OT>>>Living Trusts Are Usually Unnecessary
For Those Who Don't Have a Large Estate
By JEFF OPDYKE
Staff Reporter of THE WALL STREET JOURNAL
Beware the living trust -- it can kill you financially.
A number of lawyers, independent securities brokers and small financial firms
are pitching these estate-planning vehicles as a way for average folks to better
prepare for the inevitable and help their families avoid estate taxes and probate.
A number of people are biting.
But in many cases, it's the wrong people. A study released last week by the
American Association of Retired Persons shows that some of the most eager
buyers of the trusts are age 50 and older with annual incomes of $25,000 or
less. For that group, the trust "is close to being a worthless document," says
Sally Hurme, an attorney and program consultant for consumer issues with the
AARP in Washington, D.C. "The only thing they've done is waste money and
likely created more problems than they solved."
The reason is that most of the trusts being sold are simple, boilerplate
documents that aren't tailored to the specific needs of families -- which is the
whole reason for setting up a living trust in the first place. In addition, these
living trusts can actually hurt your eligibility for Medicaid -- the federal-state
health program for low-income families and elderly people. And then, there's
the cost: anywhere from $750 to $2,500 to set up the trust.
Purveyors of living trusts -- known as "trust mills" -- routinely target older
Americans in mass mailings, newspaper ads and door-to-door campaigns. The
ads often claim -- erroneously -- that the trusts will let your heirs avoid estate
taxes. Many even use the AARP name to lend an air of legitimacy, although
"AARP is not behind these products," Ms. Hurme says.
Many states are cracking down on the practice. Michigan recently launched
investigations into several firms that use nonlawyers to pitch these legal
products, while both California and Florida have won judgments against firms
for using scare tactics to sell trusts to elderly consumers.
How They Work
For some people, a living trust is a good estate-planning tool. But to know
whether it's right for you, you have to understand how it works.
Basically, a living trust is a legal mechanism that allows you to transfer
ownership of your assets -- such as a home, cars and investments -- before you
die. The assets are put under the control of a trustee (who can be anyone of
your choosing), who manages them for your benefit while you're alive and then
disburses them to beneficiaries upon your death.
Handled properly, a living trust allows wealthy people to reduce the amount of
taxes owed by their heirs. Living trusts also are a good way to make sure
certain wishes are carried out -- such as the care of a special-needs child if an
elderly parent dies.
But for moderate and low-income people, living trusts probably aren't a good
idea. The main reason is they can damage your eligibility to receive Medicaid.
Although eligibility laws vary among states, assets such as homes and cars often
aren't included in determining whether you qualify.
In some states, however, if you transfer those assets to a living trust, "they are
included in the calculations," says Clifton Kruse, a lawyer specializing in estate
planning and elder law at Kruse & Lynch, a Colorado Springs, Colo., law firm.
As a result, your trust could make you ineligible for the federal health-care
program.
As for estate taxes and probate, "the living trusts sold by trust mills can be
misleading there, too," says John Rogers, an estate-planning lawyer with Ross,
Sacks & Glazier, in Los Angeles. Living trusts don't help you avoid estate
taxes, despite claims to the contrary made in many sales pitches. With
boilerplate living trusts, Ms. Hurme says, "estate taxes will apply."
Moreover, there is little reason to fear probate. It's simply the legal course
followed to ensure wills are accurately executed. It can be a bear in some
instances, but many states have adopted uniform probate codes that greatly
simplify the costs and time. For modest estates, probate can be quite painless.
In addition, Mr. Rogers says, trust mills frequently fail to tell buyers that they
have to actually transfer the assets into the trust. Therefore many people simply
buy the document and file it away. As a result, their assets end up in probate
court anyway, so you've "blown your reason for having a trust," Mr. Rogers
says.
In Louisiana, trying to avoid probate is all but irrelevant. Because of the state's
inheritance-tax laws, a trust will go through something remarkably similar to
probate, requiring the same amount of time and lawyers' fees anyway, says
Carole Cukell Neff, a certified estate-planning expert at New Orleans law firm
Sessions & Fishman.
Case Studies
Many times the way these boilerplate trusts are written shows just how shady
they can be. Mr. Rogers notes a recent client: A widower who wanted to leave
certain assets to his children and grandchildren bought a living trust that had
been written for a married couple.
Worse, the distribution provisions were conflicting. In one section the
grandchildren received the assets at 18 years old; in another section the age
was set at 23. Mr. Rogers had to go to court to fix the mangled document.
"This is not an aberration," he says.
So unless you have a very large estate, or unless you have "very specific needs
that you can articulate," you probably don't need a living trust, says Ms. Hurme
at the AARP. According to Mr. Rogers, a properly prepared will
"accomplishes what a trust does" for those with modest assets.
Even without a will, you don't face much worry with a small estate. Tax laws
allow for a so-called unlimited marital deduction, which means you can leave
everything -- a billion dollars if you have it -- to a surviving spouse without
triggering taxes; taxes are imposed after the surviving spouse dies.
There is also what is called a unified credit, which lets you bequeath as much as
$675,000 to anyone, tax-free. With proper planning, married couples can
create exemptions of up to $1.35 million. (By 2006, those exemptions rise to
$1 million per person, $2 million per couple.)
Are you still in the market for a living trust? There are a couple of things you
can do to save yourself trouble later on and to ensure you get the product you
need.
First off, Mr. Kruse says, if you see an ad for a living-trust seminar at a local
hotel "that's a neon-sign warning to stay away." Also, be wary of mail and
phone solicitations, particularly from nonlawyers.
Different states set different laws regarding trusts, wills, probate and items such
as Medicaid eligibility. So call your state's bar association and ask for a referral
for a lawyer certified in estate law and trust planning. Or contact the American
College of Trust and Estate Counsel, in Los Angeles, an invitation-only group
of lawyers who specialize in this area.
In short, Mr. Rogers says, "if you determine you need a living trust, spend the
money to take care of the special needs you have." Otherwise, experts say, just
get a will. |
