Financial Planning: A Midyear Guide 1987 : part five: Building Wealth : Living Trust: a Shortcut Around Probate to Help Heirs
It’s a wry old joke often told to law school students in their first course on wills, trusts and estate planning.
The hard-working lawyer puts his son through college and law school and then brings him into the law firm. The young man’s parents soon depart for a summer-long vacation in Europe, leaving him in charge.
When they return, the son proudly announces his achievements: “I won a motion to get the Hill case dismissed. I settled that pesky Jones matter. And do you remember that 8-year-old probate case on the Wilson estate? I finally closed it.”
“What? You closed the Wilson estate?” the father yells. “How do you think I paid for your college and law school education?”
Probate reform in the past 20 years has just about cleaned up the once-checkered field of law where some overreaching lawyers and out-and-out crooks plied their trade.
And that’s a good thing, since life’s two certainties--death and taxes--come together in the inevitable probate action. Anyone who accumulates some wealth and property must come to grips with the realities of probate--legal fees, costs and delays. You can take some steps to preserve most of your hard-won assets for your heirs, although one popular method, the so-called living trust, is the center of some debate.
In California, the minimum fee for a probate lawyer is $5,150 for a $200,000 estate or $21,150 for a $1-million estate. The executor (one who isn’t a family member or friend who would waive the fee) is entitled to the same amount, potentially raising the total cost to the estate to $10,300 and $42,300, respectively.
That’s too low, some probate lawyers claim. So, like good business operators, lawyers have come up with an alternative to generate income by dusting off an old legal mechanism for holding property--the living trust.
The increasingly popular trusts, known in the law as inter vivos trusts, are aimed at avoiding probate. Some lawyers advertise that living trusts also can be used to minimize federal estate taxes, also known as death taxes, but legal specialists say the tax is the same on property in a trust as it is on property in probate.
Used in conjunction with a will, a trust accomplishes the primary goal of probate court--transferring assets to survivors--but without the expense and the year or two of delay.
The advantages of living trusts, lawyers say, include:
With a husband and a wife as co-trustees, there is no need to go to court to have a guardian appointed in case one of the spouses suffers a debilitating illness or otherwise can’t handle financial affairs. The co-trustee simply takes control.
A trust can designate who will handle various affairs, such as funeral arrangements, and can vest power in a co-trustee for distributing personal effects free from court review.
A trust can give a co-trustee personal custody of surviving children, while a provision in a will naming a person to rear children is not binding on a court.
A revocable trust can be changed or revoked at any time, although once a husband, for instance, has died, provisions regarding his property in the trust could become irrevocable.
A trust is a private document that comes under public scrutiny only if someone challenges its provisions in court. A will becomes a public document as soon as it is filed for probate.
“Some people are sensitive to not letting the world know what they’re doing,” said Los Angeles lawyer Alan D. Shulman, a certified tax specialist and estate planning partner in the entertainment firm of Wyman, Bautzer, Christensen, Kuchel & Silbert.
There are, however, drawbacks to a living trust, lawyers note:
It cannot pass property free and clear of claims by creditors. In probate court, on the other hand, creditors and others must file any claims against an estate within four months, or else the claims are extinguished. Whatever property is left passes free and clear to the heirs. That’s important for those in so-called risk professions, such as doctors and lawyers who may have lawsuits or other claims pending against them when they die.
The annual cost of maintaining a trust, particularly a
large one with professional trustees, can ultimately rival the costs of probate.
There can be complications in transferring such assets as stocks and bonds or a spouse’s separate property into a trust, causing a higher legal bill.
The average person with a small estate who can’t afford professional trustees may simply be incapable of managing a trust. At the very least, he or she may need professional help and annual reviews of the trust--all of which cost more money.
“You can’t just throw assets in a trust for the purposes of avoiding taxes and creditors,” said Beverly Hills lawyer Jay G. Foonberg, a certified tax specialist. “If the person has the sophistication to discipline his affairs, he can manage.
“But when you put the bank account and the car in the name of the trust, and you have community property and joint property that hasn’t been transferred to the trust, you have a hodgepodge,” he said.
The result is that a challenge to a trust could wind up breaking it and sending all the assets through probate anyway, he pointed out.
Foonberg is no fan of living trusts, although he acknowledged that they are useful under certain circumstances and with certain people.
But the greater danger in living trusts, he believes, is the opportunity some lawyers are taking to pump up fees. Creating a will can cost the average wage earner about $100. But add a living trust with the will, and the cost soars to $1,000 to $2,000.
The heavy promotion--and hard-sell advertising--living trusts are getting bother some lawyers, Foonberg among them.
“One reason for the large amount of living trusts being created is because the fee is unregulated,” Foonberg said.
Regardless of whether a living trust is used, a will is usually regarded as the basic tool for estate planning. And the Internal Revenue Service will get its share of the estate taxes under either a will or a trust, Shulman and Foonberg said.
In a typical family situation, the husband dies first. Through his will, he leaves all his property to his wife. She invokes a spousal exemption under the law and takes all the property without paying any estate tax. However, the tax is only postponed. When she dies, the feds move in.
The idea of estate planning is to avoid probate as much as possible and minimize the tax on the estate. That is usually done by making outright gifts during a person’s lifetime or by coupling a will with either a living trust or one created by the will.
Serious estate planning should begin once an individual has a net worth--assets minus debts or liabilities--of $600,000, lawyers said. That’s the amount of property that any individual can give away during his or her lifetime or through a will without incurring estate taxes.
For married couples, that means each spouse can make tax-free gifts of $600,000 in value, thus reducing the size of the estate and the taxes eventually paid, said Los Angeles lawyer Robert F. DeMeter, a certified tax specialist.
(While alive, a person cannot make a single, lump-sum, tax-free gift of $600,000, but he can make gifts up to $10,000 apiece every year to as many people as he wants. After he dies, the entire amount, though, can pass tax-free through a will.)
For purposes of round numbers, take a couple with a $2-million estate. The husband makes a $600,000 gift to his children, leaving a $1.4-million estate free of taxes under the spousal exemption for his wife.
She also gives her children the same amount of property tax-free, reducing her estate for tax purposes to $800,000. After she dies, the final estate tax would be about $242,000, DeMeter said.
But if the husband never took advantage of the tax-free gift, the estate after the wife’s death would be $1.4 million, which would incur nearly twice the estate tax, or about $450,000.
About the only time a will might not be needed, DeMeter said, is in the case of a childless couple with less than $600,000 in assets and with all property owned as joint tenants with right of survivorship. When the first person dies, he said, no property would go through probate and no property would be taxed.
