Hazards of Living Trusts
Seniors are bombarded with advertisements on TV, in magazines, newspapers, and on the Internet promoting “living trusts” as a way to avoid probate. These advertisements often recite the supposed dangers, and expense of probating a will, and claim property can be passed at death through a trust without resource to the probate courts. Unfortunately, increasing numbers of the families who relied on these living trusts are finding themselves in probate court, the very place they sought to avoid.
Many of these living trust programs offer incomplete estate planning packages that fail to take all the steps necessary for proper disposition of assets at death. Sometimes all the pieces are there. but the person creating their own trust fails to complete all the pieces. Every estate plan needs to include a will which at minimum designates a personal representative and beneficiaries. If the estate plan includes some kind of trust then it may include a “pour over will” which catches any property that may have inadvertently missed the trust and designates the living trust as the beneficiary.
Unlike a will that can be placed in a drawer or a safe deposit box and ignored for years, Living Trusts require attention to detail and maintenance. In order for a living trust to work all real estate, bank accounts and other investments must be transferred into the trust. Failure to properly set up or maintain a Living Trust can result in property never being properly placed in trust. Such property would pass by intestate succession if there is no will.
Is processing an estate as difficult and expensive as these ads claim? Unless your estate is worth more than $5 million, there are no federal or Colorado estate taxes. So estate tax avoidance is not a reason for creating a that is not a concern for small estates. The second is that probating a will can cost very little in this state.
If the value of the personal property (not real estate) in the estate after mortgages and liens have been deducted is $66,000 or less, the property may be collected by affidavit by an heir or an heir’s agent and distributed according to the wishes of the deceased without opening a case in probate court or having a personal representative appointed.
If the deceased owned real estate or personal property worth more than $66,000, then the estate would be processed by informal probate which will be handled by the local probate registrar. No court hearings are required in an informal probate. A series of documents including the will, if there is one, and an inventory, are filed with the probate registrar who reviews them to see that everything is in order.
If there is no will and some doubt about who the heirs are, or if the will is contested, then the estate must proceed to formal probate. Even in formal probate, the process can proceed smoothly without court hearings if all involved parties can come to an agreement. Disputes within the family are the most frequently cause of expensive probate legal battles.
There are three major errors made in living trusts that can lead to disaster later:
1. Failure to execute a will. The most important thing a will does is appoint a personal representative and name residuary beneficiaries. The personal representative is the person who speaks for the deceased person if the estate ends up in probate court. If no personal representative is appointed by a will, then the court may appoint a “public administrator” to be personal representative. Despite the title a public administrator is a private attorney who will charge the estate fees to act as the personal representative. A public administrator is a stranger to the family who does not know the deceased of the other family members and is not required to follow the family’s wishes.
2. Failure to properly designate the property in the trust. It may be unclear what property is in the trust and what is not. Trust property may be sold and other property purchased that may be deeded in individual names or held in joint tenancy. A probate court might have to determine after death what property was in the trust and what property was not. Property that was not part of the trust will pass by intestate succession and the heirs determined by state law, if there is no will.
3. Use of an irrevocable trust rather than a revocable trust. An irrevocable trust cannot be revoked or terminated by the person who created it. There are limited circumstances where an irrevocable trust is appropriate. Such a trust should not be used lightly because it can only be changed by a probate court.
Trying to avoid a will probate can often be far more expensive than processing a will through normal procedures. Since trusts are handled by the probate court any problems with them will land the parties in the same probate court they thought they were avoiding.