Everyone should have a living trust. Avoid probate at all costs. Avoid horrible death tax bills. Avoid exorbitant executor fees and legal fees. The list goes on and on. While there is a grain of truth in these arguments, you should take a closer look before expending resources on a living trust. Here’s why.
You Should Avoid Probate at All Costs – This paranoia seldom rings true. For most married couples, there is no probate when the first spouse dies. (This is because their assets pass free of probate by reason of joint ownership or beneficiary designation.) Thus, the probate avoided by a living trust does not occur until the surviving spouse dies.* If both spouses are in their 50s, for example, the probate avoidance cost savings may not be realized for 30 years or more. But if the clients are in their 80s, the probate avoidance benefit can be a huge advantage.
* There is an exception to the statement that a probate is only required at the death of the surviving spouse. A probate is also required upon the death of the first spouse to die if a “credit shelter trust” will be established. A credit shelter trust is a tax planning vehicle to hold part of the decedent’s wealth so that it is not included in the surviving spouse’s estate for estate tax purposes. Credit shelter trusts are usually unnecessary for federal estate tax purposes, because “portability” of the federal exemption vests the surviving spouse with a $10M exemption. However, since Oregon’s estate tax exemption is only $1M, and Oregon does not allow portability, some clients choose to establish a credit shelter trust to keep up to $1M of the decedent’s wealth out of the survivor’s estate for Oregon purposes. (Other clients feel the modest tax savings does not warrant the administrative burden of maintaining a credit shelter trust for the rest of the survivor’s life.)
Establishing a Living Trust is Easy – Wrong. The time and disruption to clients from re-titling their assets — which must be done for a living trust — is painful, and they dread it. Bank and brokerage accounts must be closed and new accounts opened; deeds must be prepared and recorded; stock certificates must be exchanged with transfer agents. Instead of “Jane Smith and John Smith,” the owner becomes “Jane Smith and John Smith, Co-Trustees of the Jane and John Smith Living Trust under agreement dated 12/05/2011.” And if you forget to transfer a single asset (as is frequently the case), the probate avoidance benefits of the trust are lost.
A Living Trust Saves More Taxes Than a Will – False. A living trust is tax neutral compared to a will.
A Living Trust Saves Executor Fees – This depends on how much the trustee (of the living trust) charges for his services. Under state law, a trustee of a living trust is entitled to a “reasonable fee.” There are no guidelines on what is reasonable, and there is no court oversight. That is why trustees occasionally take ridiculous fees and hope nobody will notice. In Oregon, the “automatic” executor fee is 2% of the estate. Court approval is needed for additional fees. This may be a windfall or a bad deal for the executor, depending on how time-consuming and messy the estate administration turns out to be. But at least it is not a blank check.
A Living Trust Saves Legal Fees at Death – Usually true, but the savings is offset by the added legal fees when the trust is established. (The legal fees for a living trust are perhaps twice the amount for a will.) In Oregon and Washington, post-death probate legal fees are not based on a percentage of the estate. Instead, the probate attorney is compensated for actual hours spent. Further, at least in Oregon, the court must pre-approve all probate attorney fees. In conclusion, post-death attorney fees are normally less when there is a living trust, but the difference may not be substantial. And court approval of probate legal fees prevents attorneys from taking advantage of financially naïve clients.
A Living Trust Preserves Privacy of the Decedent’s Finances – This is true, although of modest importance to most clients. Probate filings (which disclose the assets of the estate, values, names and addresses of beneficiaries, etc.) are a public record and can be reviewed by anyone. On the other hand, the administration of a living trust is private. For this reason, high-visibility clients prefer living trusts.
Lawyers Don’t Like Living Trusts Because They Lose Probate Legal Fees – This is seldom true. Except for elderly individuals or those with serious health issues, the probate legal fees are so far down the road that they are all but irrelevant to the attorney. But the attorney does not have to wait for the extra legal fees needed to prepare a living trust.