I am not an attorney; however, I’ve been forced to mess with Wills and Living Trusts for at least thirty years. One of them was one that one of my mother’s attorneys convinced her to initiate to replace a Will that had been drawn by another of her attorneys a few years before.
So the other day, a friend of mine, knowing all of this, asked me to address what I feel are the issues with Living Trusts because in his own case, he is beginning to see “cracks” in his that he doesn’t like.
I thought I’d share with you what I wrote to him..my sole opinion.
Remember, I live in Texas. Each state has its own probate laws. Nevertheless, generalized, the following is reasonably standard.
If you find merit in it, please make sure that you let your attorney, financial advisors and family weigh in before you make any decisions.
I believe that the main problem with Living Trusts is that for all practical purposes that they exist is to keep your business as a secret from the world.
Often it's claimed, and in some states it probably is, cheaper to administer at death rather than to probate a full Will.
And that's the very selling points that lawyers push as being so wonderful about the format.
However, in almost all cases, that simply isn't true in Texas. It is true that legal fees for drawing the documents necessary for a Living Trust exceed those for a simple Will.
The other selling point is that everything addressed in the successor Trust is a secret from public record and, in the main, probate court scrutiny.
The third is they are almost always drawn so that the trustee does not have to post bond.
(Like it or not, that is primarily because bonding companies charge high premiums to insure non-professional trustees because their past experience with non-professionals is that claims paid are high. That's a sure indication that bonding companies know something you need to know.)
And just as bad, they are often drawn wereby there is no requirement for annual audited financial records.
If the trustee is sued by a beneficiary for any actions other than alleged fraud that the trustee has committed on behalf of the trust, the trust pays all of the trustee's legal expenses; the trustee is defending the integrity of the decisions of the trust which are, in fact, the trustee's.
The trust doesn't pay the expenses of the person who is suing unless, of course, the trust looses the law suit and the court awards attorney fees to the plaintiff.
Another thing that is wrong with them is that the trustee is usually a beneficiary. Like it or not, it is a conflict of interest.
Experience has shown that trustees often give weighted consideration to what will personally benefit them rather than equally to all of those designated as beneficiaries
If a trustee wants to force compromise by the other beneficiaries, often the trustee need only drag its feet in making timely dispositions to the beneficiaries.
And finally, rarely do the trustees have sufficient pertinent business and legal experience when it comes to managing a trust. They just do not, and on the job training is costly to all. And it may not be successful!
And just think, most trust agreements provide payment to the trustee for his services, and he’s paid before there are distributions paid the beneficiaries.
So contrary to what many attorneys claim ... that the cost of a trust is usually far less than messing with probate...is one with which I strongly disagree.
At least with probate, the court must make certain that the testator's wishes are carried out, and that requires the executor to handle things the way the court instructs/approves.
So it costs more....what is more important, having your wishes abided by or risking that the trustee will do things his/her way, knowing that no one is going to sue, and if they do, the trust pays the bill, not the trustee.
If your plan is to have a Living Trust, you might consider having it written so that the first generation receives the income off of the trust assets and has the right to some specific distributions on certain dates throughout their lives, but that the corpus itself passes to the second generation or a charity upon the death of the named beneficiary(ies).
That helps stop a spendthrift. (Interestingly but predictible, unless distributions are spread out, most beneficiaries immediately by a new car and pay off their credit cards within sixty days of their new found "wealth.")
I would appoint a trust department of a national bank as the trustee, if possible.
They not only manage things the way the trust agreement orders them to, but they make certain the thing stays legal, that income taxes and property taxes are properly filed and paid, and that regular accounting statements are provided the beneficiaries.
Trust accounts are subject to regular audit by the bank's internal auditors as well as the national bank examiners.
And, professional trust companies of banks are always bonded.
If you decide to limit what certain beneficiaries will receive, you have every right to do that as long as you do not ignore naming them in the trust and Pour-Over will. Name them in the trust, then say what they get.
There doesn't have to be a reason for your decision to be specified.
Living trusts are often not fully funded. As I mentioned above, they are accompanied by what is known as a Pour-Over Will.
Its primary purpose is to make certain that any property that has not been deeded to the Living Trust prior to the time of your death, automatically passes to the successor trust at that time, and to name the trust that suceeds the living trust at the time of your death.
A Living Trust ends when the moment the trustor dies.
Make certain that as soon as the Living Trust is formed, that you have your attorney deed everything to the Living Trust, and that all future business is done under its auspices.
That means separate bank accounts and seperate income tax filings.
In the case of your home, I believe that you will want to deed it to the Trust and retain a Life Estate. Your attorney will help you make this decision.
Here is a word of caution: Often attorneys leave "per stripes" as part of a will or trust. Here is what it means:
“An estate of a decedent is distributed per stirpes, if each branch of the family is to receive an equal share of an estate.
“When the heir in the first generation of a branch predeceased the decedent, the share that would have been given to the heir would be distributed among the heir's wife and children in equal shares.”
If you are going to specifically name each person/organization and what they will receive and under what conditions, you will want to make sure that the attorney does not inadvertently have per stirpes language in the document, as it could be conflicting.
Finally…
If you continue with the Living Trust, have your attorney draw up a Memorandum of Living Trust which you will sign and have notarized in a format that can be recorded in the deed records and the probate records of your county, then make certain it is promptly recorded.
Its purpose is to notify "the world" that the trust exists and in general language, who the trustee is and who the beneficiaries of the remainder trust will be at your death. Once you have it recorded, send a copy to everyone who is named. This will keep the trustee from “inadvertently” failing to notify anyone of their good fortune…like your church, for an example.
Again, this whole piece is my opinion and from professional information I assume to be reliable. If any of this strikes cords, print it out and have your attorney read and advise you accordingly.
BILL CHERRY, REAL ESTATE BROKER
Dallas – Park Cities
Since 1964
214 503-8563