One of my colleagues who is a member of WealthCounsel recently posted an article explaining why revocable living trusts are not just for the rich. I certainly concur with her sentiments and will emphasize a couple of the points she made.
The primary advantage of a living trust based estate plan compared to a will based estate plan is the avoidance of probate – if, and this is a really significant if — the trust is properly funded. What do we mean by properly funded? A properly funded revocable living trust is one in which you have re-titled your assets and changed the beneficiary designations on life insurance, retirment plans, and any other asset that has a beneficiary designation.
“Funding” your trust is not always simple, and it is always somewhat of a hassle. It is necessary that you visit each bank in which you have accounts, contact each brokerage house and mutual fund company in which you have an account, contact your insurance companies, your retirement plan custodians, and anyone else who has custody of an asset belonging to you. You also must have deeds prepared for each parcel of real property that is to be transferred directly to the trust. Whew! A lot of effort!
What’s the reward for all of that effort? Avoiding probate usually saves time, money, aggravation, and usually is private, compared to a probate that is conducted in the circuit court’s public records. The time and money saved often is that of attorneys and others involved in the probate process. The savings of both time and money can be significant.
But, you say, the savings comes out of the assets remaining at my death – the additional cost of a revocable living trust comes out of my assets when I am alive! Why should I spend my money now to plan for an event that won’t happen until my death?
There are at least two very good reasons that make the revocable living trust significantly superior, in most cases, to a will based estate plan. First, the revocable trust takes effect immediately upon its signing, and if fully funded (all asset are titled to the trust), can help you avoid a court-supervised guardianship in the event of your incapacity. The second reason is that by using the revocable living trust as the vehicle for the distribution of your assets at death, you avoid not only the pitfalls associated with probate, but you can also avoid catastrophes that arise out of the use of joint ownership of property and improper beneficiary designations.
Avoiding a Court Supervised Guardianship
A court supervised guardianship is necessary when you are unable to manage your own affairs, and you have not provided for your incapacity through effective estate planning. Providing for your incapacity, through effective estate planning, includes implementing a durable power of attorney, a designation of health care surrogate, an HIPAA release and authorization, and a living will – at a minimum. Another way to plan for your potential incapacity is through a revocable living trust.
If you have a fully funded revocable living trust, upon your incapacity you will have named one or more successor disability trustees to take care of you, and to manage your assets. You will have provided instructions in the trust document that guides and directs your disability trustee regarding your desires concerning your personal care and how your assets are to be managed. For instance, you can instruct your successor trustees to maintain you in your private residence for so long as it is reasonable to do so without impairing your health. Or, you may want to be placed in an institutional setting (skilled nursing home) immediately upon you no longer having the ability to care for yourself, so that you are not a burden on your adult children’s lives. You have the ability to choose the most appropriate course of action for your care, based on your desires.
You can include instructions in your trust about which assets should be liquidated to provide for your care, in the event that is necessary. For instance, if you don’t want the family farm sold to provide for your care, you can designate that in your trust document. Your desires, as expressed in the trust document must be followed by the trustee, or the trustee will have breached the trustee’s fiduciary duty to the trust beneficiary – you.
The durable power of attorney is not always as effective as the successor trustee in dealing with your business and financial affairs. A third party (like a bank, insurance company or IRA custodian) is not legally obligated to honor a durable power of attorney in Florida. If a third party refused to honor the durable power of attorney, there is no legal method of compelling that party to recognize and honor the power of attorney.
Conversely, your successor trustee of your revocable living trust is the “legal owner” of the assets in the trust (you remain the “beneficial owner”). As the legal owner of the assets, the same third party must respond to the demands of the successor trustee, just as when you were in control of the trust assets as the original trustee. Many potential problems are eliminated through the use of the revocable living trust.
Because third parties must deal with the successor trustee, as the legal owner of the assets in the trust, there usually is no necessity for a court supervised guardianship, with its annual accountings, annual guardianship plan required by the probate court, and the necessity to obtain court approval for most significant actions or expenditures related to your care and the management of your assets.
Pitfalls of Joint Ownership
Many problems can arise when someone relies upon joint ownership as a method of transferring property at death. An entire post at a minimum, if not a book, can be written about issues created by joint ownership of assets when someone dies. In this post, we’ll only discuss a couple of them, as examples of the problems a revocable living trust can avoid.
One such problem arises often in the context of blended families. When joint ownership is used with blended families, it can result in unexpected consequences. Several years ago, a client who lost his wife to cancer, later remarried. He had three sons who were small at the time of his first wife’s death, and were all teenages when he married his second wife. In an effort to make her feel like part of the family, he retitled all of his assets into joint tenancy with his new wife, with right of survivorship. A couple of years after the wedding both husband and wife were killed in an auto accident. The wife’s parents, through an accident reconstruction expert, convince the court that the husband died an instant before the wife, because his side of the car was hit first. Under the law of joint tenancy, instantly upon his death, all of the interest in all of his assets transferred to his wife by operation of law. Neither husband nor wife had wills. When the wife died a fraction of a second later, all of her assets transferred to her parents under the intestacy statute, since she had no will. The husband’s children were left with no assets, and became ward’s of the state until they turned 18.
Another tragic case involves two brothers who I met with about three years ago. They had worked for more than 20 years building the business their father started. Their father died about 10 years before their mother. The stock of the corporation that owned the business transferred to their mother upon their father’s death because the mother and father owned the stock as husband and wife. The mother later married. Probably because it was the way it was done when her first husband died, the mother transferred ownership of the stock to herself and her new husband as joint tenants with right of survivorship. About three years ago, the mother was killed in an auto accident. Instantly upon her death, because of the joint ownership with rights of survivorship, the ownership of the stock transferred to her new husband. He died 12 days later because of his injuries in the same auto accident. He had no will, so this assets, including the ownership of the corporation that owned the business, transferred to his children upon his death. His children became the 100% owners of the business that the brothers had worked for 20 years building!
The use of a revocable living trust could have allowed the avoidance of the problematic outcomes in the cases discussed above through proper instructions to the trustee.
Improper Beneficiary Designations
As with jointly owned property, beneficiary designations can create unexpected, and undesirable, results. The most common beneficiary designation that causes unexpected results is naming a minor child as a beneficiary. If a minor child is the beneficiary of a life insurance policy, retirement plan, IRA, annuity, or any other type of property with a beneficiary designation, there will be a court supervised guardianship of the property of a minor child that will be required. Minor children cannot legally own any assets. There must be an adult custodian for the assets of a minor child. Where inheritance is concerned, if a beneficiary designation or even a will, provides that something be given to a minor child, then the court supervised guardianship must be established for the ownership of the assets. A guardianship of the property of a minor child requires that the guardian hire an attorney, and most decisions made regarding the expenditure of the funds in the guardianship account, must have the approval of the probate judge. If the judge doesn’t approve, the distribution from the account does not occur. The attorney and the guardian of the property are entitled to fees, and there must be annual accountings filed on behalf of the guardianship. Worst of all, at least for most people, is that with a guardianship of the property of a minor child, all of the assets that are the subject of the guardianship are turned over to the minor child at age 18, with no guidance, direction or protection.
A living trust, if made the beneficiary of the assets designated to go to the minor child, can provide for instructions and guidelines regarding the type of support to be provided for the minor child, the time of distribution of any, all or none, of the assets to the child, and can provide protection of the assets for the child in the event of divorce, creditor judgments, or just about anyother circumstance that occurs with young people when dealing with money.
In short, with the revocable living trust, you have the ability to control when, how and to whom your assets are distributed at death, and you have the ability to provide for the management of your assets and your own care in the event of your disability at death.
Copyright 2008-2014 – The Coleman Law Firm, PLLC