Living Trust as your beneficiaries.
Now that you know everything you need to know about what the Living Trust is and how it works, the big question becomes: Do you need one? The last thing you want is to be sold something you don’t need. To help you make this decision, I refer you to the next chapter.
CHAPTER 3
Do You Really Need a Living Trust?
Or, Don’t Let Someone Sell You Something You Don’t Need
In Chapter 2, I presented you with the best explanation of the Living Trust you have ever heard in your life. By having the Living Trust described as an “after-death power of attorney,” you now understand that the Living Trust appoints someone – your after-death agent – to sign documents after your death to transfer your assets to the beneficiaries you named in your Living Trust. Lovely!
Okay. So where do we go from here? We continue with a series of questions: So what? Who cares about appointing an after-death agent? Why is that fun? Answering those questions in the order in which they just appeared may give you a better sense of the next steps.
• So what? The Living Trust process will save your beneficiaries thousands of dollars after your death because it prevents them from having to probate your assets.
• Who cares? The beneficiaries you named in your Living Trust care.
• Why is that fun? The money you saved for your beneficiaries by avoiding the probate process will provide them with the additional funds they need for that shopping spree, car purchase, dream trip, or whatever else floats their boats.
The Reasons Why a Living Trust Is a No-Brainer
You may have heard – or you know – that the Living Trust keeps your children (and your assets) from having to go through the probate process after you die. That is the number one reason why people establish their Living Trusts. Without the desire to avoid probate, there would be no such thing as a Living Trust.
Probate is the court-supervised process of transferring your assets to the beneficiaries of your estate. Actually, that is a fairly boring legal explanation of probate, and I promised you that I would avoid legal jargon as much as possible. Let me state it in a more accessible fashion.
The purpose of probate is to get the judge to do something. And that something is to sign an order that authorizes someone to jump in after you die and transfer title of all of your assets from “dead you” to your spouse, children, or other heirs.
The someone who transfers your assets is the person you have named as the executor in your will. I sometimes call the executor the judge’s helper. After all, the judge is certainly not going to do the down-and-dirty work of managing and distributing your assets after you die. That’s not what the judge does. Instead, the judge is merely a voice box that gives your executor permission to do what needs to be done: marshal your assets, inventory them, pay off your creditors (if any), and distribute your assets to your beneficiaries, who are the designated people you have named in your will.
Is that it? Is that all probate is – just getting the judge to sign an order distributing your assets? That sounds pretty simple. After you die, maybe your executor can go to the courthouse on his or her lunch hour, flag the judge down in the hallway, show the judge your will, and say, “Please sign this order right here.”
Obviously, this facetious statement is designed to make a point: It is not easy. In fact, probate is time-consuming, with most normal, garden-variety, noncontested probates taking a minimum of six months to complete; and it is expensive because of filing fees and court costs that can run into the thousands of dollars. Perhaps most daunting, probate is a lawsuit. In other words, whenever you try to get a judge to do something, even if it is just signing a distribution order, you have to bring a lawsuit. Therefore, probate is litigation that your beneficiaries bring to obtain an order of the court to transfer your assets – to them!
Check if your state has a “Small Estate Law” that prevents full-blown probate administration of, well, small assets.
In California, where I practice, a deceased person’s probate assets (meaning, bank or brokerage assets in that deceased person’s sole name) that total less than $150,000 can be distributed to that deceased person’s legal heirs without any court involvement whatsoever when those heirs present the account holders with a one-page “Small Estate Affidavit.” After the account holders receive that Affidavit, they are required by law to turn over those accounts to the heirs. It’s that simple.
But now the question becomes, who are the heirs so entitled to those accounts? Although it’s not your function to make that determination, here is a helpful tip you can give when you are presented with this situation: “If that deceased person has a Living Trust, he will also have an I forgot will, which states, in essence, that his Living Trust is the sole beneficiary of all assets that are in his sole name. As a result, that Living Trust is the heir.. and the ones who sign and present the Small Estate Affidavit are the Successor Trustees of that Living Trust.” For more about the I forgot will, see Chapter 4.
Like any lawsuit, probate involves attorneys. And where you have attorneys, you have fees. There are two types of fees. First, there is a fee for ordinary legal services, such as filing the court petitions, preparing the distribution order, inventorying the assets, and preparing the accounting. These ordinary fees are usually based on the value of the assets that are going through the probate process. For example, in California, attorneys get 4 percent of the first $100,000 of the assets going through probate, then 3 percent of the next $100,000, then 2 percent of the next $800,000. An estate of $1 million will cost the beneficiaries $23,000!
For us attorneys, this is great! It’s a lot of money for what is not especially a lot of legal work. No wonder my father called probate “the lawyer’s retirement fund.”
But it gets better.. at least, for my colleagues and me. The other fee is for services that the court considers extraordinary, and it is paid on top of the fee we already get for ordinary services! So, if there are legal services rendered to deal with matters “beyond the ordinary,” such as selling real estate, defending against a will contest brought by a disgruntled heir, or filing a lawsuit against a person who has an asset that should be brought back into the estate, the attorney gets to bill the usual hourly rate.
The delays and fees associated with probate are outrageous, and you should go out of your way to prevent them from befalling your family. In order to avoid these problems, you should establish a Living Trust. With the Living Trust, you appoint someone other than the judge – your successor trustee (whom I refer to in Chapter 2 and throughout this book as the “after-death agent” – to do what the judge usually does, which is to transfer your assets to your live beneficiaries after your death. The Living Trust has several advantages:
• A Living Trust is less expensive and more time efficient.
• The fees for a Living Trust transfer are significantly less than the probate fees, perhaps 0.5 percent of the value of Living Trust assets.
• The transfer of the Living Trust assets can take place as soon as your successor trustee wants it to take place.. perhaps as soon as 20 minutes after your funeral. That situation has actually occurred during my practice, but it was borne out of efficiency (as opposed to greed and selfishness). My client’s Living Trust appointed her four children as her successor trustees. After she died, her children came together for the first time in many years for her funeral. Thinking they might never gather again in the same city for the rest of their lives, they came directly to my office after the
