Living Revocable Trusts Myths Facts Estate Planning

LIVING TRUSTS: MYTHS AND FACTS

The Castleman Law Firm
A Professional Corporation

5870 Stoneridge Mall Road, Suite 207
Pleasanton, CA 94588
Phone: (925) 463-2221
Fax: (925) 463-0328

Most people who are considering estate planning have heard of "living trusts." They are often advertised on the radio and newspapers as the only way to save taxes and avoid probate. The advertisements and hype are often misleading. The purpose of this article is to expose some of the myths surrounding "living trusts."

In many cases "living trusts" are very useful, and our firm, in fact, recommends the use of a living trust in most cases. However, in some cases a revocable living trust may be inappropriate. Also, if a revocable living trust is not properly funded, maintained, and administered after death, the trust may be useless or even dangerous. Each individual's case must be carefully considered to determine the advisability of using a "living trust," and whenever a living trust is used, it must be properly funded, maintained, and administered.

DEFINITION: A "living trust" is a trust created by a married couple or a single person during life. If the trust is created by a married couple, it can be revoked or amended while both are alive and competent. A single person who creates a living trust can also revoke or amend it. A "living trust" is properly known as an inter vivos revocable trust, or simply as a "revocable trust." In the discussion of myths and facts which follows, the term "revocable trust" will be used.

MYTH: Avoiding probate saves federal estate taxes.

FACT: Avoiding probate does not save taxes. Probate is the supervision of the distribution of a decedent's property by a court of law. The probate system and probate avoidance have to do with state law and the manner in which property passes at death from a decedent to others. Federal estate taxes are determined by an entirely separate body of law which is contained in the Internal Revenue Code. Saving estate taxes has nothing to do with probate or the avoidance of probate. Saving taxes requires the intelligent use of certain techniques, whether or not probate is avoided.

MYTH: It is always best to avoid probate.

FACT: In most cases, it is good to avoid probate. But sometimes the use of the probate process is better. Probate is better when there is a possibility that someone will contest the decedent's estate plan because of the more immediate court supervision and, in some cases, the greater burden placed upon contestants. Probate may also be better if there is a good reason to impose supervisory controls over the person responsible for administering the estate. If the reasons for using probate do not apply, the use of a revocable trust is almost always better.

MYTH: If your estate is not in a revocable trust, it will be necessary to probate your estate.

FACT: Probate can be avoided by other planning techniques (but joint tenancy is seldom a good technique). In California, between husband and wife, probate is simply avoided at the first death by using the community property set aside procedure for community property assets (separate property would have to be probated). However, on the second death probate would be necessary if the survivor did not place his or her assets into a revocable trust or use some other technique.

MYTH: Don't worry about trusts or probate; just hold your property as joint tenants.

FACT: Although it is true that joint tenancy will avoid probate, it is probably the worst way to transfer property at death. It allows for no proper estate planning. It can cause the recipient significant income tax problems upon a subsequent sale of the property. Additionally, at the time the joint tenancy is created, it can give rise to a gift tax, and the "transferred" property may subsequently be included in the donor's estate at death if the donor retains certain rights in the property. During life, property which is held in joint tenancy is subject to attachment by the creditors of any of the joint tenants, and any of the joint tenants can sever the joint tenancy and force a sale of the property. Finally, the use of joint tenancy allows for no controls as to whom will eventually possess the property. Thus, your property could end up in the hands of strangers or other unacceptable persons.

MYTH: If you have established a revocable trust, you don't have to worry about probate or taxes.

FACT: You always have to plan for taxes if you have a potentially taxable estate, whether or not you use a revocable trust or a will. Also, many revocable trusts simply do not, or will not, work. Many living trusts do not work because: (1) they are not properly drafted; (2) they are not properly funded; (3) they are not properly maintained; (4) insurance and/or retirement funds have not been properly integrated with the rest of the plan; or (5) they are not properly administered after death. Many of the existing living trusts will be absolutely useless for probate avoidance because of one or more of the five reasons just mentioned.

MYTH: A revocable trust will save more estate taxes than a testamentary trust.

FACT: A testamentary trust (i.e., a trust set forth in a will and which comes into existence only at death, and thus is subject to probate) can save the same amount of estate tax as a revocable trust.

MYTH: You and your spouse can always be the trustees.

FACT: You can serve as your own trustee of a revocable trust during life (so long as you are competent), but after death there can be significant problems if a surviving spouse is the trustee of all trusts unless his/her powers are limited.

MYTH: Using a revocable trust is always less expensive than an estate plan that will require a probate proceeding.

FACT: They key word here is always. In most cases, the use of a revocable trust will be less expensive than probate. In certain cases however, especially small estates which can avoid probate whether or not a revocable trust is used, the cost of using a revocable trust may be higher.

MYTH: To avoid probate, all you have to do is to sign a trust document.

FACT: Unless you transfer your property to the trust, simply signing the document is a useless act. Also, once the trust is established and properly funded, it must be maintained. After death, it must be properly administered.

MYTH: It is easy to use a revocable trust.

FACT: Very good records must be kept, and, as we have said before, a trust must be properly funded. The failure to properly fund the trust (i.e., transfer assets to the trust) makes the trust useless. The failure to keep proper trust records may be fatal to its existence. If a revocable trust is used, it must also be properly maintained. We recommend annual consultations with your estate planning attorney. It is also extremely important that, upon the death of a trustmaker, the surviving spouse or family members immediately contact the estate planning attorney, because very important decisions have to be made regarding the administration of the trust.

MYTH: If a revocable trust is used, there are no post death administrative costs.

FACT: There are many things that must be done to administer, or wind up, a revocable trust after death. There will be post death administration fees and costs. It is our recommendation that these fees and costs be discussed with the attorney who plans the estate at the time the revocable trust is established. For example, in our practice we have a program that allows the trust creators to know what the limits of the post death administration fees will be, and provides for a cap on those fees.

MYTH: If you have a revocable trust, after a death the surviving spouse or family members have little or nothing to do, because probate has been avoided.

FACT: This is perhaps the most dangerous myth of all. After the death of a spouse, the surviving spouse must immediately seek the assistance of an attorney familiar with the administration of revocable trusts. The same is true after the death of the surviving spouse or of a single person. Any delay will cause serious administrative and tax problems.

CONCLUSION: The "Myth/Fact" discussion set forth above is not meant to discourage use of revocable trusts. As we said in the beginning, our firm recommends the use of revocable trusts by most of our clients. The point of this discussion is to show that a revocable trust is no panacea. Any estate planning must be done with careful thought and an examination of all alternatives. It is very important to engage the services of a qualified estate planning attorney.

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