Kevin J. Waite, P.C.

Regardless of whatever else you may have heard, there are only two ways to avoid probate: don't die and don't own anything.

The living trust attempts to accomplish the second way of avoiding probate, no one having yet discovered how to accomplish the first. As an estate planning tool, a living trust is neither inherently good nor inherently bad. It has certain advantages and certain disadvantages. Whether its use is appropriate depends upon the particulars and is a matter for individual determination.

But first, a little background. Probate is simply the procedure for transferring a decedent's assets, either by that person's will or by state statute if there is no will. In the overwhelming majority of cases, the system functions smoothly and without undue delay or expense. It is the rare, but sometimes colorful case in which the estate is tied up for years and burdened by enormous legal fees and administrative expenses - whether because of a will contest or other disputes among the heirs or because of disputed claims against the estate - that provides grist for the mill of the "avoid probate" industry.

You might not know it from the sales pitches, but a "living trust' is nothing new as an estate planning mechanism. It has been around for years under the more traditional names "revocable trust" and "inter vivos trust," literally, a trust "between the living." If it tells you nothing else, the Latin name tells you that the concept is very traditional. A living or revocable trust is one created by a person while living that may be revoked or modified by that person without the consent of any other person. The creator of the trust, called the "settler" or "grantor," can be his or her own trustee and can designate a successor trustee or trustees in the event of incapacity or death. The settlor is typically the beneficiary of the trust during his or her life, and designates in the trust document who will be the beneficiaries upon his or her death.

The use of a revocable trust "to avoid probate" requires that the trust be funded with all or substantially all of the settlor's assets during the settlor's life. It is in this way that the revocable trust enables the settler to follow the aforementioned advice, "don't own anything." The assets have passed from individual ownership to ownership by the trust. Thus, when the settlor dies there is nothing in the estate (assuming no further acquisitions) and nothing to "probate," even though the settler, as beneficiary, has enjoyed the use of the trust assets during his or her life.

There can be additional advantages of such trusts, beyond probate avoidance. For example, if the settler is successful in avoiding probate, the size and distribution of the estate can be kept confidential, unlike probate proceedings which are matters of public record. Also, the assets of a living trust can typically be distributed to beneficiaries sooner than is possible in the probate of an estate. Living trusts also can be an excellent way of keeping records and managing property. Another argument for living trusts is that confidentiality of trust provisions and avoidance of court procedures tend to reduce the likelihood of the equivalent of a will contest.

It sounds too good to be true and in most cases it probably is. Many of the proponents of living trusts as a way to avoid probate treat such trusts as a "one size fits all" concept, and give short shrift, or no mention at all, to their disadvantages.

A major disadvantage of a living trust is the cost associated with its preparation and funding. The paperwork is more complex for a living trust than for a will and the attorney's fee is typically larger. Property that passes by title, for example, real estate and vehicles, has to be transferred formally from individual ownership to trust ownership. More paperwork and more expense. Beneficiary designations to property such as insurance policies and bank accounts may also need to be changed. For an estate with fairly extensive property and complex dispositions, the cost of preparing and funding a living trust can be two or three times the cost of a will with equivalent dispositions. People who choose a living trust over a will are essentially doing much of their own probate before their death, similar to the way that some people plan their own funerals. As a result, they are paying costs and performing work now that would otherwise be deferred until after death and then paid by their estate and performed by their Personal Representative. There is nothing wrong with this of course, as long as a person realizes that is what he is doing.

Additionally, the formalities of setting up and funding a living trust must be observed and records kept to reflect that observance throughout the settlor's life if the transfer of the assets is to occur smoothly and without probate when the settlor dies. Again, more paperwork and transaction expenses to keep the trust current. Unfortunately, many people lack the self-discipline necessary to keep their affairs in the order required by a living trust after they have established one.

The costs to set up, maintain, and administer a living trust are generally at least the same as the costs of a will plus probate. With a living trust those costs are loaded toward the front end, with a will toward the back end.

On occasion, there is a distinct advantage to opening a probate case even where the decedent had a trust and all the decedent's property had been placed in the trust. The probate process allows for publication of a "Notice To Creditors," which in effect imposes a very short statute of limitations on claims against the estate. Trust administration procedures do not provide for this, so any claims against the trust are subject only to their ordinary limitations periods.