Living Trusts: Removing the Mystery

By Mark T. Coulter, Esquire
Estate Planning Attorney

People are often confused by the workings of a Living Trust, and have trouble making a decision regarding whether one is right for their plan. Living Trusts can be a valuable estate planning tool, but are not the easy answer to every estate planning question. Many salesmen, very few of them trained attorneys, pitch Living Trust kits to the public in much the same way that snake oil salesmen appealed to our ancestors. Instead of falling victim to these predatory salesmen, arm yourself with information and trusted advice about whether a living trust is a proper tool for YOU and for YOUR GOALS. Let’s look at the problems with Living Trust sales, and then the advantages too.

What is a Living Trust?

Simply stated, a living trust arises when a person (the Settlor) places assets into someone’s name to hold and manage (The Trustee), not necessarily for the Trustee’s benefit, but for the benefit of others (the Beneficiaries). It is called a ‘Living Trust’ because you make it while you are alive (versus a testamentary trust, which can achieve many of the same goals, but is created in your will). Most people who say they want a Living Trust mean a Revocable Living Trust. A revocable trust is usually set up with the Settlor as the Trustee, and the Trustee can decide to stop giving trust benefits to the beneficiaries, and instead just give some or all of the trust assets back to the Settlor. This is good for peace of mind in the Settlor who establishes a trust, because the Settlor knows they can get their assets back if their situation changes or they just change their mind. The drawback of a revocable trust is that the courts realize that the assets are still essentially the Settlor’s, so that the trust can still be attacked by creditors, and is counted as an asset of the Settlor by Medicaid and other government agencies.

Don’t be a Victim

1. Don’t be pressured into buying a Living Trust in the spur of the moment, or to seize a ‘limited time offer’.
2. Get your advice from a trusted professional (attorney, accountant, banker…), not a salesman or website selling information.
3. Spend your time and money on documents drafted for you, not forms generically designed for the entire world.

Misrepresentations of Living Trusts

Pushy salesmen often oversell the benefits of a Living Trust to make a sale. Here are some of the common claims:

1. “You need a Living Trust to avoid Estate Tax”.
   Many people pay little or no estate tax, because it only applies to 7-figure estates. The amount of assets required before the Federal Estate Tax applies has been varying, but has not been less than $1,000,000 for the last ten years. For these larger estates, many tax avoidance, or tax minimization, techniques exist, with a Living Trust being one. Further, the tax avoidance features of a Living Trust can be accomplished in much the same fashion in your will, avoiding the investment of establishing a trust during your lifetime. On the other hand, a Living Trust can provide powerful tools and strategies to avoid or minimize estate taxes, and provide other benefits as well. The complexity of this area is one good reason to select an attorney who practices extensively in this area. Lots of people claim to have information about how these trusts work, but in Pennsylvania, only an attorney is legally permitted to advise you in how to use a Trust or Will, and only an attorney is legally permitted to draft these important documents. Anyone else is practicing law without a license, which is a crime in the Commonwealth of Pennsylvania.
2. “You need a Living Trust to qualify for Nursing Home benefits.”
   While the use of a trust can preserve assets while still maintaining eligibility for Medicaid nursing home benefits, a garden variety Living Trust form package can not achieve this, and instead this tool can disqualify you from nursing home benefits for years. We can work to create special trusts which walk the delicate line between preserving your assets for you and/or you family, and still demonstrating financial need required for Medicaid nursing home coverage.
3. Living Trusts can save the expense of Probate
   In some cases, this is correct. In others, different tools or strategies may be appropriate. Without an evaluation of the specific circumstances surrounding your family, your assets, and your goals, no generalization can realistically be applied. If a Living Trust is properly constructed, funded and maintained, it can reduce or eliminate the expense of probate. There may still be work to be done following a death, but much of the administrative work has been accomplished ahead of time, and a properly funded trust can be administered by your successor trustee without needing to resort to continuing court supervision or the probate process.
4. Living Trusts can’t be contested by your family
   Because a Trust is not a Will, it obviously won’t be subject to a Will contest objection. A trust, however, is bound by contract principles in most instances, and can still be attacked on the same common bases which a will is, i.e. undue influence, fraud, or lack of mental capacity at the time. In fact, many authorities find it takes greater competence to execute a trust than a will. For either document, a strong “no contest” clause can reduce this risk substantially.
5. Creditors and lawyers can’t get your assets if you hide them in a Living Trust
   The courts do not like to serve as accomplices to fraud. Putting your assets into a Living Trust, under your control, almost universally fails to protect them from your creditors. The courts reasonably take the position that you still control the assets, and will require you to use your powers to access them to pay your debts, including legal claims brought against you. You can, however, wrap your assets with enormous protection as they pass to a surviving spouse or other beneficiaries through your trust. Again, personal guidance by your attorney is required. If you are looking to protect assets for yourself, a different trust structure may be applied.
6. You need a Living Trust to protect your assets in case you become incompetent or otherwise need a guardian.
   While a Living Trust can serve this purpose, other tools, such as a Durable Power of Attorney, might attend to this need with less expense and inconvenience. There area disadvantages to Powers of Attorney as well, including the fact that many institutions consider them ‘stale’ and thus invalid after a short period of time, whereas a Living Trust provides back-up protection throughout your life. Professional advice is the best way to make the decision about what is best in your life.
7. Everyone should have a Living Trust
   While a Living Trust is a good tool for many people, for others the expense of creating, funding and maintaining the trust may outweigh the benefits which it might provide. Particularly with younger families, severing jointly titled assets to fund a Living Trust can bring unnecessary exposure. The Living Trust can be a good tool for easing probate chaos for your family, minimizing expense, and providing protection during periods of disability or incapacity. It is not, however, the answer for everyone, and counseling about the best option for you and your family is required.
8. Living Trust kits have attorney approval I can rely on
   If you look at the fine print in any kits or forms sold online or in a bookstore, you’ll see that they always point out that they can’t say if the form is right for you, they aren’t your attorney, and you should consult an attorney or planning professional to answer any questions about estate planning. You don’t get your medical care or dental care from a book nor online, so why would you imagine that you are going to get competent, reliable legal counseling from a generic form mill? Who wants a McTrust?
9. You don’t need a will if you have a living trust
   Even with a living trust, you will still need to have a will to deal with any assets which aren’t in your trust at the time of your death. Even the most detail oriented person may not have every asset titled in their trust when they die. If you don’t have a will too, then those assets pass under state laws of intestacy to statutory heirs, rather than your trust beneficiaries. A proper ‘pour-over’ will can resolve this, but you have to have one.

How can I decide if a Living Trust offer is good?

As we’ve said, you will have justifiable confidence if you deal with an attorney who practices in estate planning. Some questions to consider that might show if you are being ‘sold’, instead of making an informed purchase, include 1. Are you pressured to purchase the first time you meet a salesman to qualify for a ‘special deal’? 2. Can you get your questions about the provider and their products answered, or are they evasive? 3. Do you know who will draft, or did draft, your important plan documents? 4. Do you understand everything you need to in order to comfortably make a decision? 5. Do you know if the document will work for you, and how? 6. Were you looking for estate planning, or are you buying something pushed by a telemarketer, door-to-door salesman, or email solicitation? 7. Is the person an attorney, or a salesperson? 8. Am I being pushed to buy other financial products, such as annuities or life insurance?

LIVING TRUSTS CAN BE A GOOD PLANNING TOOL TOO!

We don’t want you to think that a Living Trust is never the answer for you. It simply isn’t the fast and easy answer some salesmen would lead you to believe.

Living Trusts can provide a ready means to take care of managing and controlling your family finances during your life, and right after your death. By doing the work to properly create a living trust during your lifetime, and placing most or all of your assets into it, you have taken a lot of the grinding detail work of probate away from your family and executor after your death, and instead shouldered that burden yourself while you are still here to tend to it yourself. Moreover, the expense of probate is largely moved from after your death into your lifetime by means of the work you undertake to establish and fund your trust.

We begin your planning by discussing with you what your goals are for your estate, now and in the future. You have spent a lifetime assembling assets and a lifestyle, and you likely want to maximize your ability to enjoy that today, and pass your assets and values on to your family later. Protecting your lifetime estate, and passing it in a controlled and easy fashion can be done with a variety of different trusts available.

Understanding and controlling tax and probate expenses are important factors to take into account as your custom plan is created. The end result is the combination of planning tools which best brings together your goals, wealth, and applicable legal requirements. It’s your life; you deserve a custom plan.

A living trust can permit you to exercise control over how the beneficiaries of the trust (you, your spouse, or anyone else you choose) use the assets you have provided. If you want them invested in a certain fashion, or used for certain things, you can control these in a trust. Assets provided for the use of those other than you can frequently be sheltered from claims of their creditors, now and in the future. As families merge more and more today, a living trust can be used to make sure that in the event of your death, your assets are distributed according to your wishes not only at your death, but following the death of those taking your assets. Otherwise, for example, your assets could pass from you to your wife, to another man (if she remarries), and then to the children of this strange man’s first marriage if he saw fit. These crazy results can be controlled with trust dispositions.

WHO SHOULD BE MY TRUSTEE?

Sometimes, you are your own trustee. Many Living Trusts which are created primarily to simplify asset disposition and control after a Settlor’s death are set up this way. You can have more than one trustee, if you want to have you and your spouse be the trustees at first. Other times, people select their attorney, a trust company, or a trusted friend or relative to serve this role. Any competent adult is permitted to serve as your trustee, and qualified trust companies as well. It is a good idea to have back-up trustees named too, in case the first one is unwilling or unable to serve in this role. This is known as a successor trustee.

WHAT WOULD I DO WITH A LIVING TRUST?

Trusts are very flexible tools, and you can do any number of things with them. Here are some of the more common uses we see.

1. Managing your assets according to your wishes and needs if you suffer physical or mental disability or incompetence.
2. Manage your own assets while you are alive, but passing them outside of probate proceedings, saving delay and expense at your death pursuant to your described trust scheme.
3. After your death, keeping your assets in trust to benefit your spouse and/or children, but keeping them safe from claims of creditors, courts or future ex-spouses.

DO I HAVE TO PUT ALL MY ASSETS INTO MY LIVING TRUST?

It is up to you what assets you put into a trust, and when. Some people only put a few dollars in to set the trust up, but otherwise they wait to put substantial assets in. The risk in this is that the planning goals to be met by a trust may be thwarted if you unexpectedly die before you put the assets into the trust which it was expected to control. We can counsel you about the when, what and how of funding your trust, and find a method which works best for you. We typically assist our clients to fully fund their trust immediately after the Living Trust is executed.

HOW TO DECIDE IF A LIVING TRUST IS FOR YOU?

The best way to answer a complex question like this is to consult with an impartial, trained professional. When we help people shape their estate plan, we aren’t interested in selling you some generic package. Instead, it is our goal to help understand your goals and your situation, and then craft a plan with you which best accommodates both. We aren’t here to ‘make a sale’, but to develop a relationship of trust with our clients so that they know where to turn for their legal need, now and in the future.

About Our Law Office

At the Estate Planning Centers at Coulter & May, P.C., we devote our practice to estate planning and assisting families through such transition times with estate and trust administration counseling. We offer guidance and advice to our clients in every area of estate planning, and offer comprehensive and personalized estate planning consultations. For more information or to attend an upcoming seminar or to book a consultation directly, please contact us at (412) 253-7526 or visit us online at www.estateplanningcenters.com.

Disclaimer: The information presented in this article is a conversational summary of a complex area of law and should not be construed to constitute legal advice. No person should rely upon the content of this article for making any decisions, and should instead consult with appropriate legal and tax professionals.