I walked into an orthopedic doctor’s office the other day. He looked at me and said, “I recommend immediate bilateral knee replacements for you, sir.”
“My knees feel fine,” I said, “I came because my shoulder is hurting.”
“The shoulder can wait,” he snapped, “You need those knees replaced.”
I said, “I don’t think so,” and did a dozen deep knee bends, then threw in some Russian bear dance moves for good measure.
The doctor’s face turned puce and he shouted, “You need knee replacements. I barely make a nickel when I do a shoulder operation. Knee replacements are hugely profitable. They are what keep me in business.”
Does this dialogue sound familiar? If you consulted an attorney or investment advisor about estate planning and you were sold a plan based on a revocable living trust (RIVT), it may have been a similar situation. Many attorneys want to sell every client an RIVT, whether it is beneficial for the client or not. Why? Because a plan based on an RIVT is more profitable than a plan based on a will.
The attorney will not be as brutally honest as the doctor above, but the motivation may be the same – greed often Trumps the best interest of the client. This is especially true of “trust mills.” These are operations where non-lawyers sell trust-based estate plans that are then signed off by an attorney, who may never even meet the client.
Trust mills sell cookie-cutter legal documents at exorbitant prices, usually as a pretext to get information about the victim’s assets and sell annuities and other financial products. Instead of meeting with an attorney who explores the various options and explains the best plan for that client, a sales representative sells the plan and a tame attorney “reviews” it. This is practicing law without a license or facilitating unlicensed legal services – a crime. It is seldom punished because the victims will not realize they have been harmed for years and because the sales agents are very good at stringing their victims along.
Deciding whether to create and fund a trust-based estate plan or to rely on a will may be very simple. If the individual or family does not include any dependent who is under age or otherwise requires supervision, and the estate does not include assets that must be actively managed, there is little justification for a trust. However, if there are beneficiaries whose money must be protected against creditors, incarceration reimbursement, needs-based programs, lack of financial judgment or persons with undue influence, or if there are diverse assets requiring management, a trust will likely be justified.
Attorneys often dispute the advantages of RIVTs compared to will-based estate plans on Internet discussion boards called listservs. These arguments can eat up bandwidth for days before the disputants “agree to disagree.” The discussion will probably resume a few months later, repeating the same points – verbatim!
Here are the arguments for and against RIVTs:
Cost – An RIVT, with the ancillary documents, generally costs more than a will. In fact, an estate plan based on a trust must include a will. Furthermore, a trust can be more expensive and confusing to revise than a will. If the grantor of the trust wants a change in the nomination of successor trustees, not only the trust, itself, must be amended; it may be necessary to draft a new certificate of trust existence. As amendments are added to the original trust, it becomes more difficult to determine the precise terms of the trust.
Changing the will is easier. The will is a stand-alone document that is revoked by a later will. The attorney only has to draft and execute a new will. Creating a new document is usually easier and less expensive than changing an existing document.
In most states, a properly funded RIVT (meaning that all of the assets have been titled in the name of the trustee or are paid on death to the trustee) may make opening a probate estate at the end of the grantor’s life unnecessary.
This means that estate administration may be more expensive when a will must be probated. However, the difference in total cost is small, so the main difference is that the cost of an RIVT is up front, but the slightly-higher cost of probating a will is post-mortem.
More important is the fact that titling assets in a RIVT does not guarantee that there will be no probate estate proceeding. Nor does it avoid the possibility that the estate may be contested.
Until a probate proceeding is initiated, creditors and potential beneficiaries who are excluded from the trust may have difficulty finding out about the trust assets and dispositive terms. That does not mean that a diligent creditor or interested person cannot find the trustee and demand information and payment. Further, if the probate estate is insolvent, the trustee may be required to cover outstanding debts or to distribute assets to the personal representative.
Creditor Protection – A revocable inter-vivos trust does not provide any meaningful protection against the claims of the decedent’s creditors. Trusts that would frustrate creditors are a world away from the type of RIVT used for routine estate-plannig, both figuratively and literally. If you would like to learn about asset-protection trusts, read, “Michigan’s New Law To Allow Domestic Asset Protection Trusts.”
Privacy – Trust proponents claim that using an RIVT avoids the public scrutiny of a probate proceeding, but nothing prevents a disgruntled creditor or would-be beneficiary from contesting the terms of the trust. That would make the whole proceeding a public record. Privacy as an issue is a red herring. Although privacy may be preferable, the records of most decedent’s estate files do not contain any information that is not readily available for free on the Internet.
Tax Avoidance – There are few circumstances that would provide a tax advantage to a trust-based estate plan, as opposed to one without a trust, unless the family net worth exceeds the Federal Estate Tax exemption of $5.49 million. There are some states with a lower threshold for state estate tax where a trust might save tax, but that is not the case in either Michigan or Pennsylvania. The advantage would be minimal, in any case.
Protecting Beneficiaries – A trust can include comprehensive rules to protect and manage money or assets held for beneficiaries that could not be written into a will. Where there are beneficiaries who are underage or have disabilities, an RIVT should be used to structure the management of the assets for their protection and care. A trust with a reliable trustee can be established to avoid mismanagement and loss of important government benefits, preventing a wasteful and cumbersome probate appointment of a guardian or conservator.
Conclusion – Although an estate plan that is based on an RIVT is more expensive than one that is based on a will, the difference should be a minor consideration in such an important purchase. A trust provides a distinct advantage over a will when it comes to post-mortem management of the estate for the benefit of the beneficiaries. This is extremely important when there are minor beneficiaries or beneficiaries whose shares must be protected and managed for one reason or another. Given the crucial importance of the welfare of the beneficiaries, an RIVT is well worth the extra cost.
John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
©2017 John B. Payne, Attorney