When to Trust Living Trusts Fewer people need these heavily hyped devices to duck probate costs than the promoters want you to think. To find out whether you can use a trust, read on.
(MONEY Magazine) – Maybe you've seen one of the dozens of newspaper ads placed by lawyers and financial planners urging you to attend special no-charge seminars where you'll hear about the wonders of living trusts, which allow you to pass assets to your heirs outside your will. Or perhaps you caught the 30-minute cable-TV commercial in April, ''Money Makers for the '90s,'' in which Ontario, Calif. lawyer Fred M. Cohen hawked his $39.95 living-trust booklet cum cassette claiming that ''anyone who owns a home'' should have such a trust. You might even have been visited by a door-to-door salesman for one of the smooth < outfits known among attorneys as living-trust factories -- actually, firms that mass market trusts composed mostly of boilerplate language for $1,000 or so. Why the intense salesmanship? Simple: living trusts are easy to peddle and command big fees. ''You can learn how to sell living trusts in less than one day,'' promises an insurance magazine ad for the sales training program of American Family Living Trusts of Rancho Cordova, Calif. ''Producers are now averaging over $2,000 a week.'' Unhappily, that boast may well be true. A custom-designed trust can cost $600 to $3,500 or more, depending on the size and complexity of your estate. Yet a growing number of middle- and upper-middle-income Americans are persuaded to spend such sums by the new marketeers. ''Most people selling living trusts are aboveboard, but some of the mass-marketing groups are outright crooks,'' says James Quillinan, chairman of the estate planning, trust and probate law section of the California state bar. ''This is a complex legal area that requires careful drafting, planning and execution.'' The trusts were once used almost exclusively by the rich. Not anymore. ''Avoiding probate is one of the most popular conversation topics among people over 55,'' says San Diego attorney Robert Armstrong, who has drawn up more than 14,000 living trusts since 1980. And to hear some trustmeisters talk, everyone should have a revocable living trust -- so named because you transfer ownership of assets to the trust while you are alive and can alter the document's terms at any time. You can serve as trustee and manage the assets yourself; after your death, a successor trustee, typically a family member or friend, will distribute the assets to your beneficiaries according to your instructions in the trust document. Do living trusts ever live up to their star billing? The answer: yes, but less frequently than their advocates claim. Proponents are quick to point out that the trusts avoid the ''evil'' and the ''ordeal'' of probate, the legal process in which a court approves your will and supervises the distribution of your assets. While that language may be hyperinflated, the point is correct: probating an estate can take a year or longer, and legal fees and court costs often amount to 5% of the assets. Boston attorney Alexander Bove, author of the Complete Book of Wills & Estates (Henry Holt, $19.95), estimates that a lawyer settling a $1 million estate in Massachusetts might charge $25,000 to , $40,000 in probate fees, compared with $6,000 to $8,000 for settling the same estate in a living trust. Proponents also argue correctly that unlike a will, a living trust will protect your family's privacy. Once your will is admitted to probate, anyone can read it at the courthouse. But a trust document will remain secret even after the assets are distributed, except when a trustee needs a court to interpret the trust's instructions or a beneficiary -- usually one who feels shortchanged -- persuades the court to make the documents public. (This doesn't mean, however, that you can use a revocable trust to keep assets out of your creditors' hands. After a will is admitted to probate, creditors have four to six months to present claims to the executor for payment. With a trust, your assets can be transferred to the heirs immediately, so your creditors have to go to greater lengths to collect -- they must sue the trustee in court or the beneficiaries if the trust has been dissolved. But since there is no time limit, such suits can be brought years after you die.) Contrary to what many trust salesmen say, living trusts don't confer any tax benefits that a married couple can't get with a will. In either case, you can leave your heirs as much as $1.2 million free of federal estate taxes. You do it with a will through testamentary trusts that let you and your spouse each make full use of your $600,000 federal estate-tax exemption. Similarly, a couple can set up a living trust that splits into two trusts after the death of the first spouse. With both types, each trust contains up to the maximum of $600,000 in assets that can pass tax-free to the heirs. When the first spouse dies, his or her trust pays income to the survivor. Upon the second death, the assets of both trusts are distributed free of estate tax to the couple's ultimate beneficiaries -- their children, for example. Are living trusts better estate-planning tools than wills? The answer depends on your circumstances. Take for example Phoenix insurance broker Lou Cady, 50. Last September, soon after he learned that his 79-year-old mother was dying of cancer, he paid a total of $1,000 to his lawyer and his investment adviser to set up a living trust for her. ''We brought in deeds and stock certificates, then transferred and signed the documents,'' says Cady. When his mother died in November, the trust ''was a godsend.'' Explains Cady: ''I've seen some heirs tied up in probate for years, but I was able to dispose of the assets as I wished.'' Nonetheless, for most people, living trusts aren't worth the cost and trouble. For couples whose houses are jointly owned and who have few other assets, a living trust would be ''overkill,'' says David Rhine, a tax partner at BDO Seidman in New York City. And a trust will be worthless if you don't bother to transfer to it title to your real estate, stocks, mutual funds, bank accounts and other property. Some seminar showmen barely mention those tasks -- and an estimated 50% of people with living trusts neglect to do them. Retitling bank accounts, securities and mutual funds can require hours of work and reams of forms that must be filled out. Moreover, you'll probably need your lawyer to retitle your house and any other real estate (cost: about $150 a property). The best way to decide whether a living trust is appropriate is to consult an experienced estate lawyer. In general, however, you are a candidate for a trust if one of the following applies to you: -- The cost of going through probate in your state is high. Figuring this out is tricky. Fees for executors and attorneys vary enormously from state to state. So do court costs. In addition, states calculate the size of estates in different ways. Some include the market value of a decedent's home; others don't. Thus estates of the same size might be valued for probate purposes at $600,000 in Texas but $1 million in California. For help in estimating your estate's probate costs, consult the 50-state appendix in Probate: How to Settle an Estate (Random House, $8.95) by Kay Ostberg and HALT, a nonprofit consumer advocacy group in Washington, D.C. In general, say estate lawyers, the probate process is particularly costly in California, New York and Pennsylvania, where total fees could top $35,000 on a $600,000 estate. For an estate of the same size in comparatively bargain states like North Carolina, Texas and Virginia, probate would run less than $16,000. -- Your estate is likely to prove contentious. For example, you may plan to leave a large inheritance to a second spouse, which could anger children from your first marriage. ''Only rarely have embittered heirs been able to invalidate living trusts, so if your objectives could put your estate in jeopardy, you should definitely consider a living trust,'' says Honolulu attorney David Larsen, author of You Can't Take It with You (Vintage Books, $6.95). -- You want to keep your estate private. As your estate grows more substantial, so do the benefits of nondisclosure. ''You might not want the world to know that your spouse inherited $250,000 in securities,'' says David Parsons, senior manager of Price Waterhouse's personal financial services group in Morristown, N.J. ''His or her name would end up on a lot of investment marketing lists.'' -- You fear becoming physically or mentally incompetent. A living trust can let you avoid a conservatorship -- that is, being placed under a court- appointed guardian if you become unable to manage your own affairs. When setting up the trust, you can provide for a successor trustee to manage your assets if you are incapacitated. If your successor trustee is a professional at a bank or investment firm, you will usually pay an annual fee of 1% to 2% of the assets under management. Some aging couples hire a pro to begin managing the living trust while they are still vigorous. If you do set up a living trust and transfer your property to it, you should also have a simple will, which will cost $250 or so. One reason: only in a will can you name a guardian for your minor children. Another: you may leave assets out of your trust on purpose or by accident. Without a will, those assets will be distributed according to your state's laws rather than your wishes. But if you have a will with a so-called pour-over provision, the assets will automatically shift to your trust and pass the way you intend.
BOX: MAJOR BENEFITS OF A TRUST . . .
-- Gives you full control of your assets while you are alive and competent -- Avoids probate costs -- Permits assets to be distributed quickly upon your death -- Keeps the details of your estate private -- Arranges for a successor trustee to manage your assets should you become incapacitated -- Is difficult to contest
. . . AND THE TRADE-OFFS
-- Costs more in legal fees than drafting a will -- Requires retitling all assets that the trust will hold, which can be tedious and expensive -- May require you or your heirs to pay annual fees of 1% to 2% of assets to a professional trustee -- Leaves your trust assets vulnerable to creditors' claims longer than a will does