Confession, I listen to a lot of radio. I’ve always enjoyed this time in my car for a quick errand or even a 10-hour road trip cross country. In these moments I learn things I didn’t know, listen to other perspectives that I feel enhance my own and even sometimes change my opinion of things. An unexpected change from all of this has been the recent enjoyment I’ve been getting from commercials.
This may be because I recently unplugged the cable at home and went all “Wi-Fi over everything”, but recently I’ve inherently noticed that I missed the slight ambush of being disposed to different types of marketing, whether it be abrasive, deceptive, informative or otherwise. All things (or advertisements) considered, the radio has the most entertaining commercials out there. This may be because it leaves more up to the imagination to the listener than watching television or I’m just simply more engaged when driving my car. I guess you should probably watch out for me on the road.
Recently, I’ve heard some good advertisements about estate planning. During these commercials they describe multiple benefits for individuals who are interested in protecting and preserving their values and assets. Of, course as an Estate & Elder Law attorney, we agree in these benefits, but estate planning isn’t always for everyone. According to these ads, a trust is the “be all end all” of estate planning to avoid probate. And, although it is true that a trust has several benefits and avoids cumbersome interactions with a Probate Court, if it’s not handled properly, even planners with the best intentions, may not avoid the process completely.
So, What Type of Trust Do I Need?
First things first, I can’t really answer this question without some information from you, but what I can do is describe, for the purposes of this article, the option I heard being touted on the radio, a living trust (or whatever fancy name someone want to give it). A living trust is a written document that you create with an attorney during your lifetime that may help avoid probate. You may choose to fund it, or leave it unfunded until your death. By "fund it," I mean that you make it the legal owner of your assets, some or all of them, it’s up to you. For example, you might choose to retitle your bank accounts, investments, or even your house into the name of your trust. If you do, you will no longer be the owner of those assets, the Trustee of your trust will be. However, since you will most likely be named the Trustee during your lifetime, you essentially still retain control of your assets. Your trust will contain provisions for management of the transferred assets during your lifetime and will also include, what happens to those assets upon your death. In the latter regard, it can function as substitute for a will. Most often you, the creator of the trust, is the trustee, although sometimes the creator will name a spouse, child or bank as a Co-Trustee.
A living trust is revocable, meaning that you can end it at any time. You, as its creator, reserve the right to amend, revoke, change it or the trustee. Because you retain these rights, you are treated by the IRS as if you still own the property (which is primarily why this isn’t the best option for some). Therefore, you will report on your Income Tax Return, e.g. Form 1040, any income generated by the transferred assets. And, so long as you are a Trustee or Co-Trustee, the trust will not have to file a separate income tax return. The IRS treats you as the owner because you really have not parted with control. You can take the assets out of the trust for your personal use at any time and for any reason.
So Why Create a Living Trust?
First, the assets you have transferred to your trust prior to death will avoid probate. The primary purpose a Probate Court serves when someone dies is to facilitate the transfer of title from the person who died to the “rightful” beneficiaries. In the case of a funded living trust, the trust, which is the legal owner of the assets, did not die and the Probate Court does not get involved.
Avoiding Probate means that assets can be transferred after death by the trustee to the intended beneficiaries without the same delay as when the Probate Court is involved. Avoiding probate also means that you can avoid Probate Court fees and accompanying attorney fees. Secondly, a trust keeps affairs private. Unlike a will which is a public document filed with Probate Court at death, a Living Trust is private and is not available for inspection by the public at your death. Third, the Living Trust will ensure that your assets are managed for your benefit in the event that you become incapacitated. Should you become either physically or mentally disabled, then your successor trustee will manage the trust and its assets in accordance with the terms established by you.
The Need to Fund the Trust
You will only receive many of the benefits if you actually fund your Living Trust. Some people create a terrific Living Trust and don’t fund it, either intentionally or by accident. If it is intentional, the person likely has a "pour-over" Will, so in the event the person owns any assets in their name at the time of their death, their "pour-over" Will states those assets are to be added to the created, but unfunded, Living Trust. However, all such assets will be subject to probate at death before they are added to the trust. Any assets which you own in your own name at the time of your death are subject to probate, even though they will ultimately be added to the assets held in a Living Trust. You should carefully and continually review assets held in your own name (whether you own them now or acquire later) to be sure that such ownership is appropriate if your desire is to avoid probate upon your death.
A decision to delay funding could just be the burdensome nature of having to transfer everything over to the trust (dealing with all the banks that hold your CDs, your brokerage account or individual companies, doing new deeds to your real estate etc.). However, this responsibility can be passed along to the appropriate individuals with a properly drafted Power of Attorney.
Two strong arguments for using and funding a Living Trust are if you have out of state property or a family that is estranged or prone to disputes. For out of state property, a Living Trust that holds such property will avoid the need to go through that state's probate procedures and paying a lawyer from that state to handle the probate, usually at considerable cost.
If there is a second marriage or children who do not get along, then a Living Trust may be best because it will be harder for one of the other potential beneficiaries to cause trouble for trouble's sake. Remember that a Living Trust is a private document and disputes are often caused by individuals who think they know what they are or aren’t entitled too. Much of our time in these situations is spent with individuals (or their attorneys) whom assumed they were beneficiaries, but were not.
The Probate Process
Whether probate avoidance is "good" or a "bad" can be subjective. To answer this question, we need to define exactly what probate is (because it’s often misunderstood) and then overlay the process on your financial and family circumstances to determine whether probate avoidance makes sense for you.
In general, when a person dies the function of the probate court is the following: to ensure if there was a Will, it is the decedent's true and last Will; to ensure that the decedent's assets are safeguarded and protected from waste, theft, or neglect; to ensure that bills and debts are paid; and, lastly, to make sure that what remains is paid to the intended beneficiaries in accordance with the decedent’s will.
In essence, the purpose is to oversee the transfer of title of the decedent's assets from the decedent's name to the decedent's beneficiaries, making sure along the way that all the assets are accounted for and the bills are paid.
Is Probate lengthy and Expensive?
To expedite the process, an Executor may make distributions to estate beneficiaries prior to concluding the Probate Court process. You must always be careful, however, to retain sufficient assets, in order to pay creditors and any taxes (property, income or otherwise) that may be discovered to be due. The Executor is personally liable if there is a shortfall. Usually, most of the wait time for an Executor is the 6-month claims period in Kansas and 1-year in Missouri (that allows creditors or beneficiaries to attest a will) to end.
If beneficiaries are transferred assets and then unpaid bills or “new” beneficiaries appear, payouts, court costs and attorney fees may rise, and if you made distributions before the Probate Court concluded the Probate process, you just transferred all the financial assets of the estate! Being patient, following the probate protocols and having a knowledgeable attorney in these circumstances is critical. Most of our probate cases are handled in just over 6-months (in Kansas) or 1-year (in Missouri), due mostly to the claims timeline requirement.
Probate should not be an inherently expensive process. However, I have found that probate becomes expensive for three reasons. The first is when the family is dysfunctional to begin with and now that mom and dad have both died (the ones holding it together), the beneficiaries' (usually children) true nature is revealed, and they argue over who gets what. All of a sudden, once forgotten Items acquire amplified significance. In such disputes people tend to act in a manner not economically justified and end up hiring lawyers to resolve personal matters. At this point, counseling is needed more than lawyering and sometimes I think law school should include a few counseling courses into their curriculums.
A second reason probate becomes expensive is because the named Executor is neither particularly trustworthy nor knowledgeable. Telltale signs are usually when you notice the Executor "dragging their feet" the entire time, trying to live in the decedent's house rent free for as long as he can, co-mingling personal funds with those of the estate, and not communicating with family members or beneficiaries (who then hire their own lawyers to find out what is going on). All of this delays the process and results in additional costs for everyone, and not just financial.
A third reason is due to an ambiguous or inconsistent scheme presented by a beneficiary that the decedent left behind to dispose of his property. This can be due to a poorly drafted will or because the decedent had assets titled jointly with some children and not with others, but made promises to those children not on the title that certain assets would pass to them under their will. This is the classic "I have titled my house and bank account jointly with my daughter, but she knows when I die she should share it equally amongst her siblings." Right! This is a formula for trouble if there ever was one, unless there is very good trust among the entire family.
In summary, the probate process and probate court avoidance through living trusts has its pros and cons. There is no right or wrong solution to this question, but for those with assets they hope to someday pass along to a beneficiary, being informed and planning ahead is essential. What matters most is that someone takes the time to discuss with you how each method would work in your situation, what advantages might benefit you and what the disadvantages are for each type of estate plan. This is where a lawyer who is well versed in estate planning and administration can play a valuable role for you and your loved ones.
Berger Estate & Elder Law P.A. has been serving Kansas City for over 30 years providing Trusted Council with Proactive Solutions. Give us a call today at (913) 491-6332, visit our website berger-lawfirm.com or stop by our conveniently located offices at 11233 Nall, Suite 140 Leawood, KS 66211 for more information.