Why are titles to millions of U.S. houses, condominiums and investment properties held in their owner’s revocable living trusts? Could it be these real estate owners know something most of us don’t know?
Although it has been almost 40 years since Norman F. Dacey wrote his best-seller book “How to Avoid Probate,” which sold more than 1.5 million copies, most homeowners and realty investors still are unaware of the benefits of living trusts.
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For revealing the secrets of living trusts to avoid probate costs and delays, Dacey was enjoined by the Connecticut Bar Association. In New York, he was charged with criminal contempt of court and ordered to pay a $250 fine or spend 30 days in jail for writing his book. But he appealed and the New York Court of Appeals found him not guilty. Today, living trusts are widely accepted in every state to avoid probate.
WHAT IS A REVOCABLE LIVING TRUST? A living trust is a method to hold title to real estate and personal property. The major advantage is to avoid probate costs and delays when the property owner, called the trustor, dies.
When a living trust is created, the property owner(s) transfer the real estate and personal property into a living trust. Assets to be transferred might include a home, investment property, a second home, stocks, bonds, home furnishings, artwork and other major assets. The living trust then specifies who is to receive these assets when the trustor(s) dies.
Until death or incapacity of the trustor(s), the living trust assets can be bought, sold, and refinanced just as before. That is because the trustor is also the living trust trustee and beneficiary, maintaining full control.
However, when the trustor dies, the alternate or successor trustee automatically takes over and carries out the living trust provisions. It’s much like a will, but probate costs and delays are avoided.
TWO PRIMARY BENEFITS OF LIVING TRUSTS. Homeowners and realty investors who are unfamiliar with inter vivos (which means “among the living”) revocable living trusts think all they do is avoid probate costs and delays.
That benefit is extremely important. But there is another major living trust benefit if the property owner becomes incapacitated, such as by a severe stroke or Alzheimer’s disease. If that happens, the successor or alternate living trust trustee can manage the property, even selling it if necessary for the trustor’s benefit.
For example, suppose a married couple, let’s call them Ronnie and Nancy, own their home in joint tenancy with right of survivorship. Ronnie contracts Alzheimer’s disease and is unable to understand reality. He no longer even recognizes his wife. She becomes unable to care for him at home and decides to move him to a convalescent hospital. But their funds run out. She has to sell their home to pay for his care. Then she learns, because Ronnie can’t sign the deed, she must have a court-appointed conservator represent him.
Instead, suppose Ronnie and Nancy held title to their home and other major assets in their living trust. When Ronnie became incapacitated, as determined by a physician, Nancy could then continue managing their living trust assets as before. She would be able to sell, refinance, or sell, doing whatever she deemed necessary as living trust successor trustee.
PROBATE COSTS AND DELAYS CAN BE VERY EXPENSIVE. Most states have simplified probate procedures for small estates. For example, California exempts estates up to $100,000 from probate formalities. Oregon has a more generous $140,000 exemption and Wyoming allows up to $150,000 of net assets to pass without probate.
If you think probate costs are insignificant, think again. For example, Elvis Presley left a $10.2 million estate. But probate costs were $7.2 million, leaving only 28 percent of his estate for his heirs. A worse example is Marilyn Monroe who left an estate worth more than $1 million that took 18 years to probate, leaving just $101,000 for her heirs after the lawyers and others took their fees.
Bill Lear, inventor of the Learjet, died in 1978. But his will is still being contested in court today. Famous actor John Wayne, who passed away in 1979, still has his estate tied up in probate, while his heirs argue about who gets his assets. Even frugal J. Paul Getty’s estate has spent more than $40 million so far on attorney and other fees with no end to the estate probate in sight. I could go on, but you get the idea why it is so important to avoid probate.
ADDITIONAL LIVING TRUST BENEFITS. For homeowners and realty investors who own real estate in two or more states, a special living trust advantage is avoidance of probate costs and delays in those states. The successor trustee just merely deeds the deceased’s properties, without probate, to the individuals or charities specified in the living trust.
For example, a few years ago my friend Borgie died at age 83. She owned real estate in Florida, Minnesota and North Dakota. Her son later told me, because she didn’t have a living trust, probate proceedings were required in all three states, including hiring a probate attorney in the three states to distribute her real estate to the heirs named in her will. A living trust would have avoided that cost and delay.
Privacy is another living trust advantage. Unlike a decedent’s will which becomes a public record, a living trust remains private after the trustor dies. For example, when Bing Crosby died in 1978, virtually all his assets were in his living trust. The details of his vast assets and who received them under the terms of his living trust never became public knowledge. However, a few states require living trust registration, but there is no penalty for failure to do so.
Litigation is discouraged by a living trust because there is no probate court proceeding. Nobody except the living trust beneficiaries have a right to learn the living trust contents and receive an accounting. But will contests can freeze a deceased’s assets for many years.
To illustrate, the late Charles Kuralt, CBS-TV folksy personality famous for his “On the Road” travels, owned some beautiful Montana property when he died of lupus. His will left all his assets to his surviving wife. But his Montana mistress claimed the Montana property was left to her in a holographic will. In a very nasty lawsuit, the court ruled she was entitled to receive the Montana property. This result could have been avoided if his assets were in a living trust.
Another living trust advantage allows the trust to be amended or revoked at any time, much like a personal will. A living trust has no effect on the trustor’s tax breaks, such as the $250,000 principal residence sale tax exemption, homestead rights, and even tax-deferred exchange benefits.
LIVING TRUST DISADVANTAGES. But living trusts are not without disadvantages. It costs money to create a living trust. Attorney fees vary widely, depending on the complications.
Some living trust attorneys advertise $395 or $495 basic fees for minimal service. However, many attorneys charge $1,000 to $2,500 or more, including deeding real estate assets into the living trust. It is extremely important to “fund” the living trust with assets, otherwise it is worthless.
Another possible disadvantage occurs when the living trust trustor property owner wants to refinance the property. Rather than accepting the trustor’s signature on the mortgage documents, some unenlightened mortgage lenders require the trustor to take the property title out of the living trust, sign the mortgage papers, and then deed the property back into the living trust. But this inconvenience is not a major drawback.
However, living trust trustors still need a will because not all their assets will be in their living trust. For example, many insurance agents recommend automobiles not be transferred into living trusts.
ALTERNATIVES TO LIVING TRUSTS. Some homeowners feel satisfied holding title to their real estate in joint tenancy with right of survivorship (or in tenancy by the entireties between husband and wife in states allowing this method). However, as shown in the Ronnie and Nancy example, if a joint tenant becomes incapacitated, a court-appointed conservator or guardian will become necessary to transfer property title.
A “payable upon death” alternative is available for checking and savings accounts in many states. Upon death of the primary account holder, the balance goes to the person named. However, complications can develop if that person predeceases the account owner who forgot to change their bank records before dying or becoming incapacitated.
Another alternative some individuals use is a power of attorney granted to a trusted relative or friend. However an ordinary power of attorney ceases to be effective when the grantor dies or becomes incapacitated. A durable power of attorney for financial management can help but it won’t enable the attorney-in-fact to distribute assets after death. Probate proceedings then become necessary.
SUMMARY. Revocable living trusts provide major benefits for homeowners and real estate investors who want to avoid expensive probate costs and delays for their heirs. Another major advantage is to provide for the possibility the trustor will become incapacitated and unable to manage their assets.
At that time, after a physician determines the trustor is unable to manage their assets, the named successor trustee can manage the living trust assets. More details are in the new Robert Bruss special report, “Living Trust Pros and Cons for Avoiding Probate Costs and Delays for Your Heirs,” now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com.
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