By Attorney Susan M. Mooney
Several statements are generally offered as advantages by those individuals who advocate “Avoiding Probate” by the establishment of a Revocable Living Trust to own your assets. The following is a sampling of some statements used in support of a Living Trust arrangement which were presented in an Article published by the New England Financial Journal entitled “Avoiding Probate” by Laura Walbert. Each statement set forth below is followed by a response that raises issues for consideration in making a decision about whether a Living Trust is advantageous for your personal Estate Plan.
This statement is an over simplification. It is not usually “simple” for most clients to put all their assets into the Trust.
This means that ownership of each and every asset, bank account, stock certificate, parcel of real estate, personal property, etc. must be changed/transferred to the name of the Trust.
a. Depending on your assets, it could take a lot of work to transfer ownership of all assets to the Trust and sometimes takes several weeks or months to complete the transfer.
b. Many people decide it is overwhelming to effect the transfer of all assets on their own, so decide to have the law firm accomplish the transfer of all assets to the Trust for them (this is an added legal cost not included in the cost of preparation of the Trust documents, which is usually billed on an hourly fee basis).
c. Based on personal experience I have found it very common for individuals to fail to effect the transfer of all assets to the Trust (either failing to do so themselves, misunderstanding the proper titling of assets into Trust ownership, or if the law firm is effecting the transfer, the client frequently has failed to inform the law firm of all assets).
While there may be no tax consequences - (no savings and no cost) tax-wise, there may be additional tax filings required for the Trust each and every year. Therefore, possible extra cost of tax preparation each year due to the existence of the Trust should be considered. Each year certain Trusts may be required to file a State and Federal Income tax return, although any taxes would pass on (be paid or refunded) through the individual’s personal tax return. [Example: In the event the Trust exists for twenty (20) years between the date of establishment and date of death and a Trust tax return is required, there would be accounting fees for twenty (20) years of State and Federal Income tax preparation filings, in addition to cost of preparation on an individual’s usual Income Tax personal returns.] Thus, extra accounting fees are possible and should be considered over the life of the Trust.
The percentage quoted includes attorney’s fees, personal representative’s (executor’s) fees, accountant’s fees, etc. Certain attorney’s fees are still required whether or not assets are held in Trust and accounting fees may actually be higher in the Trust situation. Furthermore, if you shop carefully for an attorney, legal fees related to probate can and should be paid on an hourly basis, rather than percentage fees. In our experience hourly fees are generally far lower and provide fair compensation to the attorney with lower cost to the client for the legal service provided. By way of a simple example, suppose you compare two (2) Estates, one valued at $100,000.00, with the only asset a primary residence of the deceased, and the second Estate valued at $500,000.00, again with the only asset the residence of the decedent. The legal work would be the same for probating each of these Estates. In my opinion, there is no reason that cost of probating the second Estate should be five (5) times that of the first. Our firm charges an hourly fee for these services. In many cases costs of probate would be less than one-half (1/2) that of a percentage fee for the legal work involved, if legal work is based on an hourly fee. Also, legal costs associated with sale of real estate, liquidating assets, and tax filings would still be necessary whether the assets are owned by a Trust, or are subject to probate proceedings. These legal costs would not be avoided by Trust ownership and are included in the quoted estimate of costs of two percent (2%) to seven percent (7%) of the Estate value. (See also No. 5 below).
In many years of probate practice, I have found Trusts are not usually perfectly funded, in fact, in almost every case some asset is not owned by the Trust at the time of death due to either a failure to transfer it, a recent acquisition, a forgotten asset, an incomplete transfer, etc.
If some asset is left out of the Trust, a probate proceeding will be required as well. The individual who has already paid the costs of the Trust (the added legal and possibly accounting fees during lifetime) now has the cost of probate anyway, in addition to the Trust costs. I have found it more the general rule, than the exception, to have both the Trust, as well as the probate proceeding, due to a failure of the Trust to own all assets. It is rare to find a “perfectly funded” Trust.
The two percent (2%) to seven percent (7%) cost of probate referred to above includes Personal Representative (Executor) fees. In the majority of cases, in my experience, I find the Personal Representative family member or friend does not accept any fee at all. This is generally approximately three percent (3%) of the cost. Further, Trustees also are entitled to charge a fee, and this fact is ignored by those who suggest that the Trust will save costs, since Trustee’s fees may be payable over many years of Trust ownership of assets, while generally the course of a Personal Representative’s work is completed within a year or so, thus limiting potential fees to a short duration for time of service.
Accounting fees should not be any different at all in most cases, whether there is a Will or a Living Trust, and in others the difference is insignificant.
A probate proceeding, when done in a timely, cost efficient manner, is not a big deal and usually goes smoothly. If an individual establishes a lifetime Trust and a probate is required as well, this is often a much bigger deal than a simple probate.
The probate process in Massachusetts can and should in most cases be completed in approximately twelve (12) months, however, most assets within the Estate can be liquidated within a few months of death, such as real estate sales and stock liquidations. If there is a Living Trust as owner of the assets at death and there is real estate and other assets to be liquidated within the Trust, it is unlikely that this would be accomplished in less time than through the Probate process. Estate taxes, if applicable, are due nine (9) months from the date of death, and whether there is a Trust or Will makes no difference. Thus, the time savings is not usually a significant factor.
Multiple probate may be required anyway when there is property located in various States. Generally, probate proceedings in other States (not the State of residency) where the decedent simply owned property are simplified procedures (called ancillary probate) and are not full probate proceedings. A Trust ownership of out of State property can however avoid the out of State ancillary Probate. Furthermore, if the Trust is the owner of your personal residence and the residence is sold during your lifetime, you may not get the full benefit of the tax exemption for sale of a personal residence. This issue should be explored with your accountant or tax advisor. It is not recommended that one Trust own multiple properties, but rather each property should be owned by a separate Trust for better insulation from liability for each property.
a. This is a false statement. What is published in the newspaper is not “the terms” of the Will, but only a Notice that the Will of the decedent has been filed with the Court. The Will is public record in the Courthouse, if someone wants to go to the trouble of going to the Court to look it up, however, in that case if the Trust is the owner of real estate then the Trust may be recorded at the Registry of Deeds and, therefore, the Trust may also be public record. Therefore, if you want the Trust to own your real estate, usually a second Trust, or Trustee’s Certificate, is recorded to own the real estate, so the first Trust can remain confidential. This second Trust, or Trustee’s Certificate, is again an added cost of the Living Trust plan, which perhaps is being established to avoid probate costs, but has its own costs to establish and maintain.
Preserving confidentiality is not usually an issue for the average person, but it may be for a celebrity.
b. If there are minor children as beneficiaries of the Estate (Trust or Will) confidentiality may be a disadvantage to them. If the assets are left for the benefit of a minor, by way of a Living Trust, the Trustee will have no reporting requirement to the Court, thus the minors will have no record of the Trustee’s expenditures, and if the minor children question the use of the assets they would be forced to file a costly lawsuit against an uncooperative Trustee. If, on the other hand, the funds were left by Will to the minor children, there would be an annual reporting requirement to the Court, thus there would be a public record, accessible to the minor in future years, as a safeguard to be sure their funds are properly accounted for. There is an added cost for filing the annual accounting with the Court each year, however, the minor’s funds are protected by Court oversight.
a. “A Will can be signed and left in a drawer for twenty (20) years, leaving it more open to the argument by an unhappy heir. This statement is, in my opinion, misleading. A twenty (20) year old Will is not at all likely to be subject to challenge. A Will that is signed on the individual’s deathbed is far more likely to be challenged than an older Will.
b. “We were getting along so well in the last five (5) years, I should have inherited more.” This is not a legal basis for any Will challenge. Challenges to Wills are limited to legal basis such as fraud, undue influence, testator’s incompetence at time of signing, or improper witnessing of the Will. Challenges cannot arise based merely on an individual’s belief that they “should have inherited more”.
Every individual should establish a Durable Power of Attorney and a Health Care Proxy to handle their financial and personal decisions in case of their disability, whether that individual has a Trust or not. A Living Trust does nothing to protect any individual’s personal decisions in the event of incompetence.
“With a Will, often a ‘Living Probate’ Court proceeding is required”.
I have never heard of the term “Living Probate” Court. In Massachusetts, there is a Probate and Family Court with jurisdiction over all probate proceedings. A person with a Living Trust that becomes incompetent may have some protection for their financial well being, but they have no protection for personal decisions. Without a Durable Power of Attorney and Health Care Proxy, a Probate Court Guardianship or Conservatorship proceeding would be required to protect an incompetent disabled individual, regardless of the existence of a Trust. Possibly the author means a Probate Court proceeding, while the person is “living” (such as a Guardianship or Conservatorship) could be required. A Guardianship or Conservatorship, however, could be avoided in most cases where an individual has executed a Health Care Proxy and Durable Power of Attorney, but it would not be avoided if there is only a Living Trust. Additionally, if the Trust is unclear or ambiguous, a Probate Court proceeding may be required to interpret it, so a Trust does not necessarily insure against Court involvement, and, in fact, Trusts are frequently subject of costly Court proceedings for interpretation, clarification or amendments.
“That includes real estate, vehicles and all financial assets”.
a. It really can be a “trick”, see comments under #1 above.
b. I NEVER, NEVER, NEVER, recommend placing a vehicle into Trust ownership, due to insurance coverage and liability issues.
i. Insurance coverage issues can be very tricky under Massachusetts Law. If the Trust is the named insured, you personally may not have the benefit of certain insurance coverage you would have if you owned the vehicle personally. Although you may have purchased the coverage and paid for it, you may not have the protection you think you have if the Trust is the real owner of the vehicle. Despite the fact that you may pay the same insurance premium, you may find coverage is denied to you only after you’ve had a claim against you while the vehicle is owned by the Trust.
ii. Liability-wise it makes no sense whatsoever to expose all your Trust assets to claims against you for motor vehicle accidents. Therefore, you should NOT have the Trust as owner of your vehicle. We strongly advise against Trust ownership of any motor vehicles.
a. You will need a Will anyway, regardless of the Living Trust, as well as a Durable Power of Attorney and Health Care Proxy.
b. If your Trust does not own all assets, a probate proceeding will be required anyway - Thus, you would now have both costs of probate, as well as the cost of the more expensive Estate plan where you have established the Living Trust. Our costs for simple Estate plans, without a Trust arrangement, but including a Durable Power of Attorney and Health Care Proxy and simple Will ranges between $800.00 to $1,000.00 for an individual, or $1,200.00 to $1,500.00 for a couple. All of these documents are critically important for all individuals whether or not they may also have a Trust.
The costs associated with liquidating real estate, or other assets owned by a Trust, Trust tax filings, Trustee’s fees, after death is not included by advocates of Living Trust arrangements, who state that “after death Living Trust should only cost heirs $2,000.00”.
In my thirty-four (34) years of probate practice, in reality, I have found that the costs to heirs of Estates that were left to them by way of a Living Trust has in most cases been as expensive, and in many cases, far more expensive, than if the same assets were left to them by way of a simple Will. The biggest problem I have found is that most individuals do not “perfectly” fund the Trust, leaving other assets to be probated, and most clients prefer not to pay the added legal expense involved in order to have the law firm fund the Trust “perfectly” for them, and they then fail to either do it at all themselves or fail to do it properly.
There are many reasons that a Living Trust may make sense to your personal Estate plan, but avoiding probate should not be your sole criteria. There are other, simpler and more cost effective ways to avoid probate such as, joint accounts, and/or Life Estate ownership of real estate, and/or naming beneficiaries, or transfer on death (TOD) designations, that may make more sense for your situation, and are also far less costly to establish and simpler to manage than a Trust.
Further, a Living Trust could actually be detrimental to you for Medicaid planning in the event that the Trust is the owner of your personal residence and you require long term care in the future. Living Trust arrangements tend to make the most sense in larger estates valued at over the Estate tax limit ($11.58 million dollars per person beginning January 1, 2020, for Federal Estate tax purposes, and $1.0 million dollars for Massachusetts Estate tax purposes) where the Trust arrangement clearly offers tax advantages and significant tax savings if properly drafted and implemented. Other reasons that a Trust may make sense is where planning for a disabled individual (such as a child or grandchild), or a minor child, is needed, or as a possible method to avoid a Will challenge where you may be leaving an unequal distribution of your assets among your heirs, or wish to disinherit a legal heir.
IT IS IMPERATIVE THAT YOU OBTAIN TIMELY AND COMPETENT LEGAL ADVICE BEFORE DECIDING ON AN ESTATE PLAN THAT MAKES SENSE FOR YOUR INDIVIDUAL PERSONAL NEEDS. DO NOT MAKE YOUR PERSONAL DECISIONS BASED ON WHAT YOU READ IN A MAGAZINE OR HEAR ON THE RADIO OR FROM WELLMEANING FRIENDS AND RELATIVES.
IN THE CASE OF MANY ARTICLES, IN NEWSPAPERS OR MAGAZINES, LEGAL ADVICE IS PRESENTED BY “A FINANCIAL JOURNALIST” (PROBABLY A NONLAWYER) IN WHICH CASE, IN MY OPINION, THEY MAY BE PRACTICING LAW WITHOUT A LICENSE.