A Living Trust is an excellent estate planning option for many people. The idea of being able to immediately transfer assets at death without probating the estate is a huge advantage for many. However, like so many things these days, “One size does not fit all”. The same can be said for “cookie cutter” estate planning.
I take an educational approach to my practice and client experience. I want my clients to know the options they have that accomplish the goal in a manner unique to them. You don’t want an attorney who is only going to give you one option as that option will likely make more money disappear from your wallet.
“Where There’s a Will, There’s a Relative.”
-Author, Unknown
REASON #1: LIVING TRUSTS HAVE HIGHER UPFRONT COSTS
The truth is that it costs more to prepare and properly fund a Living Trust than it does a Will. Usually, a trust document is much longer and more sophisticated than a typical will. In addition, some, if not all of your major assets (real estate, brokerage accounts, etc.) must be transferred into the name of your trust. Failure to do so may cause your estate to be probated which is most likely the main reason a Living Trust was formed.
So how much does it cost to complete a Living Trust versus a Will? That can vary from attorney to attorney, but it is not uncommon to see it cost 2-5 times the amount of a will. Like any decision, you must weigh the upfront costs versus the cost over time. If you form a Living Trust and your estate avoids probate, you will be saving your heirs a lot of money since the cost to probate an estate is usually substantially more than the cost of a Living Trust.
When I meet with prospective clients, I review both the advantages and disadvantages of a Living Trust vs. just having a Will. Moreover, all the costs to complete a Trust or a Will plan are disclosed so you know exactly how much money you will have to invest.
REASON #2: UNFUNDED OR PARTIALLY FUNDED TRUSTS
Over the years I have met with several people to review estate planning documents that were prepared by another law firm and they want their plan updated or changed. It usually goes something like this:
They bring in an enormous stack of documents some are in a nice leather-bound estate planning portfolio with their names engraved on it. Upon reviewing what has been done, I start to ask about whether their assets have been transferred into the trust. In order to accomplish this, you must re-title the name of the asset. Instead of “Joe Smith” it has to become “Joe Smith, trustee of the Joe Smith Revocable Living Trust dated April 1, 2020”.
I then ask them why they decided to complete a Living Trust. Usually, they say, “I was told I needed it” or “to avoid probate”.
When I explain to them that most of their assets are not properly titled in the name of their trust and, if they should die, their estate would have to be probated, jaws hit the floor.
Their $5,000.00 estate plan, without proper funding, got them a nice leather binder.
When my office completes a Living Trust for a client, we specifically go over what and how each asset should be titled or re-titled. We also prepare deeds to transfer real estate to their trust(s), give instructions on what other assets need to be transferred, and follow up to make sure everything was done correctly.
REASON #3: FINANCING REAL ESTATE
When someone purchases a home or refinances an existing mortgage, the lender will require that the title to the property be in the name of the owner(s), individually, and not in the name of a trust or other entity. Why is this? Lenders do not want a property to be transferred to another Buyer without the loan being paid in full. This is commonly called a “Due on Sale” clause. It is a provision in a mortgage that requires the Seller to pay the lender in full upon the transfer of ownership.
In reference to a Living Trust, some lenders will not allow the property to be purchased or refinanced into the name of the trust. This subsequently conflicts with the purpose of your trust (for the property to avoid probate).
So what do you do? For the home you live in, it may require you to transfer ownership at a later date. Many people will refinance their mortgage one or more times. So, every time they do, they will have to transfer it out of the trust, only to put it back in trust later. This means extra attorney fees and recording costs.
But what about the “Due on Sale” clause, does the lender make me pay them back in full? When it comes to your principal residence, there is a federal law (Garn-St. Germain Act) that prohibits your lender from requiring the balance to be paid in full or initiate foreclose.
What about other real estate? This can be tricky. Let’s say you own rental property or a vacation home. The Garn St. Germain Act only applies to mortgages on principal residences not on non-owner occupied property. By transferring those properties into your trust, you are taking a chance that the lender could require it to transfer back in your name alone or to pay them in full (if the transfer triggers the lender’s due on sale clause).
My office will review with you whether transferring real estate into a trust or if some other titling convention is beneficial.
REASON #4: CREDITOR CLAIMS AGAINST YOUR ESTATE
When people die, they often owe creditors money. Car loans, mortgages, credit cards, student loans, medical and funeral expenses all must be paid before beneficiaries get money. One reason that states have probate laws is so that a creditor can file a claim against the estate. The time to do so varies from state to state, but in Wisconsin, a creditor or potential creditor, has about 3 months to file a claim against the estate.
In the case of a trust, it is surprisingly different. Without probating an estate, a creditor may have as much as 2 years to file a claim without the proper notices. Thus, subsequent guidance from an attorney may be needed with a Living Trust in order to shield the estate from further liability.
My office always discusses the benefits of probating an estate if it makes sense for the client. Most times, late claims against the estate will not be an issue.
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