Should Your Client Have a Living Trust?
By Steve Greer, CPA
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our client has recently been to an estate planning seminar. He has a folder full of documents describing all the benefits of a living trust. He has a follow up meeting with the speaker, but decides to call you first to see if you know anything about these trusts. The revocable, or “living,” trust is becoming an increasingly popular alternative to wills and probate. In recognition of the greater use of trusts in recent years in estate planning, Tennessee has recently become one of the first states to adopt the Uniform Trust Code (“the code”).1 The code is the first national codification of the law of trusts designed to clarify existing law and to provide uniformity among the states. This article addresses some of the considerations in deciding when to use a living trust and includes some of the provisions of the new code. The terms “revocable trust” and “living trust” are used interchangeably throughout this article. The term “revocable” means the trust is changeable. The person creating such a trust is called the “settlor.” The “trustee” is the person or entity holding legal title to the assets for the benefit of the beneficiaries.
How Does the Trust Avoid Probate?
For property title purposes, the trust is a separate legal entity, although it is disregarded for income and gift tax purposes during your client’s lifetime.2 Title to the trust assets is not affected by your client’s death, and if the trust has been properly funded, letters testamentary from the probate court are not required to gain control of and administer assets. Consider an analogy in which your client is president of his or her corporation. Upon the client’s death, assets inside the corporation would not be affected. The directors would then elect a new president who would continue the business without delay. Likewise, a properly funded revocable trust would continue the settlor’s business without delay.
Advantages of Living Trusts
The main advantage of the living trust is considered to be reducing or eliminating executor and/or attorney fees and other probate. It is hard to generalize about probate fees. In some areas, executor and attorney fees may be set by the court with reference to the value of the estate.3 In other areas, fees are based on hourly rates or a fixed fee. The fees must be approved through the final accounting of the executor or by consent of the beneficiaries.4 If the estimated probate costs are significantly greater than the cost of establishing and maintaining the trust, a revocable living trust should be considered. A funded revocable trust allows the successor trustee to assume management of assets for a client upon proof of the client’s incompetence. A durable power of attorney can provide similar protection for a client who doesn’t have a revocable trust, and even persons with a trust should also have a power of attorney for business transactions and health care, as well as a living will. Because the assets are in the name of the trust, rather than in the name of the incompetent, a trust may offer more protection to a disabled person who might be taken advantage of. A conservatorship through the court, in which the incompetent’s ability to enter contracts is taken away, offers even more protection, but the cost and continuing court supervision must be considered.
What is a Living Trust?
A living trust is a trust set up during your client’s lifetime. Your client transfers most or all of his or her assets to the trustee of the trust. In a living trust, the client normally acts as his or her own trustee. This type of trust is different from a testamentary trust created under a will, which only becomes effective at your client’s death and then only after probate of the will. Successor trustees are named to act in the event of your client’s death or disability. The client retains the right to revoke or amend the trust at any time, but upon death, the trust becomes irrevocable. After death, the trust assets are then administered by the successor trustee without the involvement of the probate court and disposed of according to the terms of the trust, which contains instructions for payment of debts and distribution of assets.
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A living trust can be beneficial if your client owns real estate in another state. Additional probate proceedings are usually required to pass title in that other state, unless it is jointly owned with a spouse. This is because title to real property is governed by the law where it is located. Personal property is controlled by the law of the decedent’s domicile. For example, if your client owned real estate in Florida, then a separate probate proceeding would be required there to clear title. Florida presumes that an executor’s commission of three percent and an attorney’s fee of three percent are reasonable on the first $1 million of a formal administration.5 This could be avoided through a living trust which holds title to the real estate. After the settlor’s death, the trustee of a living trust can administer the trust and distribute assets to beneficiaries without court involvement. Unless there is litigation among beneficiaries, the living trust does not have to be filed in the public records. This provides a measure of privacy as to who gets what and the
amounts involved. Once probated, a will becomes a public record. Financial information may or may not be made public in probate, depending upon whether an inventory and accounting are filed or waived. A will is more likely to be contested than a trust because the probate process requires claims to be settled and a notice to creditors to be published in the newspaper, thus alerting heirs. However, the usual grounds for setting aside a will, such as incompetence or undue influence, if proven, can be used to set aside a living trust on these same grounds. The code establishes a twoyear time limit within which to commence an action to contest a revocable trust after the death of the settlor. This period can be further shortened to 120 days after the trustee provides a copy of the trust and other information to a party.6
Disadvantages of Living Trusts
The legal fees to establish and fund a living trust are usually higher than the
Advantages of Living Trusts
• Probate Cost Savings • Planning for Incompetency • Faster Distributions • Privacy • Avoiding Multiple Probates in Different States • Avoiding Contests
Disadvantages of Living Trusts
• Cost of Establishing • Administrative Inconvenience • Probate Still Required if Fail to Retitle Assets
fees to write a will. There may be outof-pocket expenses in retitling assets in the name of the trust, but note that recording deeds to revocable trusts are exempt from the conveyance tax.7 The legal fees after death are usually less where there is a funded living trust than with a will and probate. Certain costs remain the same, such as preparing tax returns. The Tennessee inheritance tax clearance should be recorded in the register of deeds office if there are no probate proceedings where the clearance must be filed.8 There is a certain amount of attention to detail and paperwork in keeping assets titled in the name of the trust and some clients are better with these details than others. It generally makes sense for younger clients to have a will to cover basics in the event of a premature death, and then consider a living trust as they become older and their affairs are more settled. Some financial institutions and title attorneys are not comfortable with trusts, although most of these concerns should be alleviated through use of the certification of trust form provided in the code. Use of this form provides protection to third parties relying upon the form.9 Although the code does not provide a creditor’s claims period comparable to the probate limitations period,10 bona fide purchasers and encumbrancers without actual knowledge of creditor’s claims or unprobated wills are protected if probate has not been started within six months after death.11 Probate will not be avoided if the trust is not fully funded. This can result from failure to fund upon creation of the trust or subsequently when the settlor acquires additional property. Probate may be necessary to transfer title to property held outside the trust. This is why clients with a living trust still need a “pour over” will, which transfers probate assets to the trust.
Misrepresentations About Living Trusts
Misrepresentations About Living Trusts
• Exaggeration of Probate Costs and Delays • Creditor Protection • Tax Savings • Probate Should Always be Avoided
Revocable trusts are often sold based upon client’s fears or lack of knowledge about probate costs. These fears are sometimes created by promoters of trusts to make their product look inexpensive by comparison. The expected savings from a living trust may prove to be illusory if the client fails to fund the continued on page 28
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Should Your Client Have a Living Trust?
continued from page 27 trust. Any assets not titled in the trust and for which there is no beneficiary designation or survivorship provision, such as joint ownership, must still go through the probate process. Clerks of the probate courts, as well as attorneys and bank trust officers, can be useful sources of information about the customary fees in an area. The delays on distribution in probate are sometimes exaggerated. In Tennessee, the settlor of a revocable trust is not protected from his or her own creditors. The code makes clear that after the death of the settlor, the assets of the living trust are subject to the claims of the settlor’s creditors.12 It is not clear whether this will have any effect on estate recovery from medicaid recipients which has previously been limited to the probate estate.13 A few other states have recently enacted legislation giving the settlor of a living trust protection against his or her own creditors even where the settlor retains the control of and the benefits from the trust.14 Whether these selfsettled spendthrift trusts will withstand creditor challenges in Tennessee courts will depend on the particular facts and whether a strong public policy is involved.15 If the settlor lives in Tennessee and injures another party in an automobile accident in Tennessee, will the fact that the trust was created under Nevada law prevent a Tennessee court from attaching the assets of the trust that the settlor retains the benefit of? The code retains the traditional creditor protection of a spendthrift clause for beneficiaries other than the settlor.16 Trusts are sometimes promoted for tax savings. A properly drawn will can utilize the same estate tax savings techniques (e.g. credit shelter trust) as a properly drawn revocable trust and vice versa. There are no estate tax or income tax advantages to a living trust. There may be circumstances where probate actually has advantages, such as providing a forum for a relatively quick and final adjudication of creditor’s claims. Probate offers protection for surviving spouses and dependent children against the decedent’s unsecured creditors through the elective share, exempt property and year’s support.17
Should Your Client Have a Living Trust? - It Depends
Consider a living trust where: • probate costs are higher than the cost of setting up the trust; • probate may be required in more than one state; • your client insists on privacy in the terms of his estate plan; and • a contest is expected. A living trust may not be appropriate where: • probate is less expensive than setting up the trust; • the client is unlikely to properly fund the trust; • probate can be avoided by simpler means, such as beneficiary designations; and • the time and expense of probate can be reduced through the small estates procedure18 or probating the will only for real estate title purposes.19
Conclusion
Living trusts are a useful estate planning tool and may be preferable to the will and probate process for many clients. The code treats revocable trusts as the functional equivalent of a will and contains helpful provisions to bring parity between the workings of a trust and a will.20 The effective date of the code was July 1, 2004, although the code applies to trusts established on, before or after the effective date.21 As the client’s most trusted financial advisor, the certified public accountant can help clients make an informed and objective decision about whether a living trust is appropriate. The changes brought about by the adoption of the code will bring more certainty and predictability in the use of living trusts as an alternative to wills and probate. ■
References
Public Acts 2004 Chapter No. 537, Tennessee Code Annotated 35-15-101. 2 IRC Sec. 676; Reg.25.2511-2 3 See Hamilton County Chancery Court Rule 18.14 or Shelby County Probate Court Rule XII as examples of the use of the value of the estate in setting fees. These are guidelines and are not binding on the court and may be contested by interested parties.
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Tennessee Code Annotated 30-2-606. The executor is not entitled to credit in the accounting for unapproved fees and has to restore any such funds paid. 5 Florida Statutes 733.617 and 733.6171 6 Section 50 Tennessee Uniform Trust Code, Tennessee Code Annotated 35-15-604. 7 Tennessee Code Annotated 67-4-409 (a)(3)(f) 8 Tennessee Code Annotated 67-8-420 9 Sections 88 and 89 Tennessee Uniform Trust Code, Tennessee Code Annotated 35-15-1012 and 35-15-1013. 10 Tennessee Code Annotated 30-2-310 11 Tennessee Code Annotated 30-2-408 12 Section 44 Tennessee Uniform Trust Code, Tennessee Code Annotated 35-15-505. 13 TCA 71-5-116 requires the state to seek reimbursement from the estate of certain recipients of nursing home services paid by Medicaid, but recovery is presently limited to the probate estate. Does Section 44 of the code make the living trust available to estate recovery? 14 See, for example, the Alaska Trust Act, HB 101 effective April 1, 1997. 15 Section 8 Tennessee Uniform Trust Code, Tennessee Code Annotated 35-15-107, states that the law of the jurisdiction designated in the trust instrument will apply unless contrary to the strong public policy of the jurisdiction having the most significant relationship to the matter at issue. 16 Tennessee Code Annotated 26-4-101 17 Tennessee Code Annotated 31-4-101, 30-2101 and 30-2-102 18 The small estates procedure is available to administer personal property not exceeding $25,000 in value. Tennessee Code Annotated 30-4-101 19 Tennessee Code Annotated 32-2-111 20 The rules of construction that apply in Tennessee to the interpretation of and disposition of property by will now will also apply as appropriate to the interpretation of the terms of a trust and the disposition of the trust property. Section 13 Tennessee Uniform Trust Code, Tennessee Code Annotated 35-15-112. For example, the provisions made in your client’s will for a spouse are automatically revoked upon a later divorce. Tennessee Code Annotated 32-1-202. Now, these “safety nets” will also apply to the interpretation of a trust. 21 Section 94 Tennessee Uniform Trust Code, Tennessee Code Annotated 35-15-1105.
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About the author Steve Greer, CPA, is an attorney with Greer & Greer Attorneys in Paris, Tenn. He served on the joint committee of the Tennessee Bankers Association and Tennessee Bar Association studying the Uniform Trust Code and recommending changes to the Tennessee Legislature. He may be reached at stevegreer@bellsouth.net.
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