Living Trusts Are Valuable Tools Alright, But Watch That Pitch

MARCH 1, 1999 VOLUME 6, NUMBER 35

“Since the Revocable Living Trust avoids the expensive and lengthy legal process known as ‘probate'” proclaims a national insurance sales agency in its brochure, “it is fast replacing the Last Will and Testament as the preferred method for asset distribution.” Elsewhere, the same insurance agency promises that the “Living Trust avoids probate and is less expensive, quicker and private. The Living Trust completely eliminates the court process.”

In their zeal to sell living trusts, many non-lawyer document preparers and not a few lawyers resort to half-truths and the occasional outright misrepresentation. A review of the literature handed to seniors at a recent Tucson “estate planning” seminar (really a pitch for living trusts, annuities and insurance) reveals some of the misinformation:

The pitch– “Aren’t trusts only for the rich? No. Anyone with property or assets totalling more than $30,000 should consider a trust to avoid probate.”

The truth–in Arizona, estates of up to $50,000 in personal property plus $50,000 in real estate can be transferred through a very simple affidavit process. But even more fundamentally, even larger estates seldom go through the probate process. Holding property in “joint tenancy with right of survivorship” is a popular way to avoid the probate process, particularly between spouses. Bank accounts, stock certificates, bonds, brokerage accounts, annuities, life insurance and many other assets can be titled as “POD–payable on death” (or “TOD–transfer on death”) to avoid the necessity of probate. The simple reality is that probate is initiated in a tiny minority of cases, and often only as to a fraction of the decedent’s assets.

The pitch– “At your death, the court must first validify [sic] your will. This process is called probate. During probate not only is your estate tied up, it is also publicly recorded making your private information available for anyone, family friend, or stranger.” And elsewhere: “A recent survey indicated that it takes sixteen months for the average estate in America to clear probate.”

The truth–the probate process is, indeed, the mechanism by which the court determines the validity of your will. In almost every case, that determination is simple and straightforward–will contests are extremely rare. More importantly, your estate will not be “tied up” during the probate process. Your personal representative will be authorized to liquidate assets as may be needed, pay your debts, distribute living expenses to your spouse and children, and even make distributions of some of your estate. Despite the common belief that estate information is publicly available, there is no requirement that an inventory or accounting be filed unless requested by one of the beneficiaries. And the typical probate process, at least in Arizona, takes about six months, with many probates being opened and closed virtually simultaneously.

The pitch– “This [probate] is also the process that can cost your heirs up to 8% of your estate.” Another pamphlet trumpets that “Probate expenses…can cost between 3% to 12% of an estate’s gross value.”

The truth–the cost of probate proceedings must (at least in Arizona) be based on the actual work required to administer the estate. If the personal representative chooses not to charge (which is usually the case, especially when the personal representative is also an heir), then the only costs will be legal fees. While those fees may be substantial, they are more likely to be 1% than 8% of the estate. Arizona law is more restrictive than some states, but even in those states which provide for a percentage fee for the attorney handling a probate, it is more likely to be 3% than 8%. Administering a living trust will also cost something, though likely not as much as a probate for a comparable estate.

Living trusts are an important estate planning tool–and option– for many people. They may be particularly valuable for those who have real estate in more than one state, or disabled (or spendthrift) children, or large estates requiring careful tax planning. But living trusts are seriously oversold, and consultation with a competent estate planning attorney is the best way to make the necessary cost-benefit analysis. Be wary about getting legal advice from an insurance agent.

©2017 Fleming & Curti, PLC