What the Experts Say
Since the 1960s, when Norman Dacey touted his book, "How to Avoid Probate," so called "living" trusts (more properly, "revocable trusts") have been incredibly oversold to people who do not understand what they are buying. Well intentioned folks are lured by slick advertisements to attend free seminars often presented by lawyers who are little more than salesmen. These promoters prey on the public's lack of real knowledge and their fear of "Probate." They recommend living trusts for almost everyone as a miracle solution to a virtually non-existent problem.
Custom designed revocable trusts are at the core of some of many of our clients' estate plans. Most people, however do not need these trusts. They can accomplish all of their objectives for a lot less money with properly planned and drafted wills, powers of attorney and advance health care directives. So called "living" trusts, especially those done by the promoters extolling "Probate avoidance," will cost you a good deal of money and will not be of any real benefit to you and your family.
After you have read this Special Report, you will have a better understanding of what a trust is. You will know whether you should be considering a trust for your family at all. You may find that, using a will with trust provisions for your children or grandchildren is just as effective as creating a "living" trust, is easier to understand and more economical.
One of the promises that we make to our clients is we will speak and write in understandable English. Because many commonly used words have a different "legal" meaning, I would like to define some of the terms used in this Special Report in plain English. Please understand that these "layman's definitions" may not be 100% technically correct. They are meant to help you understand this Special Report.
Will. A will is a document in which you distribute your solely owned assets to your spouse, children, charities or other beneficiaries. You can name a guardian for your children in your will.
Only "solely owned" assets are distributed by will. Only assets that are in your sole name are distributed by your will. Assets that are jointly owned, such a house that your spouse and you own together, are distributed directly to the other joint owner. Life insurance, IRAs and other retirement assets are distributed under "beneficiary designations." They are not distributed under your will.
Probate. "Probate" is the process of transferring your solely owned assets to your heirs when you die. The Connecticut Probate system is, for the most part, user friendly. You should, however, obtain proper professional help in settling an estate or in administering a "living" trust.
Trust. For our purposes, think of a trust as an account with some special and unique features. You put assets into the account, either during your lifetime or by your will. You appoint a manager of the account ("trustee"). After your lifetime, the account will be managed by a trustee whom you select. He or she will distribute your assets to your family in accordance with your wishes.
What is a So Called "Living" Trust?
In very simple terms, a "living" trust is a trust that you create during your lifetime under a document called a "trust agreement" or a "declaration of trust." You transfer your house, bank accounts, securities and other investments to yourself as trustee. This is called "funding" the trust.
In a technical sense, your assets are no longer in your own name. You own them as a trustee for yourself. The trust document can provide who receives your assets after your lifetime. For example, the successor trustee can be directed to distribute them to your spouse or children. Because you own the assets as a trustee and not in your own name, they are distributed outside of the Probate system.
"Avoiding Probate" is the reason why most people create "living" trusts. As you will see, avoiding probate is probably not a sufficient reason, particularly in Connecticut, to justify the extra expense and ongoing attention to detail required if you create a "living" trust.
The Truth About Connecticut Probate
The Probate Court is an agency that has several "jobs." One of them is overseeing the administration of estates. Another is appointing conservators to deal with the affairs of people who are incapable of managing their own assets. Some of the criticism of the Probate system is valid. However, creating trusts primarily to avoid the Probate process when a person dies or becomes disabled is, for most people, a needless waste of money and time.
Why a Will Makes Sense for Most People
Suppose that you want to have your assets distributed to your spouse when you die. If your spouse doesn't survive you, you want your adult children to inherit your estate. You obviously want your assets to go to your heirs in the most efficient way. The sales pitch that, using a "living'" trust instead of a will, you will save money and administrative headaches is, for most people, not true.
First Myth - You Will Save Probate Court Fees With a "Living" Trust
Suppose that you have a house owned jointly with your spouse, cash in the bank, an IRA and a life insurance policy. When you die and those assets be distributed to your spouse, children or other beneficiaries, there will be a statutory Probate Court fee on the value of all of your assets, regardless of whether those assets are administered under the Probate system.
In virtually all other states, there is no Probate fee on assets of "living" trusts and other assets which are distributed outside of Probate. This is not true in Connecticut, where the statutory Probate fee is based on the value of all assets that you can distribute at your death including assets that you have put into a "living" trust. That fee is not the 4% number used by the promoters of "living" trusts to scare you into buying their product. The Connecticut Probate fee is approximately one-quarter of one percent.
Let's see what you've avoided by paying over $3,000 for a "living" trust. The Probate fee on assets of $500,000 is $1,865]. On assets of $1,000,000 it's $3,115. Once again this fee cannot be avoided by using a "living" trust.
Second Myth - Your Assets Will be "Tied Up in Probate"
There are some genuine horror stories of estates taking years to settle. However, those estates may have hard to value assets, disagreements among the beneficiaries, disputes with the taxing authorities or other roadblocks to efficient administration. Those same roadblocks would make the administration of a trust a nightmare.
What the "living" trust promoters don't tell you is that, in most families, the executor of a will can be appointed by the Probate Court very quickly, sometimes a few days after the asset owner's death. If the executor is operating under a well drafted will, he or she can almost immediately start distributing assets to the beneficiaries. However, a prudent executor or trustee of a "living" trust would probably be better advised not to make significant distributions until there is no possibility of creditors' claims. He or she should also make sure that there is enough cash available to pay administration expenses and taxes.
Third Myth - "Living" Trusts Save Taxes
"Living" trust promoters tell you that these trusts will save estate taxes, which can be as much as 50%. While it's true that the estate tax can be 50% or more, that tax only applies to estates in excess of $2,000,000. For the majority of people who go to the free seminars, the estate tax will not be an issue.
Fourth Myth - "Living" Trusts are the Only Way to Deal with Disability
It is true that, if you create and fund a "living" trust and become disabled, there will be no need to have a conservator appointed in the Probate Court to manage your assets. It is also true that conservatorships are unpleasant and are an invasion of privacy. However, there is a much simpler way to have your assets managed in case of disability. You can name someone whom you trust as an "agent" and give him or her what is called a "durable power of attorney". This document gives your agent the ability to deal with your assets and is effective even if you are incapacitated.
No asset management device is perfect. Some years ago, I tried a matter involving an agent who used a power of attorney to steal $600,000 from his "friend." Trustees can be less than honest as well. If you are afraid to give someone a power of attorney, you should not let him or her be your successor trustee. In this sense, a conservatorship may not be a bad idea because the conservator has to file accountings with the Probate Court and any unlawful activity would be easily discovered.
What About Trusts for Children?
Probably the most common type of trust is a "contingent trust" for children. This trust will only come into effect if you and your spouse die before your children are mature enough to receive their inheritance without supervision. You can leave any type of assets to the trust, including cash, securities and real estate. You can designate the trust as beneficiary of your life insurance and retirement plans such as IRAs and 401(k) accounts.
How Can I Create a Contingent Trust for my Children?
You can create this contingent Trust in one of two ways. You can use a revocable "living" trust or you can create the trust in your will. This type of trust is called a "trust under will" or in more technical language, a "testamentary trust."
EXAMPLE: You state in your will: "I leave the assets of my estate to my trustee. My trustee shall administer those assets in trust for my children's benefit as provided in Article Four of this will." You designate the trustee of the trust as beneficiary of life insurance and retirement plan assets.
Why Create Your Children's Trust Under Will?
Think about the real possibility of your children needing a trust. Most children's trusts provide for the assets to be distributed at age 30 or 35. The probability of a 41 year old woman living to age 60 is 90%. For a man the same age, the chance decreases to 80%. I'm certainly not an actuary, but based on these numbers, it would certainly appear that most trusts for children will never be funded. That is why they are called "contingent" trusts.
For people whose only reason for creating the Trust is to provide for a contingent Trust for children or grandchildren, there is no practical difference between using a Trust under will and a Trust under agreement. Both can have exactly the same provisions. While the trustee of a testamentary trust must account in the Probate Court, the chances of the trust actually coming into existence do not justify the extra cost of a revocable trust agreement.
The fact that the "odds" of both parents dying before their children reach, for example, age 35, are relatively small does not mean that parents shouldn't create Trusts for their children. We have fire extinguishers and burglar alarms even though the chances of having a fire or a burglary are quite remote. Having a contingent trust for your children is a form of insurance. It gives you the security of knowing that if things go wrong, your children will be given the best opportunity to receive the full benefit of your assets, even if circumstances arise that would otherwise keep them from making the best use of what you have left to them.
If this is your only reason for creating a trust, and you are a Connecticut resident, there is no practical difference between a contingent children's trust created by will and one created in a "living" trust, except that the creation of a "living" trust is much more expensive. The trustee of a trust under will must account in the Probate Court. The trustee under a "living" trust must account to the beneficiaries. There is not significant difference in the cost of preparing these accountings.
I would suggest a better use for your money than paying the additional lawyer's fee for creating a "living" trust for your children. Take them on an educational trip. Both they and you will be better off.
Advantages of Wills
Even if there is no "Probate" estate and all assets are in a funded Trust, an inventory of assets still has to be prepared. The trustee of a revocable trust still has to make a list of the assets with their date of death values in order to prepare the state and federal estate tax returns. The state return is required even though the assets are less than the exemption.
Executors have to file accountings in the Probate Court. Trustees are still required to prepare accountings in order to keep the beneficiaries informed.
A Probate proceeding cuts off claims of creditors after a certain period. With a revocable trust, there may be lingering uncertainty as to potential claims.
Executors of Probate estates can select a fiscal year for income tax reporting. This may be advantageous in many cases, especially if there are unusually large income or deduction items within a short time. Trustees of fully funded trusts cannot make fiscal year elections and must report all income on a calendar year basis.
So Who Are Revocable Trusts For?
The purpose of this Special Report is to educate people on the myths of so called "living" trusts that are being aggressively marketed by some lawyers and others who are more like salesmen than professionals. Properly planned and drafted revocable trusts, custom tailored to meet clients' specific needs, can be extremely useful. Some of the times when revocable trusts make sense and are worth the additional investment are:
• Creating an estate tax shelter for married couple with assets over $2 Million.
• Setting up a "Special Needs Trust" for a child with physical or developmental disabilities.
• Clients with children from a previous marriage. Special trusts called "QTIPs" let you provide for your spouse and guarantee that your assets will eventually be distributed to your children.
• Your spouse or children need someone to manage assets for them.
• You have a need for privacy and are concerned that wills, Probate inventories and accountings are public record.
• You want to protect assets that you leave to your children from being taken to satisfy claims of creditors.
• You want to keep assets in your family and not have them be distributed to in-laws.
• You have a trusted investment advisor and want to have a seamless transition of asset management with no "gaps in service" when you die or if you become disabled.
You've Been Named As a Successor Trustee - Now What? Duties in the Administration of a Trust
If you've been named as the Successor Trustee of a Trust, all of the duties may seem overwhelming. Here's a checklist of things you need to do to administer the trust.
1. Review trust documents.
The first step in administering a trust estate is to locate and review all of the decedent's estate planning documents. Most estate plans include the Trust agreement (sometimes called Declaration of Trust), the Pour-Over Will, Power of Attorney, Health Care Directives and Living Will. Because the decedent has passed away, the Power of Attorney, Health Care Directive and Living Will are no longer valid. You should carefully review the Trust Agreement to determine the identity of the Successor Trustee, the identities of all beneficiaries of the trust and the plan of distribution the decedent intended. You should make a list of the beneficiaries with their names, addresses, phone numbers, e-mail addresses, age and social security numbers.
2. Make required filings
A. File original Will with Probate Court or the Clerk of Court. Most states require that you file the Will immediately or within a certain number of days after the death of the decedent. You will need to check with the County Clerk or Probate court to find out where to send the Will.
B. Record Death Certificate in County where decedent or trust owned real property. This will remove the decedent's name from the property tax rolls and provide evidence of ownership if the property is to be sold.
C. Obtain taxpayer identification number for trust.
D. File Notice of Trust with Probate Court or Clerk of Court. Again, this may not be required in every state. The purpose of this notice is to notify any creditors of the decedent or other interested party that, although the decedent has no probate estate, there is an existing trust that must be administered. Most states, after the decedent's death, completely cut off the claims of the Grantor's (decedent's) unsecured creditors. Some states that do not do this and require debts to be paid from trust assets are: California, Florida, Massachusetts, Michigan, New Jersey, New York and Oregon.
3. Obtain authority to serve as trustee.
A. If you are named in the trust as the Successor Trustee, you will need to have evidence of your authority to act as Trustee. The banks, brokerage firms and other third parties will not give you information or allow you to transact business on behalf of the trust until they have these documents. In most cases, you will need the following documents:
• Original signed trust agreement and all amendments to it.
• Death certificate of grantor
• Acceptance of Trustee Form. By this document, you accept the appointment of Trustee of the trust and agree to perform all of the duties of the Trustee pursuant to the Trust Agreement and the law.
• Any other documents required by the provisions of the Trust Agreement.
4. Notice requirements.
A. Most states require that all beneficiaries be notified within a specified period of time of the Trustee's acceptance of the Trust and the full name and address of the Trustee. Many states give a beneficiary of a trust the right to obtain a copy of the trust agreement. Unless, you have a valid reason not to, you should provide each beneficiary named in the trust with a copy of the trust agreement including all amendments.
B. Notify the post office to forward mail to your address so that you can receive any bills, checks or other mail of the decedent.
C. Notify the Social Security Administration.
D. Notify the personnel or human resources department at decedent's place of employment or former place of employment.
E. Notify banks, brokers, financial advisors, etc.
F. Notify telephone service and utilities.
G. Notify insurance companies. Obtain instructions for filing claims. Most insurance companies will only give notice to the beneficiary of the policy. Notifying the company will begin that process. If the trust is the beneficiary, you, as the Trustee, will need to apply for benefits.
H. Notify Credit Card issuers. They will provide an amount owed and close out the account. Also, if death was due to an accident, they may provide accidental death insurance.
5. Assemble, Inventory and Take Custody of Assets.
A. Search for assets. As Trustee, you have the duty to locate and take possession of all of the decedent's assets. Ideally, the decedent will have kept a schedule of all of his assets: those owned individually as well as those titled in the name of the trust. If not, or if the schedule is incomplete, you should locate the decedent's financial documents, such as bank statements, statements from brokerages and investment advisors, deeds, stock certificates, life insurance policies and federal and state income tax (or intangible tax, if applicable) returns.
B. Collect supporting data as to ownership. Once you have determined the existence of an asset, you should obtain the statements, certificates, contracts and policies regarding that asset.
C. Change Trustee on Existing Accounts and Open New Accounts. For each bank and investment account, you will need to change the name of the Trustee who has authority to manage the account from the decedent to you.
D. Determine date of death values (and, if applicable, alternate values). For investments and securities, you can contact the decedent's broker or financial advisor for this information. Also, there are many websites that can provide this data.
E. File claims for insurance, Veterans and Social Security benefits.
F. File waivers and affidavits releasing property from estate tax liens with the County Clerk's office or the State (if applicable).
G. Prepare Trust Inventory with date of death values of all trust assets and, in states where it is applicable, send copies to all trust beneficiaries.
H. Estimate cash needed for taxes, fees and other expenses of settling the estate.
6. Determine Debts Against the Decedent
A. Determine current bills owed to doctors, hospitals and funeral homes.
B. Make a diligent search to determine what other debts exist.
C. Determine validity of, contest or pay, and obtain receipt or satisfaction of debts. As Trustee, you have the fiduciary duty to examine each claim to determine its validity. If appropriate, you have a duty to deny payment of a claim and to defend that denial in court.
7. Administer the Trust Estate.
A. Collect all income, receivables and other moneys due decedent or the trust estate.
B. Investment of assets. As Trustee, you have the duty to preserve, protect and invest the assets of the trust estate.
C. Manage Real Estate. If any real property and the house built on it is vacant. You should take steps to secure the property and contents from vandalism and damage. If anyone is residing in the house, you should determine whether that person has the right to be in possession of the house. If the occupants are tenants, you should review the terms of the lease, if written, and make sure to enforce the provisions. You should notify the tenants in writing that the owner is deceased and that they are to make all future payments under the lease to you as trustee. Rent must be collected and deposited in the trust bank account.
D. Insure the Trust Property.
E. Keep a detailed record of all income, expenses and estate transactions.
8. File Tax Returns and Pay Taxes Due.
A. Decedent's final Form 1040.
B. Trust income tax return (Form 1041)
C. Estate Tax Return (Form 706)
9. Distribute the Estate.
A. You should read and fully understand the distribution provisions of the trust agreement. The distribution to beneficiaries is made after all debts of the decedent and expenses of the administration are paid. If distributions equal to a certain percentage of the estate are called for, then those percentages are calculated based upon the net value of the estate after payment of debts, expenses and taxes.
B. If the provisions of the trust provide that property is to be held in trust for the benefit of a certain beneficiary, then you, as Trustee, must hold and administer the property subject to the standards and duties that we have mentioned in this guide.
C. You must maintain accurate records regarding the trust property, including any additions of principal and income. Generally, you may make partial distributions to beneficiaries as the estate administration progresses in order to hold funds or property back for a period of time to pay unexpected liabilities. You can then make the final distributions to the beneficiaries only when you are certain that all liabilities have been received and paid. If you make complete distribution too early and an unexpected obligation such as taxes or a medical bill surfaces after such distribution, you will likely have a difficult time retrieving funds back from the beneficiaries to pay those expenses. If you distributed all of the trust assets without paying all of the creditors, you may be held personally liable for the shortfall.
Learn more about administering an estate with step by step directions, checklists and forms from Dean Hanewinckel's E-Book, What To Do When A Loved One Dies - A Survivor's Guide. You can order it at http://www.floridaprobatesecrets.com. Dean Hanewinckel is a probate, estate and legacy planning attorney in Southwest Florida. He is the author of 3 books. In addition to What To Do When A Loved One Dies, he has published Manifest Your Legacy and The Official Snowbird's Guide To Becoming A Florida Resident, both available at Amazon.com.