In my decades of experience 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!
Which is better for me: A Will or a Living Trust?
Generally, any estate with a gross fair market value in excess of $150,000 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 $150,000 or more usually require probate. Thus, if you have an estate with a gross fair market value of more than $150,000 you are probably best served with a Living Trust. An estate under $150,000 can get often by with a simple will and/or account titling. 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 $150,000…not the estate tax exemption amount. People often confuse these two numbers.
Why do I want to avoid probate?
- 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.
- Probate is time consuming. With probate there is often a six month to two year delay until your heirs receive their inheritance.
- Probate is public. Anyone can look in your court probate file to see the intimate details about your family and finances.
- Multiple Jurisdictions. Probate is usually required in every state where you own real estate.
Can I avoid probate by putting my child on the deed to my home?
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!
Is a Living Trust difficult to set up?
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!
Will a Living Trust cause me to lose control of my property?
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.
At what age should I consider setting up 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 some 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…”
I’ve only heard about Living Trusts in the last few years. Is it a fad?
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 $150,000 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!
Do I also need a Will with my Living Trust?
Does a Living Trust save Estate Taxes?
Does the New Tax Law Eliminate the Need for a Living Trust?
Will a Living Trust change my Property and Income Taxes?
Will a Living Trust Protect Me from Creditors?
Bonus Question: Do I need a lawyer to prepare my Living Trust?
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 or a website!