LIVING TRUSTS are the most powerful means of controlling our assets should we be struck by a disability that does not prove fatal.

What is all of the excitement about? Also known as revocable inter vivos trusts, living trusts are created to hold ownership of our assets during our lifetimes and to distribute them after our deaths. The person setting up the trust—the grantor—is typically the trustee; he or she names a successor trustee who will control the assets if the grantor should die or become incapacitated. As opposed to a will, a living trust takes effect in our lifetime, and the assets placed within it are not subject to probate, the sometimes lengthy and expensive process of determining a will’s validity.

Fevurly has no real aversion to living trusts. What upsets him most is the one-size-fits-all approach and the scare tactics used to sell them, too often to the wrong people and for the wrong reasons. After all, in the past few years the dreaded probate process has become much simpler, and in many states the costs are insubstantial. Even for those people who live in states such as California, Florida or New York, where probate costs are still based on a percentage of the estate, a living trust may not be necessary if the bulk of the assets are held in accounts that have beneficiary names specified, such as defined contribution plans, individual retirement accounts or life insurance contracts. Also, revocable living trusts do not offer any real asset protection or income tax benefits.

Despite this, living trusts do have real benefits for people with sizeable or complex estates. When drafted well and correctly maintained, living trusts can be useful financial and estate planning tools. They provide an excellent means of avoiding probate in our state of residence as well as in ancillary jurisdictions. But probate avoidance is just the beginning. Many financial advisors and estate attorneys believe that the value of a living trust can be apparent in the event the grantor is incapacitated, long before death or probate becomes a consideration. Put simply, it is the most powerful means of controlling our assets should we be struck by a disability that does not prove fatal.

You Bet Your Life
“For anyone with substantial assets, I view a living trust as a way to protect against disability,” says financial advisor Steven Weinstein, with Altair Advisers in Chicago. A former attorney who years ago worked in probate court, Weinstein now recommends living trusts to his clients as a crucial piece of their estate plan. Studies have shown that a 20-year-old worker today has a greater chance of becoming disabled than of dying before age 64. While a will takes effect only in the case of death, a living trust comes into play in the event that the grantor becomes incapacitated, enabling the successor trustee to continue to manage the assets under its guidance. In other words, the grantor can retain control over how funds are dispensed before death as well as after.

Groucho Marx is often cited as a poster boy for why living trusts can be invaluable. In the early 1970s, after becoming incapacitated by a series of heart attacks and strokes, Marx was dragged through lengthy court proceedings while members of his family, the Bank of America, and his live-in girlfriend, Erin Fleming, battled each other over his wealth and care. Marx’s will was useless until after his death, so for months he was brought wheelchair-bound into court, incapable of making his own decisions, his private life exposed to the public and the press.

Advisors often recommend a living trust combined with a durable power of attorney to cover intangibles such as health care, as well as assets not named to the trust.

“The practical and administrative consequences of having a living trust are extremely important,” says Bill Knox, a former tax attorney and current financial advisor with Regent Atlantic Capital in Chatham, N.J. Knox not only recommends them to clients, he also drafted one for his mother, who has since suffered the early stages of Alzheimer’s disease. “I don’t have to answer any questions from anyone, because when her health began to fail, the assets were all administered in the revocable trust. It’s a wonderful tool as an alternative to guardianship,” he says. Family business stock and general partnership interests can also be held inside a living trust, smoothing the transition from one generation of company leadership to the next.

A durable power of attorney can allow for a similar transfer of administrative authority, but Knox and other advisors argue that, in many instances, it can be a struggle to assure that powers of attorney are honored. If it is older than seven years, the power of attorney is sometimes considered “stale” by financial services firms. Selling someone else’s real estate under a power of attorney can also be problematic, since people are often unwilling to accept a title not signed by the original holder. Advisors often recommend a combination of a living trust with durable power of attorney to cover intangibles such as health care, as well as assets not named to the trust. 

Avoiding probate is another benefit of living trusts. Tales of probate have become the stuff of legend—with assets either getting tangled up for years or being significantly depleted while waiting for lawyers to settle an estate. To some extent, those problems have been solved. “Probate used to be a bad thing,” says Fevurly. “But in recent years it has been simplified considerably, and in most states there is what is called informal probate. It’s inexpensive, and does not involve nearly as much complexity and time.” This is not the case in every jurisdiction, however. California, Florida and New York are among the states most associated with burdensome and costly probate administration, where typical fees amount to 3 percent or 4 percent of the gross value of the estate.

The Last Details
While living trusts do require some degree of ongoing maintenance and administration, the bulk of the work is done up front in funding the trust. Funding, or transferring assets to the name of a living trust, can be simple in some cases, difficult in others. With bank and brokerage accounts, it is as easy as filling out another application in the trust’s name instead of our own. With real estate, it involves having an attorney prepare a new deed. Personal effects also require a deed or certificate of ownership in the name of the trust. Special provisions dictate how close corporations, sole proprietorships, limited partnerships and other family businesses must be named to the trust.

The living trust can be designed with estate planning provisions for gifting assets to heirs and charities while recognizing estate tax savings. The tax savings are not recognized under the revocable trust, but go into effect upon the death of the grantor, when the trust is rendered irrevocable. Using the correct language, all of these same provisions can be made within a will or testamentary trust. However, while the cost of drafting a living trust for these purposes is not significantly greater, the benefits are.

Because each state has specific probate laws, the ins and outs of living trusts can vary from jurisdiction to jurisdiction. Some foreign jurisdictions, such as Switzerland, operate under Napoleonic code rather than British-based common law and do not recognize trusts. In the state of Louisiana, which also has a civil system based on French rule, recognition of a trust can be more difficult than in other states. Trusts in or involving that state must be drafted using very specific language.

TOP VIEW Living trusts have been marketed aggressively in recent years and have gained an unwholesome reputation. But they can be invaluable tools for those seeking to maintain some control of their assets in case of disability, and those who wish to avoid probate in case of death. To accomplish this, our living trusts must be tailored to our individual needs; the one-size-fits-all approach does not work.

Attorneys commonly complain that the rules and regulations regarding the administration of a trust are not as detailed and complete as that of probate, says Robert A. Huth, a law practitioner in Boca Raton, Fla. “With a will, you know exactly where you stand in the administration process. Here, things are not as certain.” His solution is to draft into the trust the necessary details, so there can be no confusion about taxes and income and principal distribution.

Problems may also arise because living trusts can cause our estates to be exposed to creditors for longer periods of time than they are when dispensed via a will. When assets go through probate, an announcement is made to the estate’s creditors, who have only a limited time (typically a year or less) in which to make a claim. Creditors are almost always granted a longer period of time to make a claim on assets held in trust. In fact, there may be no statute of limitations for creditor claims if, upon the death of the grantor, the trust’s administrator fails to give those creditors appropriate notice.

For these reasons, when it comes to drafting and administering a living trust, competency is key. It is important to discuss the provisions of the document in detail with an advisor and estate planner. While do-it-yourself software programs and trust mills can generate reams of living trust documents, they are only valuable when crafted with each individual’s specific situation, needs and goals in mind. “You may know what you want, but you need to make sure that everything is stated correctly in the trust,” says Jay Shein of Compass Financial Planning in Lighthouse Point, Fla. “I know a lot about this stuff, but I surely wouldn’t do one on my own.”