21 September, 2017
Mrs. Gladys Holsum received an invitation to a free educational seminar about estate planning. At the seminar, after a long parade of horribles, Gladys was told she needed a revocable trust to avoid an impending calamity. She was told that a revocable trust would: (1) save her money by avoiding an expensive probate; (2) save time by avoiding a long an protracted probate administration; (3) protect her family from claims of creditors; and (4) afford privacy because nothing about the trust is filed in the public record. Is any of this true? A lot of misinformation is circulating about revocable trusts. Here is some straight scoop.
The concept of a revocable trust originated in California. At the time, probate attorneys in California were paid a percentage of the value of the estate. If you owned a house in California you were usually a millionaire because of the high cost of housing. If a probate attorney was paid two (2%) percent of the estate value, it would cost twenty thousand ($20,000.00) dollars to probate a $1 Million house. To avoid this cost, a creative attorney figured out how to bypass the probate process – with a revocable trust.
A revocable trust is fairly simple device. First, establish a trust. Second, transfer all assets to the trust. That's it. A trust is a "juridical person" that can own property just like a business entity. Upon the death of the person that established the trust, the assets of the trust are distributed to whoever is identified in the trust agreement. By effecting a distribution of assets through a trust at death, the probate process becomes unnecessary (unless the trust is not properly funded, which is often the case).
Probate is simply the judicial process of transferring property from the estate of a deceased person to the heirs or legatees of the decedent. In Louisiana, we refer to probate as a "succession." To learn more about the process, which is actually quite simple and inexpensive, click here.
The total cost of a revocable trust is usually more than probate. In real terms, you pay twice for a revocable trust, but only once for a probate. First, there is a front-end cost to establish and fund the trust. Secondly, there is a back-end cost to “administer” the trust after the death of the settlor.
Front-End Cost On the front-end, many promoters charge between $3,500 and $8,000 to establish a revocable trust. If the client is responsible for funding the trust (which would be a mistake), the cost would be closer to the lower end of the scale, which is still expensive. It pays to shop around. Back-End Cost The back-end cost of a revocable trust relates to “defunding” the trust after the death of the settlor. This defunding process serves the same purpose as a probate – to put the legatees into possession of the assets. This back-end process is referred to as a “trust administration.” Costs of “administering” a revocable trust, include attorney fees, court costs (for filing and recording transfer documents and/or a trust extract), trustee fees (unless waived in the trust), accounting fees, appraisal or valuation fees, bond fees (unless waived in the trust) and other miscellaneous expenses. For the sake of comparison, typical probate costs include most of the same expenses as a trust administration. Comparing apples, the typical costs can be broken down as follows: Revocable Trust Last Will and Testament $3,500.00 - $8,000.00 $750.00 - $2500.00 Trust Administration Probate Recording Cost - $400.00 Court Costs - $400.00 Attorney Fees - $750 - $5,000 Attorney Fees – $750 - $5,000.00 Trustee Fees (usually waived) Executor Fees (usually waived) Trustee Bond (usually waived) Executor Bond (usually waived) Accounting Fees (same) Accounting Fees (same) Appraisal/Valuation Fees (same) Appraisal / Valuation Fees (same) Of course, costs will vary, but the total cost of a revocable trust is often more expensive than a probate. So the decision to purchase a revocable trust should not be driven by cost. It should be driven by other factors.
Promoters often claim that a probate is time consuming and protracted. A probate can be completed inside of a week - if all the information is available. It takes about the same amount of time to administer a revocable trust – if all the information is available and the trust was properly funded. The process of administering a revocable trust and the probate process are actually quite similar. The difference is that the transfer of assets is “automatic” by operation of law in the probate process, and “manual” through the preparation and filing of deeds of transfer with a trust administration. In the absence of trust or estate litigation, it takes about as long to administer a revocable trust as it does to complete the probate process, so the decision to purchase a revocable trust should be based on other factors.
A revocable trust provides zero asset protection during the life of the person who establishes the trust. Upon the death of the settlor, the trust becomes irrevocable. At this point, the level of protection afforded the beneficiaries will depend on how well the trust is designed and drafted. In real terms, very few trusts are properly designed for asset protection because most are styled as some form of a support trust or terminate during the life of a named beneficiary. To learn more about the problem with discretionary support trusts, click here.
A selling point to promote the need for a revocable trust is the seeming transparency of the probate process, which requires the filing of a “detailed descriptive list of assets and liabilities” (“DDL”) of the decedent. An inventory of assets and debts does not need to be filed with a trust administration. As such, a revocable trust does afford more privacy than a Louisiana succession (assuming anyone has an interest in rummaging through court records to find out what you own). However, this can be easily masked in two ways: 1. The LLC Solution If all assets of a decedent are transferred to a limited liability company prior to death, the only thing that will appear on the DDL will be a one line reference to a limited liability company along with a dollar value to establish a new tax basis. None of the assets owned by the LLC would be identified. The use of LLCs in estate planning is becoming more common and structured properly using layering techniques, an LLC is an excellent asset protection vehicle. 2. The Alaska Solution A handful of states will allow non-residents to elect to probate their foreign wills by voluntarily submitting to the laws of their jurisdiction. Alaska is one of those states. As such, a Louisiana resident can elect to probate a Louisiana will in Alaska. It would take a team of investigators and significant financial resources to locate probate records filed in any number of the many boroughs of Alaska. If privacy is a concern, just go North to Alaska like the late great Johnny Horton used to sing. [UPDATE: Louisiana Law has change effective January 1, 2018. A revocable trust is no longer required to maintain privacy in Louisiana. Click here to learn more.] A Word on Will Contests Promoters sometimes suggest that a revocable trust is harder to challenge than a will. Any donation, whether during life to a trust or after death by will, may be challenged within five years of the date of the transfer. A will can be challenged within five years of the date of filing the will into the probate records. A revocable trust starts the clock on a potential challenge sooner - on the date of the donation to trust. A handful of states (four to date) allow “pre-mortem” probates. Alaska is one of those states, which allows a person to file a will prior to death to start the clock early (during life) on any potential will challenge. If there is any concern about a potential challenge to a will (e.g., a child is being disinherited), then Louisiana residents can utilize the pre-mortem probate process of Alaska to avert the potential challenge well in advance of death. This process would completely avert any potential challenge to the validity of a Louisiana will.
The decision to utilize a revocable trust should not be based on the relative cost or administrative burden of a probate, nor should it be based on asset protection goals. Privacy issues present a more compelling argument. However, this can be addressed by utilizing a limited liability to mask personal assets and/or by selecting an alternative venue, such as Alaska, for a probate. [UPDATE: Louisiana Law has change effective January 1, 2018. A revocable trust is no longer required to maintain privacy in Louisiana. Click here to learn more. Revocable trusts are useful and appropriate in certain circumstances. When considering whether a revocable trust is right for you, consider obtaining a second opinion. Many reputable estate planning law firms, including Theus Law Offices, do not charge for an assessment. So feel free to contact us if you are considering a revocable trust. Theus Law Offices provides a complete range of estate planning services, including wills, trust, probate, successions, estate administration and probate litigation. If you need a Louisiana wills attorney, trust attorney, estate lawyer or probate attorney in Alexandria, Lafayette, Lake Charles, Baton Rouge, New Orleans, Shreveport, Monroe, Central Louisiana or elsewhere, let our estate planning lawyers and probate attorneys help you.
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