LIVING TRUSTS vs. "PROBATE"

Living trusts can be very useful and appropriate estate planning devices; however, they are not the best estate plan for everyone. Living trusts are being "sold" by some insurance agents, attorneys, and others by making false or deceptive representations.

All of the following representations are NOT TRUE or are MISLEADING:

• AARP sponsors or endorses particular companies that sell living trusts.
• Living trusts are the best estate plan for everyone.
• Revocable living trusts will save or eliminate death taxes.
• Probate is evil.
• Wills are obsolete.
• The lawyers and court costs will take a huge percentage of your estate, unless you have a living trust.
• You don't need a lawyer to help settle a living trust.
• The way to avoid guardianships is to have a fully funded revocable living trust.
• Along with your will, a list of your assets and a list of your creditors are filed with the Court.
• The revocable living trust is never filed with any public agency.
• The only reason for probate is to protect creditors, not to protect your heirs.
• Probate is open to the public.
• Trustees of living trusts do not need to reside in Indiana, which is a big advantage over wills and probate.
• The average time to probate an estate in Indiana is eighteen (18) months, and during this time all assets are frozen.
• You can settle a fully funded living trust in a matter of hours.

Don't purchase a living trust without getting advice from a competent and independent attorney. If you have a living trust that has been purchased as a result of a seminar or solicitation you should have it reviewed by a competent attorney. If it was sold to you through false and deceptive representations you may have a remedy under the Indiana Deceptive Consumers Sales Act.

There are generally two (2) types of trusts. A testamentary trust is established by a will, and a living trust is established by a written agreement between the person establishing the trust (the "settlor") and the trustee of the trust. A trust must have a trustee who owns, administers, and distributes the trust property for the benefit of a beneficiary or beneficiaries in accordance with the terms of the trust agreement.

Trusts are very useful estate planning devices, because they can control the management, use, and disposition of someone's property after death. For example, without using a trust, there could be an outright distribution of property to your child if your child is at least eighteen (18) years old. By using a testamentary trust, this distribution can be delayed until older ages when the child is more mature and able to wisely conserve and use the inheritance.

The typical "living trust" would involve the person signing a trust agreement appointing himself, as trustee. He would then transfer ownership of his house, furniture and household goods, pets, automobiles, investments, accounts, and all of his other property to himself as trustee of the living trust. The trust agreement would provide that he could use this property in any way he saw fit, and he could amend or revoke the trust during his lifetime. Upon his death, the trust agreement would designate a successor trustee, such as a surviving spouse or child. The trust agreement would allow the successor trustee to pay the funeral expenses, debts, and death taxes, and would require the trustee to distribute the balance of the property as provided by the trust agreement (for example, to the surviving children).

In order to "avoid probate" (having an estate), the person must have transferred ownership of all of his property to the trustee of the trust by the time of his death, and if any property is not transferred to the trustee, then this property could be the subject of an estate administration proceeding through the Court. Many people have living trusts, but they have failed to transfer ownership of all of their property to the trustee so when they die they will have some transfers being made via the trust provisions and other transfers being made according to a will or intestacy laws through an estate administration proceeding.

A person who has established a trust should also have a "pourover will" that would distribute any property that would be owned by such person (and not owned by the trust) to the trustee of the trust to be distributed according to the trust provisions.

There are many considerations in determining whether a person should have a living trust. Some of the considerations are as follows:

1. Cost of a Living Trust. It is usually much more expensive to establish a living trust and to transfer ownership of all of your property to the trustee than it is to continue to own your property in your own name and provide for the distribution of your estate by a will. Recent prices quoted by out of town attorneys who have conducted living trust seminars in Columbus, Indiana range from $1,500 to $2,000 for a living trust for a single person and $2,500 to $3,500 for a married couple. These costs are usually significantly higher than what many local attorneys charge for living trusts. The extra costs of a living trust estate plan plus the reasonable rate of return on the extra costs to the date of death may exceed the costs of an estate administration proceeding. Wills usually cost much less than living trusts and the fees associated with transferring all of the property to a living trust.
2. Funding of the Trust. In order to cause the distribution of all a person's property from a living trust, it is necessary that all of the person's property be owned by the trustee of the trust. As a consequence, all of a person's property should be transferred to the trustee of the living trust at its inception, and any additional property acquired in the future must also be transferred to the trustee of the living trust. With a will, the person continues to own property in his or her own name.
3. Property Management After Disability. Living trust salespersons usually represent that a living trust can provide for the management of your property in the event you (the trustee and the beneficiary of the trust) become disabled. The trust agreement designates a successor trustee to serve in the event you, as the trustee, become disabled or incompetent. The successor trustee takes over management of the trust property and payment of your bills and expenses from the trust income and property. On the other hand, even without a living trust you should have a general power of attorney designating your spouse, your child or children, or some other trusted person or bank to be your attorney-in-fact to manage your property and pay your bills and expenses if you become incompetent or disabled. You do not need a living trust to accomplish this if you have a power of attorney.
4. Medicaid. Revocable living trusts do not offer advantages for Medicaid qualification purposes, as the property owned by the trustee is usually counted as an "available resource". Also, the Medicaid regulations permit the state to assess a Medicaid reimbursement claim against assets in a revocable living trust. A trust agreement should have special provisions that permit the trustee to perform certain transactions with the property in the trust so that the person who established the trust can qualify for Medicaid.
5. Income Taxes. Current rules do not require a separate income tax return and federal identification number for a trust when the person who establishes the trust is also the trustee. However, once a successor trustee takes over a federal identification number must be obtained, and state and federal fiduciary income tax returns must be prepared and filed for the trust each year. Similarly, the personal representative of an estate must obtain a federal identification number and file fiduciary income tax returns for an estate.
6. Will Contest and Trust Contest. Both wills and trusts can be contested. A will contest must be filed with the court within three (3) months after the will is probated, but the period to contest a trust can be longer. Certain mental competency is required to establish a valid will and to establish a valid trust.
7. Privacy. It is not necessary for a living trust to be "probated", and as a consequence the trust agreement is not routinely filed with the court. On the other hand, if any dispute or issue needs to be determined by a court, then the trust will need to be filed with the court. Although the will becomes a public record after it is admitted to probate, the nature and amount of the property of the estate can remain private. Although the personal representative of an estate must prepare an inventory of the estate assets within two (2) months after being appointed, there is usually no requirement that this inventory be filed with the court. Most estates are administered in Indiana using the "unsupervised administration" procedures that do not require the filing of a final accounting with the court. Also, although the Indiana inheritance tax return is filed with the court (even when there is a living trust being settled), the courts are directed to keep the inheritance tax returns confidential.
8. Trustee Fees. Living trust salespersons often represent that living trusts save executor (personal representative) fees. The successor trustee is also entitled to be paid a fee.
9. Creditor Claims. A revocable living trust will not protect the person who establishes the trust from creditor claims against the trust property during the person's lifetime. When an estate administration proceeding is commenced, the personal representative of the estate is required to send notice to all known creditors of the decedent, and if these creditors fail to file written claims against the estate within three (3) months, then these claims are barred. However, if property is distributed from a living trust, the three (3) month claim period would not apply, and a nine (9) month claim period may apply. Indiana law also allows a surviving spouse to claim the statutory survivor's allowance from assets in a revocable living trust. Living trusts may have provisions that require the trustee to pay the decedent's debts from the trust property. Also, Indiana has a Fraudulent Transfer Act that could result in a claim by the decedent's creditors against the trustee and beneficiaries of a living trust after death under certain circumstances.
10. Settlement of Estates and Trusts, Attorney's Fees, and Death Taxes. Those who sell living trusts typically represent that by "avoiding probate" with a living trust, there is a huge saving of attorney's fees and court costs. This may or may not be true. Court costs for probate are minimal. In order to probate a will and open an estate administration proceeding, the court costs are currently $129.00.
    It is necessary to "settle" a living trust similar to an estate. Those who sell living trusts typically represent that living trusts eliminate delays caused by "probate" in the distribution of property after death. However, a successor trustee should not distribute the trust property to the beneficiaries without making sure that all of the creditors of the decedent are paid and all of the income and death taxes are paid.
    A revocable living trust will not save any death taxes. It is illegal for the trustee of a living trust to distribute any of the trust property that is subject to Indiana inheritance tax (unless the beneficiary is the decedent's surviving spouse) without the written consent of the Indiana Department Revenue or the County Assessor, unless the transferee signs a sworn affidavit that the transfer is not subject to Indiana inheritance or estate tax and the reasons why and this form is filed with the Indiana Department of Revenue.
    Indiana inheritance tax returns must be filed within nine (9) months of date of death. After the Indiana inheritance tax return is filed, it may take several months to get an acceptance from the Indiana Department of Revenue, even if there is no audit. It takes several months to get the closing letter from the Internal Revenue Service after the estate tax return is filed. A successor trustee should not distribute all of the property to the beneficiaries, unless the trustee knows that the tax returns have been filed, approved, and accepted and that the taxes are paid in full. The trustee is personally liable for the payment of the inheritance taxes and the estate taxes. As a consequence, distributions from living trusts should not take place immediately after death.
    The successor trustee should always hire an attorney to advise and assist the successor trustee in settling the living trust and to prepare and file the required death tax returns. The successor trustee is also required to obtain a federal tax identification number and to file the required income tax returns for the trust. As a consequence, proper settlement of a living trust also involves delay and costs for attorney's fees. Settlement of an estate and settlement of a living trust both take similar amounts of time and work. Some attorneys may charge less for helping settle a living trust. Interestingly, Florida has a law that provides that a reasonable attorney fee for settling a trust is seventy-five percent (75%) of the amount of attorney's fees for settling an estate of similar size.
11. Delay in the Distribution of Property After Your Death. Living trust salespersons typically represent that "probate" causes extreme delay in the distribution of your property, and this delay can be eliminated through the use of a living trust. This is not accurate. A personal representative of an estate being administered as an "unsupervised estate" can make partial distributions of property immediately after being appointed by the court. A personal representative of a "supervised estate" may also be able to make partial distributions before the estate is settled under certain circumstances. Although most estate administrations typically take approximately one (1) year or less, property can be distributed throughout the course of the administration as partial distributions to the extent it is not needed for the payment of claims, expenses, and taxes. As was mentioned earlier, a successor trustee should not distribute all of the trust property immediately after death, but should pay the inheritance tax and estate taxes from the trust property and should wait until the appropriate death tax clearances have been obtained and all of the debts, claims, and income taxes paid before the property in the trust is finally distributed.
12. Out of State Real Estate. Real estate located out of state can be transferred to the trustee of a living trust. This real estate can usually be distributed as provided in the trust agreement without the necessity of an ancillary estate administration proceeding in the state where the real estate is located. However, there can be complications in some states. For example, Florida has a homestead exemption law that may require an estate administration proceeding to clear title to real estate that is distributed by the successor trustee of a living trust. Florida also has a law that requires the filing of a "notice of trust" with the court after the death of a person who establishes a revocable living trust so that creditors can file claims against trust assets. One should also consider the inheritance tax treatment of the state in which the real estate is located.
13. Joint Revocable Living Trusts. A joint revocable living trust is one (1) trust agreement that is signed by a husband and wife. These types of living trusts are widely promoted. They can result in difficulties relating to the determination of the basis of property for capital gains purposes after the death of the first spouse to die, and many experts recommend that they never be used if a credit shelter trust is to be created after the death of the first spouse to die.
14. Summary of Living Trust vs. Estate Administration Proceeding.

In conclusion, living trusts are not the best estate plan for everyone. One should consider having a living trust, but should receive independent legal advice as to the benefits and advisability of this type of estate plan.

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What the US Patriot Act means to you and your Banking relationship

The US Patriot Act is the short name for a law passed in October 2001 by the US Congress. Formally, the name of the law is: Provide Appropriate Tools Required to Intercept and Obstruct Terrorism.
The name provides assistance to the content of the law. The law is large, with numerous provisions - some of which go right to the heart of how you will bank!

Under the law Banks are required to take several steps with customers that they have not previously been required to do. These steps include:
a. Identify carefully who it is that is banking with the Bank;
b. retain copies of identification of the customer.
c. no matter where the bank is located, to check the individual (or corporation, or not for profit) against a list of known terrorists or organizations linked to Terrorists.

Even individuals who may have banked at a certain institution for years, will be required to provide ID at various times, when they had not been required to in the past. Anytime one opens a new account, regardless of the amount of accounts already in existence, a customer will be required to show ID. Drivers license, thumb printing, passports are all examples of ways to identify the customer.

Commercial customers are not exempt from the identification and must provide incorporation or partnership documents. Anyone wishing to serve as a Commercial Guarantor is included in the Act.

The law is not optional. Customers must provide identification, or banks will not be permitted to open accounts and transact other business. Although the law has been in existence for more than 1 year, the specific requirements for Banks have not yet been determined and a certain date has not yet been established for when the program is to begin. Once the decision is reached on when the system is to begin, the Federal government will impose fines on a Bank which does not follow the procedures.

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