The popularity of living trusts has spread to the point that now many states, most notably California, have promulgated laws recognizing and regulating trusts. There is a model Uniform Trust Code that has been adopted in different forms by more than thirty states. This recognition of trusts as a valid and effective estate planning device is long overdue. It seems attorneys have decided to join the trust revolution rather than fight it, and now many call themselves trust specialists where such a specialty is authorized. Trusts are becoming the preferred method for attorneys and clients to settle estates and avoid the probate process.
Having said that, I have spent a great deal of time reviewing trusts prepared by other attorneys at the request of new clients and find serious problems with many of them. There are templates and fill-in-the-blank programs that are available to attorneys who need to prepare a trust. They don’t just make up these documents off the top of their heads. Unfortunately for the clients, some of these boilerplate programs are completely inappropriate for the needs of a client or are legally out of date.
In years past, trusts were considered by many estate planners as primarily a device to minimize or eliminate estate taxes. The general public thought that trusts, if they thought about them at all, were for rich people. Taxes were a serious concern back in 1997, when estates in excess of $600,000 were taxed at a 55 percent rate. With a house, savings, and life insurance, there were lots of people who could have been subject to the tax. The threshold has gradually increased, until by 2019 the estate must exceed $11,400,000 before there is any tax. Estate tax avoidance is no longer an issue for most of us. Of course, laws change, but the estate tax is more likely to be eliminated entirely rather than go back to the old tax rates. We shall see.
The problem with using a trust to avoid taxes is twofold. First, couples who once might have been subject to estate taxes had complex tax-avoidance trusts prepared that placed serious restrictions on a surviving spouse’s access to the marital assets. At the death of one spouse, the trust would be split into two or more new trusts with different rules for management and dispersion of the assets in each. This required more legal as well as accounting services, both at a high cost. Discussion of A/B trusts, marital trusts, credit-shelter trusts, bypass trusts, and QTIP trusts are beyond the scope of this book, but suffice it to say that they are only necessary for very large estates, and those folks are not reading this book. Since most of these estates are no longer exposed to potential federal estate taxes, these kinds of trusts complicate the settlement process and create problems for the heirs. It can be a simple matter to amend the trusts to simplify them, but this is rarely done.
Second, these complex and outdated trusts are still being used when they are no longer needed or appropriate. One justification some attorneys rely upon is that the rules change all the time and it might be that the exemption amount will decrease, making more estates subject to taxation. History does not agree. The exemption amount has increased steadily over the last twenty years, and there is legislation introduced annually to eliminate federal estate taxes completely. However, all I can say is, rely on the advice of your lawyers but get a second opinion. Also, a state inheritance tax exists in some states that might require some planning to minimize or avoid.
Avoiding probate is the focus of this book. Trusts are the best way for anything except the simplest estates, but in most cases, there is no need for a complex trust provided that the trust contains all the necessary and appropriate provisions to cover potential issues.
Trusts are far and away the most simple and effective way to avoid probate and protect your assets for the benefit of your heirs. I have explained why probate should be avoided due to its cost, time delays, and lack of privacy. But what is this trust thing that I am encouraging people to use?
Trusts are not a new idea. In English and Muslim law, they date back to the eleventh century, the time of the Crusades. When the knights went to the East, they turned the ownership of their estates over to a trustee who was to manage them for the years while the knight was away. The understanding was that the trustee would return the lands to the knight when he returned. But sometimes the trustee refused. The courts took up the matter and determined that while legal ownership was in the name of the trustee, beneficial ownership remained with the knight, hence the name: beneficiary.
By the nineteenth and twentieth centuries, trusts were a business artifice used to control ownership in multiple businesses and create monopolies as well as a way for the wealthy to pass on their estates through multiple generations. Legal restrictions were put on these types of trusts to limit how long such a trust arrangement could continue, so that when the trust ended it could be taxed. When you hear that trusts are just for the wealthy, remember that while there used to be some truth to that, it is no longer true.
By far, the number-one recommended method for avoiding probate is the revocable living trust. Way back in 1965, Norman F. Dacey, who was not a lawyer, created a legal uproar by advocating probate avoidance using a living trust. The trouble started when he provided forms allowing people to create their own. He was charged with the unauthorized practice of law, a criminal charge, of which he was convicted in Connecticut and was also sued by the New York Lawyers Association. He ultimately beat the New York case on appeal and the resulting publicity resulted in the sale of over two million books on how to avoid probate. The entrenched probate lawyers and bar associations did all they could to stop him, but the ball had started rolling.
Estate tax avoidance became a primary purpose of trusts when the tax rates soared from 50 to 70 percent on some estates. Attorneys earned their fees when such a big tax bite could be lessened. Nowadays there are still a few people who have to plan around these taxes, but for most of us the trust has assumed a new purpose, which is management of inheritances for beneficiaries who can’t or shouldn’t manage the money themselves, and for avoidance of probate, which is the subject of this book.
However, clients don’t come to see me because they are hoping to avoid probate, and they don’t usually ask for a trust.
Most often they come to me to have their will made. Because that’s what responsible people do, right? During the initial interview I ask them what they want to see happen to their assets at their deaths. If it’s a married couple with children, the typical answer is that they want everything to go to each other and at both deaths to have everything go to their children equally.
At that point, I explain that they do not need a will and that any attorney preparing a will with those terms is doing them a disservice. As we now know, a will does not avoid probate, and if a couple in their situation dies, what they are asking for in a will is exactly what would happen if they had no will at all. The will would be probated and the procedure would be just the same as it would be if there were no will. Same cost, same time delays, same end result.
Then I ask other questions. Are your children good money managers? Are any of them disabled or receiving any governmental assistance? How old are they? If there are minor children, have you chosen a guardian for them in the event both of you die while they are still minors? Would you want your children to receive their inheritance in a lump sum at your deaths or instead have it spread out over time? Do you plan on making any charitable gifts at death? Are there grandchildren? Do you own a family business? How about vacation property or real estate in another state? Do you have parents alive? How much life insurance do you have? Is this a second marriage for either of you? Were there children before or outside of the current marriage? Do you have a premarital agreement? Who do you see being in charge of winding up your affairs at your deaths? Who would make medical and business decisions for you if you become mentally incapacitated?
The answers to these questions will determine the type of trust I would recommend and will solve the other serious problems that might arise aside from just avoiding probate. If they still want a will after knowing all about trusts, then I would make one for them, but reluctantly.
(To be continued...)
This excerpt is taken from “How to Avoid Probate for Everyone: Protecting Your Estate for Your Loved Ones” by Ronald Farrington Sharp. To read other articles of this book, click here. To buy this book, click here.
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