Living Trusts Pros and Cons

Living Trust Benefits

There are four main benefits to using living trusts, and a few negatives, described below:

1. Avoids Probate

A Living Trust avoids probate, that is, the court process necessary when you die with or without a will (and without a living trust). Avoiding probate is a worthy goal in estate planning because the cost of probate, and sometimes the delays, are greater than with a living trust. Probate is necessary when there are assets of more than $100,000.00 in a deceased’s name alone. Probate is a court case filed at the Daley Center in Chicago (it can’t be heard in the suburbs). In it, the probate court judge checks to be sure that the assets are distributed to the proper heirs and that all bills are paid by the executor of the estate. There are certain ways to hold title to property that will not cause a probate including joint tenancy with another person, a life insurance policy with a correct beneficiary designation, an IRA with a correct beneficiary designation or an annuity with a beneficiary designation. The most common cause of probate is a home or condo held in the deceased’s own name alone. Some people are unfortunate enough to have to two probate estates, one here in Cook County and another in Wisconsin or Florida because their out-of-state property was titled in their own name. There is no set fee for probate in Illinois. Probate fees consist of whatever “reasonable fee” the attorney and executor charge the probate estate. Most people object to probate because some attorneys and executors overcharge for their services. Figures like 2% to 10% of the value of the estate are many times cited as an estimate of likely probate fees. I have found that most simple probate estates cost about $2500.00 in attorney’s fees and costs. “Simple” means a reasonable number of assets, no debts of the deceased and no will contest. Attorneys commonly charge from $300 to $400 per hour in probate court cases and 7 to 10 hours is about average for most cases. Some attorneys and executors “over-do” it. I once took over a probate case in which the attorney had charged $36,000.00 for doing little more than filing the will of the deceased in court. How does this happen? It happens because probate is a mystery to the client and some attorneys and executors take advantage of this cloud of uncertainty about the probate process. Some clients just blindly accept this sort of financial mistreatment.  Delays are common in probate court cases because there is a six-month “claims period” during which creditors can ask to be paid. Usually, no distributions are made to the heirs until the 6 months passes. Your heirs, usually your children, are the ones who must deal with probate. I have found very few children that relish the thought of a probate court case. Most ask, couldn’t this have been avoided? The answer is, yes, a living trust will bypass the entire probate court system.

2. Protects Against Disability

At least once per month, the child of a client calls saying that his or her parent cannot handle their finances due to age or mental state and how does he or she get the authority to pay Mom or Dad’s bills. If the client has a living trust, we have the client’s doctor say in writing that the client is no longer capable of handling his or her finances. The back-up trustee named in the trust then takes over and is allowed to handle the finances. It’s simple and quick. If the client has no living trust, then a guardianship estate must be opened for the client. A doctor must examine the client and fill out a report, a court case is filed, an attorney is appointed for the parent, a trial is held and at the end of the trial the judge controls all of the client’s assets. The guardianship process can be expensive, long and embarrassing.  Living trusts assure that this will not happen. The authority to run the living trust is switched to the back-up trustee without going to court.

3. Privacy

A living trust is private. It is never filed anywhere. Notices need only be given to the people named to inherit under the trust.  This can be a big benefit. I have found that this is most beneficial where the client has no children and wants to leave an inheritance to selected nieces or nephews. If the client signed a will, upon the client’s death, a written notice must be filed with the client’s “heirs.” The “heirs” are not the people named in the will, but those who would have received the property if the client had no will. I have had many problems when a client with no children dies and I send a notice of the client’s death to distant cousin Willy, who hasn’t seen the client in years, but now thinks he is inheriting part of the estate. It encourages litigation to send notices like this, but they are required. Why go through that when it can all be avoided with a living trust?

4. Saves on Estate Taxes for Large Estates

Very few clients need estate tax saving A/B or “credit shelter” trusts these days. That’s because the estate tax free amount has risen to over $12 million, soon to fall to $5 million. If you are married and have an estate near that amount then you can double that $5 million exemption by using two separate living trusts. There is also a confusing concept called “portability” that protects married couples from estate tax, but some prefer to use separate trusts to protect against future changes in the law.

Negatives of a Trust: Cost and “Funding”

There are a couple of negative factors in establishing a living trust:

1. Cost

The cost of setting up a living trust is greater than a simple “I love you “ will, that is a will leaving everything to your spouse. The cost involved in establishing a living trust are: a.) attorneys fees and b.) recording fees for the real estate deed. Most married couples can have a simple will prepared for about $300.00 total. Living trusts generally cost about $1500.00  to prepare and fund. The cost is greater with a trust than a simple will because all assets must be transferred to the trust, in a process called “funding” the trust and IRAs and other assets must be carefully coordinated whereas with simple wills no titles are changed to any assets.

Many people dislike talking about death and dealing with attorneys and dislike even more paying attorneys fees. There is a mini-industry on the internet and in software sales to avoid attorneys and do your own living trust. Having reviewed many do-it-yourself software trusts, I can say that the client NEVER is confident that he or she did it right. It is well worth it to consult an attorney knowledgeable in trusts and estate to prepare a living trust. The cost of the trust is one factor to consider in setting it up. My view is that an Illinois probate will generally cost about $2500.00, so the trust pays for itself in avoiding probate costs alone. Plus it will coordinate your assets so they are distributed correctly and will reduce estate taxes too. The payback is huge compared to the cost now.

2. Funding the Trust

All assets must be transferred to the living trust. The process of changing beneficiary forms, titles on stocks and real estate is called “funding” the living trust. For instance your stock brokerage account that was under “Jim Jones and Amy Jones, as joint tenants” is changed to “Jim Jones and Amy Jones as trustees of the Jim Jones Living Trust dated 1/1/15.”  Attorneys should assist their clients in funding the trusts.  It is simply not enough to draft the trust for a client and then tell the client “Good luck transferring your assets.” Funding is looked on as a pain by clients and it can be that. I look on it as a good opportunity to consolidate assets (do you really need CD’s at 10 different banks or 40 different stock certificates ?) and  clean up beneficiary designations on IRAs and life insurance.  The client obtains change of beneficiary forms for life insurance, annuities and retirement accounts. Once all the forms are obtained, my office fills them out and the client signs the forms and they are mailed back to the companies. This does require some involvement by the client, but it is a necessary evil. Generally, funding is done within 30 days of signing the trust.