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!

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—to do what the judge usually does, which is transfer your assets to your live beneficiaries after your death. The advantages of a Living Trust are:

• 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 may never gather again in the same city for the rest of their lives, they came directly to my office after the service where I prepared a deed that transferred my client’s house from her Living Trust to her children, which they signed on the spot.

So, What’s Not to Like?

It sounds like having a Living Trust, as opposed to a will, is a no-brainer. I agree. Use a will—go to probate. Use a Living Trust—avoid probate and save thousands of dollars for your family. But still, you may believe you need a Living Trust when, in fact, you really could do without.

My basic rule about whether you need a Living Trust is this: If you own real estate of any value, whether $10,000 or $10 million, you need a Living Trust. It’s that simple. If you own any real estate, you should establish your Living Trust and transfer title of your real estate to yourself as trustee of your Living Trust. This vesting is accomplished with a deed, which will read as follows:

Grantor:
Mr. and Mrs. Bookbuyer, Husband and Wife
Hereby transfers, conveys, and quitclaims to:
Grantee:
Mr. and Mrs. Bookbuyer, Trustees of the Bookbuyer Living Trust

When both of you have died, the person or persons you appoint as your successor trustee—probably your children—will transfer the property to the persons whom you have named in your Living Trust as the beneficiaries of your house. No mess. No fuss. No muss.

If you do not own real estate, and your estate consists of, say, cash or brokerage assets, you could prevent those assets from going through probate after your death, and without the Living Trust, by simply revesting the accounts so that they are “pay over on death” accounts. These are accounts that keep the cash or stock in your name during your lifetime and, on your death, are automatically transferred (without probate) to the persons whom you have named as beneficiaries on the account.

In order to establish this type of account, you have to schlep to your bank or brokerage house and tell the account representative, “I want to change my account so that it becomes a ‘pay over on death’ account like Mr. Condon said in his amazing Living Trust book.” The representative will then have you complete some paperwork in which you name the people whom you want to receive the account after you die. For example, if you want your daughter to be the beneficiary of that account, the account will then be vested as: Mr. and Mrs. Bookbuyer ATF the Bookbuyers’ Daughter.” The term ATF means “as trustee for,” which expressly states that you are now holding the account as trustees for your daughter.

The “pay over on death” account is kind of like establishing a separate Living Trust for that asset. I say “kind of” because there is no separate inheritance instrument for that account other than the account itself. But during your lifetime, you have complete control and ownership of the account as if it were in a Living Trust, and your daughter has no access to that account during your lifetime. When you die, your daughter takes over the account as if she were the successor trustee and transfers it to herself as the beneficiary.

This sounds like a pretty good arrangement. So you think, “I will just perform the ‘pay over on death’ arrangement on my house and prevent it from going through probate. Why do I need an expensive Living Trust to avoid probate on my house when I can just put it in the ‘pay over on death’ format?”

I will tell you why! Because that method of holding title to real estate does not exist in the United States. There is no form of real estate ownership in which you can put real property in an “ATF” manner and still have the full use of your house while you are alive.

There is, however, one method of holding title to real estate in which you can avoid probate of your house without a Living Trust: joint ownership. As you are reading this very sentence, you have the perfect legal right to put your children on title to your house as joint tenants. When you die, your share of the house will automatically transfer to your children (with the preparation and recording of a document that states that you, a co-joint tenant, have died). It is as simple as that.

There! Like a magician who has disclosed the secret of an ancient illusion, I have told you how to beat the system. Actually, I am probably not revealing anything new to you, so I don’t have to worry about my colleagues hunting me down for disclosing a trade secret that can cost them some fees. Most likely, you hold title to your house jointly with your spouse. It is a logical extension to consider putting your children’s names on title as well—especially if that trick can prevent your assets from being diminished by the probate process after you die.

So, if you can prevent your house from going through probate after your death by putting your children’s names on the deed, why have a Living Trust at all? Why not just use that device and forget the Living Trust altogether? The answer is hinted at in the next heading.

Putting Your House in Joint Tenancy with Your Child Is This Side of Insanity

You have to be mad, or manipulatively persuaded by a self-serving beneficiary, to put your children’s names on the title to your house or any other real property that you own, because when you put your house in your child’s name, you now subject your house to their financial burdens and risks in life. For example:

• Divorce: What if your daughter gets a divorce? Your son-in-law will claim that he has an ownership interest in the portion of your house in your daughter’s name. He may not succeed, but your house becomes part of your daughter’s divorce settlement. And as we lawyers say, who knows what some crazy judge will do?

Or perhaps your son puts his share into the joint names of himself and his wife? Love today is a divorce tomorrow, and your ex-daughter-in-law walks away with a portion of your house.

• Bankruptcy: What if your son files bankruptcy? The bankruptcy trustee will attempt to attach your house as an asset that can be used—that is, sold—to pay off your son’s creditors.

• The Internal Revenue Service (IRS): What if your daughter gets into a tussle with the IRS over income taxes? The IRS will attempt to place a tax lien against your house to ensure that she, someday, pays all her back taxes. With that lien in place, you will have an unbelievably difficult time selling or refinancing your house.

• Other creditors: What if your son gets into an accident and does not have sufficient insurance? Or what if your daughter is a physician and runs into a big malpractice action? In either case, your house may be sold to pay off their creditors.

Certainly, you do not have these thoughts in mind when you consider placing your house in joint tenancy with your child in order to avoid probate. But this is the Law of Unintended Consequences; that is, these are the events that are never supposed to happen—and they happen notwithstanding our best intentions to the contrary. I have seen numerous situations where clients have co-owned their houses with their children to save their families the costs and hassles of probate, only to lose all or portions of them to their children’s spouses and creditors.

And for those who were fortunate enough not to be divested of their homes, they nonetheless suffered extreme distress and anguish from living under the cloud of uncertainty brought about by the litigation in their children’s lives.

In Summary

All of this brings me back to my main tenet about whether you need a Living Trust.

Again, if you have real estate, use a Living Trust to transfer it to your beneficiaries after you die, as well as your bank and brokerage assets.

If you don’t have real estate, you can use joint ownership or ATF accounts to transfer your assets to your beneficiaries without a Living Trust. However, you must be advised that the assets you place in joint ownership with your beneficiary will be subject to your beneficiary’s problems and risks of loss.

To avoid ending up as a cautionary tale of what not to do, I still advise you to use a Living Trust for the after-death transfer of your assets to your beneficiaries.