YOUR MONEY MATTERS
LIVING TRUST:
CURE FOR THE AGONY OF PROBATE
. . . You Can Keep It All in the Family
Using a little foresight, let's say, you've written a will to distribute your assets to your children after your death and now you're feeling pretty darn secure that you've safeguarded your children's inheritance. But this may be a false peace of mind. You may be leaving for your children months, even years, of agony in probate court, whopping attorney's fees, hassles with court officials and emotional anxiety of waiting for their inheritances. Surprisingly, there's a simple solution to this problem and a growing number of people are taking advantage of it.
A REVOCABLE LIVING TRUST
Like many Americans, Jane learned the value of a revocable living trust firsthand, but paid a heavy price for it. When her father died four years ago, he left his business, family residence, a vacation home in Arizona and other assets to her. Fortunately, he had left a will and at first it seemed everything would go smoothly. But the problems started cropping up almost immediately. Although Jane, an accountant by profession, was named the executor and sole beneficiary of the estate, she had to hire an attorney to probate the will. She was fairly familiar with her father's financial affairs but, when it came to probate, there was very little she could do to expedite the process. It seemed like the court and attorneys were getting involved in every decision. Finally, the probate was over more than two years later but took a heavy financial and emotional toll on Jane. The once-thriving business was pretty much ruined.
After this experience, it did not take much to persuade Jane and her husband to set up a revocable living trust. All of their assets were transferred to the trust, with both of them acting as trustees. Because the trust is revocable, they can change its terms, or even cancel it at any time. When one of them dies, the surviving spouse will continue to act as trustee and control and manage their assets. In the event of incapacity or incompetence, the living trust will allow them to avoid lengthy and costly guardianship and conservatorship court proceedings. As Jane put it, "I want everything to be as easy as possible for my kids if something happened to me. I wouldn't want them to go through what I did with my father's estate."
FLEXIBILITY
The beauty of a revocable living trust is its flexibility. In setting up the trust, you transfer legal ownership of the assets to the trust, but you name yourself as trustee of the trust. Thus, although you've relinquished the nominal ownership of the assets, you continue to be the beneficial owner; you can manage, sell, mortgage or give away your assets as you please and the trust won't interfere. If at some point in time you wish to change terms of the trust, including designation of beneficiaries, or even revoke it in entirety, you can do so.
CAN SAVE ON TAXES, TOO
Living trusts can, with proper planning, save on federal estate taxes. If a couple has a so-called "A-B" living trust, with separate trusts for husband and wife, they can pass on up to $1.2 million tax free to their children, trust attorneys say. Under this method, each trust can make the maximum utilization of the $600,000 federal estate tax exemption. The surviving spouse can draw the trust income for life, and also have the right to invade the principal of the other trust, if there be a need. When the second spouse dies, both trusts go to the children. Without the A-B plan, the children would pay $235,000 in federal taxes on the $1.2 million estate, says a tax attorney.
TRUSTS ARE HARD TO CONTEST
When a will is probated, the executor of the estate is generally required to notify all potential heirs - whether they are named in the will as beneficiaries or not that the will is in probate. A disgruntled heir, rightfully or wrongfully denied his share of the estate, can rock the boat at this time by alleging undue influence or lack of mental capacity. In many instances, he may not even need to hire an attorney to start such a will contest. Facing the prospect of a long, drawn-out court battle, oftentimes the executor or the other heirs will settle with the disgruntled heir by giving in to the "blackmail."
This is exactly what happened when J. Seward Johnson, 87, of Johnson and Johnson fortune died leaving the entire estate worth $500 million to his third wife, Basia, then 46. Johnson's six children, disinherited by their father, contested the will. In a settlement, the children and a charity got $169 million. The wife got to keep the remaining fortune and the attorneys reaped a $24 million bonanza.
Living trusts, on the other hand, are extremely hard to penetrate. A living trust is set up during your lifetime and, presumably, you've been administering the trust for several years. It would be difficult to challenge your competency to set up the trust under than circumstances.
Upon your death, the trust estate is distributed to the named beneficiaries almost immediately, without the intervention of a probate court. Anyone wishing to contest the trust would have to sue each and every beneficiary - after they've received the assets, ruling out the possibility of blackmail.
Remember, the trust is an entirely private affair and no one, other than the beneficiaries, needs to know the contents of the instrument. This precludes disgruntled heirs from using the threat of a court battle to tie up the estate in years of litigation.
JOINT TENANCY IS NOT A SOLUTION
Most married couples (and often, a parent and a child) hold title to a property in joint tenancy with the right of survivorship. Upon the death of one joint tenant, the surviving joint tenant inherits the asset without going through probate.
So far so good. But when the second spouse dies, unless he or she has placed the property in joint tenancy with someone else, that property will be probated. A living trust is one sure way to avoid that problem.
Most estate planners advise against joint tenancy for a variety of reasons. For some persons, in certain situations, joint tenancy may be a wise decision. However, in a vast majority of cases, joint tenancy spells major disadvantages.
For instance, say you own your home and car in joint tenancy with your son. If the son gets into an accident, and the injured person files a lawsuit, you'd be named a defendant along with your son. If an adverse judgment is rendered, your personal assets are at risk.
Or take this scenario. You and your wife own all assets in joint tenancy with a view to avoid probate when one of you dies. But your wife has to be put into a nursing home due to Alzheimer's disease. Now you would need to go to probate court before being able to do anything with the jointly owned assets. In this case, joint tenancy actually turned out to be a curse.
GUARDIANSHIP
Living trusts are well-suited to handle just such a contingency. A growing number of Americans are putting their assets into living trust because they want to avoid being placed under a court-appointed guardian if they become physically or mentally disabled and are unable to manage their affairs. "With a living trust, you can designate the person (generally the successor trustee) who'll take over your affairs in the event you become incompetent," says an estate planner who advises senior citizens on a regular basis. This avoids the cost and public embarrassment of a court conservatorship or guardianship proceeding.
WHY AREN'T LIVING TRUSTS BETTER KNOWN?
If living trusts are such a wonderful device for passing on your inheritance to your children, why aren't they better known?
Well, the truth is they are getting increasingly more popular, more so in certain parts of the country than others. You'll regularly find articles on living trusts in most major personal finance or money magazines and also in newspaper columns. These articles universally laud the benefits of living trusts against wills, or the scarier option of dying without a will.
This does not mean that every attorney in your town knows about living trusts, or is willing to help you set up a living trust. Many simply do not know enough about living trusts, and there are some who would rather you didn't know anything about them. These attorneys derive a substantial portion of their income from our probate system and they are not about to kill the "cash-cow." These attorneys are building a "will file"; each will they write, they hope, will ripen into a probate estate.
Then there are some attorneys who've seen the writing on the wall and have decided to join the bandwagon. They've discovered that helping people set up a living trust can be just as lucrative as probating an estate, especially if you can charge $595, $895 or $1,500 to set up a simple revocable living trust. They advertise free seminars in local newspapers and sign up clients just for such a service. While doing it, they can portray themselves as heroes. A law firm in Southern California, in its free - seminar advertisement for a living trust, touts itself as "defying the system by placing principle above profit." It is "willing to forego millions of dollars in probate fees in favor of preparing a one-time, foolproof, affordable plan." This just proves the point I've been trying to make here: Probate is a multimillion dollar business and, like the ad says, "you should avoid it like the plague."
