This edition of Friedman’s Law of the First Thing is about living trusts — what are they, what are they good for (absolutely somethin’) and what are they not good for?
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In a weird way, Dave Ramsey is my muse — I hear him say something on AM960 in the a.m. and it gets my mind a whirring and leads me to set fingers to keyboard.
Yesterday Dave was answering a question from a woman whose mother was soon to die. The daughter had no idea whether her mother had a will and she wanted to hear from Dave about what the daughter should be doing right now, given that her mother’s death was close at hand.
Dave said much in response which I thought was correct, such as (a) make funeral arrangements, and (b) talk to a lawyer who specializes in estate planning, which is the type of law having to do, most centrally, with who gets your stuff when you die, and how they get it.
But Dave also said one thing which, in my experience, was stupefyingly not correct, when he said something along the lines of this:
If later on you find that something’s not right, then you can always just go on down to the courthouse and get that fixed up no problem.
(Aside: I can find no transcripts online, whatsoever, for Ramsey’s shows, and I really don’t want to wade through lots of ads and listen to the show via kludgey streaming site that appears to lack fast forward or reverse controls, so going on memory is the best I can do here . . . ).
Now you have to understand that this statement came from a fellow who seldom passes up an opportunity to bash the federal government as a bloated ineffective stupid bureaucracy. Yet here he was making it sound like a trip down to the courthouse is no biggie, like a walk in the park on a sunny Sunday afternoon.
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As a young lawyer, I used to spend a lot of time doing that just-go-down-to-the-courthouse thing, and I can tell you that, the minute you walk into the courthouse, you’ve already lost the war. True, you might win the battle against the enemy you’re traipsing up the stairs that day to engage, but the war itself? Nuh uh. Courthouses are lousy places for people to resolve their differences, and by just-going-there, you loose.
They’re also, as it turns out, lousy places to administer an orderly disposition of a dead person’s estate.
That’s the lawyerly way to put it. Here’s the lay-way:
Court houses are lousy places for generating pieces of official-looking and official-acting pieces of paper that you can take to some keeper of a dearly departed loved one’s assets (e.g., a bank or a brokerage or a recorder’s office) to get them to transfer an asset the dearly departed owned (e.g., a bank account or a brokerage account or a piece of real estate) from being in the the dead person’s name to being in the name of the person or persons the dead person wanted to have the asset.
That’s what you want to get out of the court: official looking pieces of paper that banks and brokerages and recorder’s offices (where they keep land deeds and the like), etc. respect. That’s the end-result you seek. Sounds simple enough, right?
But what are the steps to get you to the end-result?
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A will is the quintessential way to lay out your instructions about who-gets-what after you have bitten the bullet, kicked the bucket, been run over by a bus, whatever — or simply died of old age and entropy (which gerontologists will tell you is quite rare because there is just about always a root organ failure of some kind).
But a will also doesn’t mean diddly until it has been accepted by a court as the dead person’s will. Literally diddly!
So how do you get that to happen?
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The only way that you can get a dead person’s will accepted as the dead person’s will — the only way you can get on the road that leads to getting those official pieces of paper you need to transfer assets from being in the dead person’s name into being in the name of the person who is next in line to get the asset — is via a court order from some judge.
That some-judge will be a person (usually a man-person) wearing a polyester black robe pretty much like the thing you felt so silly wearing when you graduated from some school (why we don’t view those black robes the same way we view white wigs on barristers in the UK is beyond me).
That judge will typically have, at best, a love/hate relationship with his or her job, which in just about every nook and cranny is a very tough job. It’s also a job in which all but the cheeriest and most forever-ethical of people soon fall into an M.O. of, Whatever it takes to get this #&%$!*^ file off my desk today as quickly as possible, that’s all I want to do.
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So how do you get the court order from the get-this-off-my-desk black-be-robed fellow — the court order stating that the will is accepted as the will?
You hire a lawyer who then submits the will to the court, along with a bunch of other papers evidencing your position that the will is The Will, together with a proposed order for the judge to sign. And then you set and wait some. And if all goes well, the judge sometime later signs the proposed order that you are paying your lawyer to prepare. Then, and only then, is the will operative, and then and only then are you on the court-system-based who-gets-what playing field.
After that happens, a great many other steps have to also happen before any of the “who”s get any of the “what”s to which the will says they’re entitled.
This whole process is called the probate process, and the part of the court system that does that sort of court work is called The Probate Court.
And how long do you think the probate process might take in the ever-so-loverly state of California? One site says eight to twelve months (that link also contains a decent short FAQ about California probate in general). Another says a minimum of a year (that link has a longer FAQ about CA probate). In any event, if you go full tilt towards using the probate process, it’s gonna take some time and it’s gonna take some money.
Do you suppose your loved ones will enjoy paying your hard-earned money to lawyers and using their never-enough time to opt-in to an unwieldy court-process — a process that does little more than delay, for eight to twelve months, their own sweet gratification of enjoying your stuff after you die?
So if you love ’em, you won’t want to do that. And if you don’t, why then you might . . .
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So what’s a potential dead-person to do?
In California, using a living trust is the very real answer to this very real problem.
Living trusts are also known as revocable trusts and as revocable living trusts, and are also referred to, by second-year law students and bad lawyers trying to keep the cloak of mystery around everything they do, as inter vivos trusts. Regardless of what you want to call them, though, these things help you by and large avoid all that probate process hub-bub.
And while I can’t speak with any knowledge about most other states, my hunch is that living trusts are the solution in most other states as well (lawyer kinda joke: except, perhaps, Louisiana, which started with the Napoleonic Code rather than the British Common Law, and thereby ended up with a very different look and feel to its law than every other state).
Living trusts do nearly everything that wills do, but do it in a private, contract-based way, rather than in a public, courthouse-based way, i.e., while a will is a set of who-gets-what directions to the world at large and is treated that way in the public arena of the courthouse and in that court’s public files, a living trust is a set of who-gets-what directions to only the people involved and is treated that way in the private confines of a lawyer’s office and in that lawyer’s correspondences to only those involved.
So when a person with a living trust dies, the lawyer who helped the dead person set up the living trust can do much of what the black be-robed folks in the court house do for wills, but the lawyer can do it a whole lot quicker and a whole lot less expensively, by simply making it all happen through the people involved.
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And that, dear reader, is Friedman’s Law of the First Thing as applied to living trusts. So please remember:
Living trusts are
all about avoiding people
in black robes and staying
out of the courthouses
in which they perch.
Because courthouses are lousy places to quickly and efficiently get transactions done (and transferring Old Pat’s house to Old Pat’s kids is, if nothing else, a transaction, right?).
And that means that, if you want to do this end-of-life planning stuff the right way, then you need to have a living trust. And, yes, that does mean you need to use a lawyer.
That’s right: though I’ve done my best to help you steer yourself away from courthouses and judges and such, it’s a lawyerin’ you still must go. But avoiding two out of three ain’t too bad, is it?
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One last thing: most folks, when asked, think that living trusts are about taxes. This is false. Living trusts have nothing to do with taxes — nothing to do with estate taxes or with gift taxes or with income taxes. Nada. Zilch. Zero. They are, in fact, for most intents and purposes, invisible to the tax code.
Instead, and to repeat, living trusts are all about opting out of a court system that has its roots in the England of Henry the VIIIth, and, here, stateside, in the times of Abraham Lincoln.
So when you set out your directions about who gets what when you die, please do not use something akin to what knights serving Henry the VIIIth used, and please do use something a bit more current, OK?
Because, notwithstanding statements of folks like Dave Ramsey, opting in to using the probate court is just about always the not-smart thing to do.
Usually small, if no tax planning is needed. The cost difference between wills and living trusts diminishes if you are doing tax planning.
Taxation Disadvantages - The Internal Revenue Code contains a number of income tax provisions which are more beneficial to estates than to "living trusts" operating after the death of the grantor. As examples, an estate is entitled to establish a fiscal year whereas a trust must report on a calendar year. "living trusts" may be subject to the complicated "throwback rules" with respect to accumulation of income whereas estates are not subject to these rules. An estate is entitled to a personal tax exemption of $600.00 for each tax year whereas the "living trust" exemption is $300.00 in the case of "simple trusts" and $100.00 for "complex trusts".
The probate courts may charge a fee based on a percentage net worth of the deceased time, and probate records are available to the public while distribution through a trust is private. Both living trusts and wills can also be used to plan for unforeseen circumstances such as incapacity or disability, by giving discretionary powers to the trustee or executor of the will.
Thank you for your comment.
I don't know if this is true for every state, and I am not a lawyer, but in California, where I sit as I write this, as best I know (a) fees for executors and their lawyers are set by statute, and (b) a will has no effect whatsoever on anything until the person whose will it is dies.
So when it comes to the former, it's more than the probate court "may" set a fee -- it's more like it "shall" set the fee. And then most fee-earners ask for more than the statutory rate -- they ask for fees for "special" or "extra" or "additional" services, which the judge awards to them if they show to the judge's satisfaction that there was something unusual about the probate of that particular dead person's estate that required them to provide something beyond the normal level of services.
And when it comes to something short of death, trustees have a lot more power than an executor of a will that has not -- and cannot at that time -- be admitted to probate because the testator (i.e. the person whose will it is) has not yet died. Until death, a will is simply a piece of paper -- if a fancy piece of paper folded into blue construction paper and stapled kinda inside out (at least if the lawyer used the good ol' blue-back approach).
I totally agree with the part of your comment about privacy. The probate process is about as public a process as you can imagine (anyone can go in and look at the file for a probate), while the trust process is about as private as it can be (typically no one other than the people directly involved sees anything).
The main benefit that gets people with trusts to opt in to probate (even though the trust is designed to help them avoid probate) is that probate can do a great job with respect to finalizing and then cutting off debts -- contingent or fixed debts, real or imaginary debts, sound or ludicrous debts, and all others. In probate, creditors have a handful of months in which to file a claim and, if they do not, then they're not entitled to anything (we're talking law here, so exceptions can apply!).
So if a dead person has a lot of skeletons in his or her closet (so to speak . . . ) and the heirs want to clean all that up pronto, then probate can provide a very real benefit, lack-of-privacy and all
Thanks again for your comment.