As an estate planning attorney, I’m asked almost weekly by clients whether they need a living trust. In the majority of cases, after evaluating their particular circumstances, my conclusion was that they do not need a living trust. Before I explain in detail later on in this article my reasons for my above stated conclusion, let me provide an except from a Washington Court of Appeals case ruled in August, 2022, that supports my conclusion. The case title is Cla Estate Services v. State Of Washington. The Court of Appeals rules: “CLA Estate Services, Inc. … began offering free estate-planning seminars for seniors in Washington in 2008. These seminars stressed to consumers that ‘Revocable Living Trusts’ (RLTs) were a superior means of estate distribution relative to probate…The Office of the Attorney General (AGO) sued CLA for violations of the Consumer Protection Act…the [lower] court concluded that CLA unlawfully misrepresented the benefits of RLTs compared to probate,…the presentations and workbooks at CLA’s seminar gave the deceptive net impression ‘that a revocable trust is preferable regardless of individual circumstances.’ The [lower] court found that the workbook gives the impression that wills lead to ‘WORRY,’ while trusts lead to ‘PEACE OF MIND,’ based on the workbook’s representation that wills are subject to court control, are public, take a long time to resolve, and leave families vulnerable, while trusts avoid all these issues. The [lower] court found that this impression was deceptive because it ‘misrepresents Washington law, the Washington probate process, and the relative benefits of revocable living trusts in Washington.’ As discussed above, these findings are supported by substantial evidence. We [i.e. the Court of Appeals] therefore hold that the [lower] court correctly concluded that this practice on CLA’s part was deceptive.”
Who Needs a Living Trust? One should only want a trust if the benefits far outweigh the burden. Whether a person needs a living trust depends on the individual’s specific circumstances. For most people with assets in Washington State and not in other states, a living trust is unnecessary, costly and burdensome. Rather, a “testamentary trust” is a far better option than a “living trust.” A trust comes in many forms. A testamentary trust is embedded in the Last Will and there’s no management involved during the trustor’s life time.
When I ask a client why they want a living trust, most would say that they don’t know except that they read online that says a living trust is good. Many clients say that they want a living trust to avoid probate although they don’t generally know why avoid probate is important. It’s true that a living trust would avoid probate but only if the living trust was managed properly. Otherwise, a living trust fails and probate is not avoided. This happens rather often.
How Does a Living Trust Avoid Probate?
The probate process is a court process administered in the state where a deceased person’s assets are located. When a person dies, the estate generally is composed of “probate assets” and “non-probate assets.” An example of a probate asset is real estate. When an owner of a real estate dies, the decedent’s interest in the real estate freezes and only an executor appointed by the probate court has the authority to buy/sell or otherwise manage the real estate. On the other hand, if prior to death, the decedent created a living trust, and transfer the real estate (and/or other assets) into the living trust, then the trustee named in the trust can continue to manage the real estate (and the other assets) without involving the probate court. This is not as simple as it’s being stated here. The cost of creating a living trust is high. After creating the living trust, there’s additional costs to transfer assets into the trust. With real estate, one must hire an attorney to create a deed and pay recording fee as well. If the owner of the real estate wants to refinance it, most lenders require that the title be transferred out of the living trust to an individual. If after the refinancing, one fails to transfer the title back into the trust, then the trust fails, and probate is required after the owner dies. Moreover, even if one is able to avoid probate, most people don’t know how to carry out their responsibilities as a trustee or how to manage a trust, so that the trustee needs to hire an attorney even without the probate requirement, there’s additional expenses that could have been avoided had there been a probate process. In the end, even though probate cost is avoided, the trustee will incur attorney fees assisting in handling the trust assets.
Is Probate Avoidance Important?
It depends. The probate process is a court process administered in the state where a deceased person’s assets are located. This is governed by state law so it depends on the state. In Washington State, the probate process is very efficient, both in cost and time so that if one compares the time and costs of managing a living trust or going through probate, the probate process is generally much more efficient and cost effective than managing a living trust. Therefore, for clients whose assets are located in Washington State, a living trust is more burdensome than probate and a living trust is unnecessary.
How About Creating a Trust to Avoid Taxes?
It depends on what types of taxes we are talking about (estate tax, income tax, gift tax???). There are very limited ways one can legitimately avoid taxes by transferring assets into a trust. Beware of companies that promote trust packages to avoid taxes. Here’s a link to an IRS article about abusive trusts that can land a taxpayer in serious trouble: https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-talking-points