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Robert Bruss on benefits of Trusts
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Contributed by: John Merchant
John Merchant Properties
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Here's a great article by the well known & most knowledgeable attorney, Robert Bruss, on benefits & drawbacks of using trusts in asset acquisition & management. And for estate planning, as opposed or compared to probate of wills or intestate (no will) estates.
From Reno Gazette-Journal, unedited by me:
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Living trusts can have important benefits
Trustor can rely on avoidance of probate and management estate in case of incompetency
Robert Bruss
Millions of U.S. homeowners and real estate investors hold title to their houses, condos and investment property in living trusts. Why? In a nutshell, there are only
two major advantages of doing so. But those benefits can become extremely important:
When the property owner, or co-owner, dies, their real estate and other assets in their living trust automatically pass without probate costs or delays to whomever is designated in the living trust. In other words, the living trust is a substitute for a will.
However, like a will, the living trust can be amended or even canceled at any time before the trustor dies (or becomes incompetent). The living trust creator (called the trustor) can continue to buy, sell and refinance their living trust assets the same as before. That’s why living trusts are called revocable inter vivos (among the living) trusts.
If the living trust trustor becomes incompetent, such as with Alzheimer’s disease, and is unable to manage his or her affairs, the alternate or successor trustee named in the living trust then takes over management of the living trust assets. This successor trustee is often a spouse, adult child, or bank trust department.
This secondary but very important benefit is often overlooked.
For example, suppose husband and wife own their house, stocks and bonds, checking account and other major assets in their joint living trust. The wife suffers a serious stroke and is unable to comprehend. Her husband alone can then manage the living trust assets, even selling them if necessary. Without the living trust, it might be necessary to have a court-appointed conservator represent the wife if sale of the home or other assets becomes necessary.
How a revocable living trust works
There are three parties to a living trust, which can be a joint living trust, such as between husband and wife: (1) the trustor(s) creates the living trust and transfers major assets into it, (2) the trustee(s) manages the living trust assets, and (3) the beneficiary receives the assets which are part of the living trust. At the beginning, the trustor, trustee and beneficiary are the same person(s).
After a living trust document is prepared, usually by an attorney, the next step is for the trustor(s) to transfer title to their major assets into the living trust. For real estate, this is done by a recorded quitclaim deed.
To illustrate, a homeowner would sign a quitclaim from herself to herself as trustee of her living trust. This is usually very easy to do. It’s called “funding” the living trust.
From then on, the living trust trustee continues managing the assets, such as buying, selling, refinancing and adding assets to the living trust. However, when the living trust trustor dies or becomes incapacitated, then the living trust becomes irrevocable and its terms cannot be changed.
Is joint tenancy a substitute for a living trust?
Many homeowners think holding title to their residence and other real estate in joint tenancy with right of survivorship (or tenancy by the entireties between husband and wife, in some states) is a great way to avoid probate costs and delays.
When one joint tenant dies, to clear the deceased joint tenant’s name from the title, in most states the surviving co-owner need only record (a) an affidavit of survivorship and, (b) a certified copy of the deceased joint tenant’s death certificate.
However, if both joint tenants die at the same time, such as in a plane crash or auto accident, then each of their estates must be probated and their assets distributed according to their wills. However, that procedure is not necessary if their assets are in a living trust.
Bank and brokerage accounts can and usually should have “pay on death” provisions. But that won’t help the situation where the account holder is still alive but unable to manage financial affairs. A living trust avoids such problems, which usually otherwise require a court-appointed conservator.
Probate proceedings can be expensive
Probate lawyers and court proceedings can become expensive. Fees for probate attorneys and courts are set by state law. The smaller the estate, the higher the fee percentage.
For example, Marilyn Monroe left an estate over $1 million which took 18 years to probate. Only $101,000 was left after her lawyers and others took their fees. Another example: Elvis Presley left a $10.2 million estate but his probate costs were $7.2 million and only 28 percent of his estate reached his heirs.
Frugal penny-pincher John D. Rockefeller’s probate expenses took 64 percent of his huge estate. So far, the J. Paul Getty estate has paid more than $40 million in probate costs to lawyers and others. Most of these costs and delays could have been avoided with living trusts.
Living trust advantages
In addition to avoiding probate costs and delays, and providing for an incapacitated trustor, living trusts offer additional benefits:
w Multi-state probates are avoided. If you own real estate in more than one state, when you die, unless you have a living trust, it will be necessary to have a probate court proceeding and hire a probate lawyer in each state.
For example, a good friend died a few years ago. She owned real estate in Minnesota, North Dakota and Florida. Expensive probate court proceedings were required in each state to distribute her estate assets to her heirs.
w Privacy is maintained. When a decedent dies with a living trust, the provisions in that living trust usually do not become public information. Although a few states allow registration of living trusts, there usually is no penalty for failure to do so.
To illustrate, when multimillionaire Bing Crosby died in 1978 with all his major assets in his living trust, the public never learned about his vast wealth or who received it.
w Litigation is discouraged by a living trust. Because there is no public probate court proceeding with a living trust, lawsuits by claimants not named in the living trust are not easy since living trust distributions by the successor trustee are non-judicial.
For example, if the famous CBS-TV personality Charles Kuralt held his assets in a living trust, there probably would not have been the expensive litigation after he died to determine whether his widow or his mistress should receive his Montana ranch.
w Living trusts can be changed or revoked at any time. Just as a will can be amended or revoked, an “inter vivos” living trust is flexible until the trustor dies or becomes incapacitated.
Disadvantages of living trusts
There really aren’t any serious drawbacks of living trusts. Depending on complexity, the cost of having an attorney prepare a living trust and transfer real estate titles into it typically vary between $500 to $2,000. But the savings of time and costs for heirs, compared to probate fees, are substantial.
A possible problem for trustors who want to refinance their living trust real estate is the lender might require the asset title be momentarily taken out of the living trust, the mortgage or trust deed recorded, and then the title can be placed back into the living trust. However, savvy lenders now allow the living trust trustee to sign the mortgage or trust deed without changing the title.
Contrary to popular myth, living trusts do not save on estate taxes. That is not their purpose. Under current law, each trustor can leave up to $1 million of assets free of federal estate taxes. Husbands and wives can leave up to $2 million in assets free of federal estate taxes, such as by use of an A-B trust.
A possible living trust disadvantage, if the deceased leaves unpaid bills, is the claimants can pursue living trust beneficiaries because there are no probate court proceedings to cut off claims. When a deceased dies with contingent claims, opening a probate proceeding might be desirable to resolve any creditor claims.
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