I dedicate this front page article to addressing myths and “shiny objects” that don’t work. This month, I’d like to address one of the sacrosanct beliefs held by all respectable and educated persons — namely, that trusts avoid probate.
HERE’S THE MYTH: The marketing says that you need a “Living Trust.” Otherwise, you’re loved ones will need to spend thousands of dollars struggling through the horribly long probate process. Not only that, but all your family information becomes public. How could you put your distraught loved ones through that at a time that they’re grieving your loss???
THE REALITY: First, going through the probate process isn’t so bad. In fact, I probated both of my parents’ estates. Assuming your family isn’t fighting, the cost is around $5,000 if you use a lawyer. However, simple probates can be done by yourself using forms available online. There is some time invested up front. And the whole process takes slightly over six months. But most of that time is simply waiting for the four-month creditor waiting period to lapse. A huge advantage is that at the end of the process, you know with absolute certainty that there aren’t going to be any creditors coming out of the woodwork.
Second, having a trust doesn’t guarantee that you avoid probate. However, having a well-drafted trust has a good chance of avoiding probate. Around the retirement communities here in Arizona, you’ll see billboards that advertise “Living Trusts” for only $297. I can see this if you have limited wealth that isn’t going to significantly impact your heirs. Also, it requires that your heirs aren’t going to take each other to court fighting over who gets what. And it requires that you properly transfer your assets to the trust.
Third, and I think most importantly, applies if you have any significant wealth accumulated (for instance, more than $100,000 per heir). That’s the point at which your heirs’ inheritance has a hope of doing more than just paying off their credit card debts and car loans. The vast majority of people inheriting wealth can’t hold onto it for more than a few years. One study says that happens 70% of the time, though I suspect that number is low.
There are other options rather than simply distributing everything to your next of kin when you die. You can distribute it in stages — for example, 25% immediately, 25% in 5 years, and 50% when they reach age 65. If you have at least $ 500,000 (including life insurance proceeds), you could have a corporate trustee hold it in trust and distribute it only as needed.
Keep in mind that you get what you reward. It’s very common to say that beneficiaries are entitled to receive distributions for their “health, education, maintenance and support.” For larger estates, this could mean that your heirs get monthly allowances so they no longer need to work. Did you really work so hard during your lifetime so your kids and grandkids can sit around and live off their inheritance?
Finally, merely having a living trust does not prevent your heirs from fighting with each other or with the trustee. And these fights often end up in probate court (the division of the judicial system that handles disagreements involving trusts). There are ways of preventing this from happening, including (a) having a Trust Protector with authority to amend the trust or resolve questions of interpretation, (b) requiring that all disagreements be resolved using mediation or arbitration, (c) including a No Contest Clause that states that anyone who contests the trust will lose his/her inheritance.
The information in this article is not to be construed as legal advice, and this newsletter does not create an attorney-client relationship. Your particular situation is unique, and you need to consult with an attorney (such as me) to discuss your particular needs.