change or amend the trust as often as you like. 

 

However, please do not try to change your trust on your own.  A trust amendment is a formal document that must satisfy many legal requirements.  Always seek professional advice before trying to amend your trust.

 

Question Six:  At what age should I consider setting up a Living Trust?

 

Age is surprisingly not a primary factor in determining whether one needs a Living Trust. 

 

While it is obvious that an older person or couple (with a statistically shorter remaining life expectancy) needs Estate Planning, it is also appropriate for families to set up a Living Trust while their children are very young.  For them, a Living Trust is the best way to ensure a safe supply of money for the support, maintenance and education of their children in case the parents die. 

 

In fact, for families with minor children, a Living Trust makes an excellent beneficiary for Life Insurance and retirement plans when you want the proceeds to be held for your children and used for their support without a formal court supervised financial guardianship.  With a Living Trust, there is much more flexibility, control, cost savings, and the final distribution to your children can be delayed until they reach an appropriate age. 

 

In any event, procrastination is dangerous.  I’ve had far too many calls from adult children whose parents are incapacitated (recent stroke, etc.) who want to know if we can now prepare a Living Trust.  “I’m sorry,” I must reply, “it’s just too late…”

 

Question Seven:  I’ve only heard about Living Trusts in the last few years.  Is it a fad?

         

No.  First of all, Living Trusts have been around since old English Common Law.  The very wealthy have always used trusts. 

 

Recently, however, trusts have become more popular for the "common folk" because of increased property values.  While in times past most estates were valued under $100,000 and thus passed without probate, such estates are now the exception.  Simply put, most Californians who own real estate are now faced with probate, and thus will save their family hassle and expense with a Living Trust. 

 

Another reason for the sudden "popularity" of Living Trusts is because a new generation of attorneys and more permissive attorney advertising rules has allowed the old secret to get out:  Only probate attorneys make money on probates!

 

Question Eight:  Do I also need a Will with my Living Trust?

 

Yes.  Always!  You need a special type of will called a "Pour-Over Will".  This will acts as a "backup" to your Living Trust in the event any property is left out of your Living Trust.  It also disposes of tangible personal property, and nominates guardians for your minor children. 

 

Question Nine:  Does a Living Trust save Estate Taxes?

 

Yes and no.  For a married couple a Living Trust can reduce or eliminate estate taxes by taking advantage of both spouses estate tax exemption.  For a single person, a Living Trust will not save estate taxes.  There are, however, numerous other tools available to achieve this goal.

 

Question Ten:  Does the New (2002) Tax Law Eliminate the Need for a Living Trust?

 

No!  While the new tax law gradually phases out the estate tax until it is eliminated for deaths occurring in 2010, the law, as written, reinstates the estate tax in 2011.  Although the government is likely to change this in some way, including the possibility of extending the temporary “repeal” beyond 2010, the future is uncertain. 

 

Therefore, although a modern Living Trusts should probably allow for flexible tax planning options in the future, the basic need for a Living Trust—Probate Avoidance and Possible Estate Tax Savings—remain intact.

 

Question Eleven:  Will a Living Trust change my Property and Income Taxes?

 

No. Your real estate will not be reassessed and your property taxes will not increase.  Your income taxes will be reported and paid as usual.

 

Question Twelve:  Will a Living Trust Protect Me from Creditors?

 

No.  With a Living Trust you can spend your assets, and therefore your creditors can reach these assets as well.  The purpose of a Living Trust is to avoid probate and minimize taxes, not to avoid paying debts.

 

 

          Those are the 12 most common questions about Living Trusts which I answer day in and day out, every day.  But I left off one final common question.  Let’s call it the Bonus Question:

 

Bonus Question:  Do I need a lawyer to prepare my Living Trust?

 

          Good question, but hard to answer.

 

          When I was about seventeen, I changed the oil on my car for the first time. Unfortunately, I didn’t know that you have to check to be sure the old rubber gasket is off before screwing on the new oil filter (you mechanical types will know what I mean).  Well, the oil leaked out while driving on the freeway, and $1,200 later, I learned a valuable lesson: “Do it yourself is great…but only if you know what you are doing”.

 

          I caution anyone doing their own Living Trust (or any legal document) to be sure they are absolutely certain that they know what they are doing.  Do not rely on the do-it-yourself books and software.  Often they are not California specific nor up to date, and even if they are, there is no such thing as one-size-fits-all Estate Planning.  They often fail to address trust funding (meaning that your trust is an empty, useless shell). 

 

You are unique, and your Estate Plan must address your specific needs, desires, assets, family dynamics, tax situation, etc.

 

          Finally, watch out for the trust mills.  These are companies that are, quite frankly, usually practicing law without a license.  They are often one step ahead of the Attorney General and County District Attorneys. 

 

Trust mills are usually telemarketers who contact you by phone, send a representative to your house, and sell you a package that includes some off-the-shelf legal documents as well as a variety of financial and insurance products.  In fact, they are generally even more expensive than a local attorney! 

 

You use a local doctor, a local dentist, a local CPA.  Use a local lawyer as well.  Don’t trust your family’s future to a 1-800 number!

 

          I hope this Special Report answered many of the questions you may have had about Living Trusts.  Even more, I hope this report helps you to avoid some of the common mistakes and confusion which I encounter daily in my practice. 

 

If you have a question that is not answered here, feel free to call me.  My number is (707) 829-7303.

 

Sincerely,

 

 

Kenneth S. Jacobs

Attorney at Law

 

 

P.S.  By the way, regarding the gentleman who wrote “Living Trust” on his old Will—it wasn’t “legal”.  Writing “Living Trust” on the top of an old Will does not, regrettably, meet the statutory requirements of California Trust Law.

 

 

 


Attorney Kenneth S. Jacobs is certified by the State Bar of California Board of Legal Specialization as a Certified Specialist in Estate Planning, Trust & Probate Law.  For more information please call (707) 829-7303, or find us on the web at www.kenjacobs.com.