It’s February 24, and I just made an appointment with my THIRD client this year will bring me an empty Living Trust. That’s the third one this year. I typically handle this type of client in this situation about twice a year.
The 90’s and early 2000’s was the peak for the “Living Trust” mills. While not “really” a scam (IMHO, they are a scam, for the reasons below), the model was this:
Attorney and/or insurance company advertises a “free” estate planning seminar which discusses the use of Living Trusts to “avoid probate.” (Some went so far as to incorrectly advertise that Living Trusts “avoid estate taxes.”) Even without the Living Trust mill format, a LOT of my colleagues were preparing these types of trusts because they were popular, and their clients were requesting them.
The theory behind a Living Trust is that you put ALL of your worldly assets (real estate, personal residence, cars, boats, investment accounts, retirement accounts) in the name of the Trust. Because it is (technically called) a Revocable Living Trust, you treat the assets as your own – you file taxes on the income, deduct the expenses, and control the asset as if it were your own. At your death, the assets are simply distributed to your heirs. No probate, no muss no fuss, easy-peasy. [That’s not really true, but that’s the speal.]
By the way, my clients report that these Living Trust documents (usually bound in nice leather binders with the client name embossed on the cover) cost between $5,000 and $10,000 for a married couple (usually, there is one trust for each spouse).
Generally, I have a lot of concerns about this type of estate planning – particularly for my agriculture clients (and 9 out of 10 clients that come to me with these Living Trusts are agriculture clients). The details on why this is not usually the best alternative for estate planning is a topic for another (lengthy) post.
However, my primary frustration with this type of Living Trust is that THEY ARE NEVER FUNDED! The client brings me a nice, expensive binder, and NO ASSETS WERE EVER TRANSFERRED TO THE TRUST.
The whole purpose of the trust is to manage assets – if you never transfer the assets into the trust, there is nothing to manage and the purpose of the trust fails.
[If you are an attorney reading this, yes, I am aware that a pour-over trust that accompanies the Trust documents will technically accomplish the client’s ultimate distribution objectives – but the purpose of the trust to “avoid probate” will be thwarted, and the client will have paid for the creation of the trust and for probate administration.]
This means that my clients have a very expensive doorstop and a very awkward estate plan.
One would think that the attorney who provided these very expensive documents would take the time to instruct the clients on transferring assets to the trust and would provide the deeds for the real estate transfers (in my clients’ cases – usually several parcels of farm ground). One might even suggest that to fail to supervise this part of the project would constitute malpractice on the part of the drafting attorney.
Often, the new clients that come to me in this situation either have heard me speak about the dangers of Living Trusts or (in the case of the clients I saw this week) just want to “update their estate plan.” By this time the attorney responsible for drafting the initial document is long gone.
MORAL OF THE STORY. If you have a Living Trust for your farm estate plan, double-check to be sure that the farm ground was actually transferred into the Trust. Also, verify that all your other assets are in the name of the Trust. Under Indiana law, if you die with assets in your name greater than $50,000, those assets must be administered through the probate court. If you forget to transfer that brand new car, or that vacation home, or that bin-full of grain into the Trust’s name, you will have lost the major benefit of having the Trust.
If you have a Living Trust, talk to your attorney (sooner rather than later) to be sure that is properly set up and properly funded.