There are a lot of different types of estate plans being sold out there. It is best that you know what you are buying. In last week’s column, we discussed the three most common types of will estate plans that I see: simple wills, wills with testamentary trusts and will based plans. The absolute minimum that I recommend that everyone should have is a will based plan, which consists of financial and healthcare powers of attorney (“POAs”) and a will.
However, your estate plan may require additional protections that are not available with a will based plan. These include protections for minors, young adults, re-marriage, divorce, lazy beneficiaries, mentally disabled beneficiaries, the family cottage, family pets, higher education funding, favorite charities, beneficiaries with addictions, and if fully funded, avoiding probate. This week, we will cover the two most common types of trust estate plans I see: bare bones forms based “simple” trusts and fully funded trust based plans.
Bare Bones Forms Based “Simple” Living Trusts. This type of trust is by far the most common trust I see. If you have this type of trust, your name, successor trustees and beneficiaries are inserted into a form, which you then sign. Your trust is the same as everyone else’s whose trust was prepared with the form. One common provision in these forms is one or two doctors determining your disability, instead of your loved ones.
Another common provision that these forms trusts often have is the immediate distribution of your trust property to your beneficiaries upon your death. I call these trusts a “will substitute” because immediate distributions are what simple wills provide. With immediate distributions, your beneficiaries lose many of the protections that trusts can provide, such as creditor protection, divorce protection, re-marriage protection, etc. If you all you have in your trust are immediate distributions, why have a trust?
If you have one of these forms based trusts, make sure all the blanks are filled in on the form. I have reviewed many signed estate planning form documents which still had empty blanks or had the blanks completed improperly.
However, in order to get all the benefits of your trust, it must be funded. Funding includes the proper titling of assets in the name of your trust or individual names and/or proper naming of your trust and/or individuals as beneficiaries and additional insureds. Failure to properly fund your trust will cause unintended results, which could include probate, distributions not in accordance with your instructions and other than you planned, additional taxes and additional administrative and legal expenses.
Forms based simple trust plans rarely include the funding of your trust. They sometimes do include the partial funding of real estate with Quit Claim Deeds, which may void your title insurance or force the entire pay-off of your mortgage loan. Also, if your real estate is put in your trust and your property insurance is not updated to include your trust, your real estate may not be insured.
Most forms based simple trusts do not include trust funding, but leave all your trust funding up to you. In my twenty-six years in the practice of law and preparing estate plans, I have not found anyone yet who has been able to properly complete the trust funding on his or her own. Failure to have your trust funded can result in probate fees of $1,000 to $20,000, or more.
You may be tempted to get a forms based simple trust because it can be cheap up front. I have seen fees as low as $500 for this type of trust. You get what you pay for. It is cheap for three main reasons, 1) names are just slapped on a trust form, 2) there is little or no trust funding, and 3) it may not include other documents such as financial and healthcare POAs or a will. Even though they can be cheap, I still have seen fees charged for these forms based simple trusts exceeding $4,000.
Forms based simple trusts are generally cheaper than fully funded trust based plans up front, but are much more expensive to administer after death. It is like the old Fram oil filter commercial, pay me now or pay me a lot more later.
Fully Funded Trust Based Plan. I believe a better alternative to a forms based simple trust is a fully funded trust based plan. With a fully funded trust based plan, you are in control while you are alive and well, you and your loved ones are taken of in the event of your mental disability, and after you are gone, you leave what you have to whom you want, when you want, the way you want.
Your fully funded trust based plan has five major components: revocable living trust, financial POA, healthcare POA, pour-over will and funding assistance. With a fully funded trust based plan, you not only avoid probate court appointed guardianships and conservatorships during your lifetime with your POAs, you also can get much more protections than a will based plan. In addition, you can have complete after-death probate avoidance, creditor protection, divorce protection, re-marriage protection, education trusts, pet trusts, cottage trusts, addiction protection, special needs trusts, incentive trusts, minor protection, charitable trusts and more.
If you have a trust, it makes sense to put your stuff in it. This is the funding of your trust. Properly funding your trust can be a lengthy and tedious process and typically takes more time and effort to accomplish than preparing the estate planning documents themselves.
With a fully funded trust based plan, each account, stock, bond, parcel of real estate, vehicle, IRA, retirement plan, annuity, everything you own, will be properly titled and/or have proper beneficiary designations and additional insureds. If for some reason, you forgot about an asset and it did not get funded into your trust, with a fully funded trust based plan, your survivors can use your pour-over will as a back-up to pour-over those assets into your trust through the probate process.
This trust funding sounds like a lot of work and a lot of money. Although fully funded trust based plans generally cost more up front than forms based simple trusts, they end up being a bargain for most families. Since after death administration costs are so much lower with fully funded trust based plans, the overall costs, both up front and after disability and death, are generally lower than forms based simple trusts.
You should expect to pay at least $3,000 for the drafting and implementation of a fully funded trust based plan. Depending upon the work involved, these upfront costs could be $6,000 or more. If you are paying less, you are probably getting less, much less now, and your loved ones will end up having to do a lot more work and pay the big bucks after your disability and/or death.
When it comes to trust plans, you choose. You can pay me now for a fully funded trust based plan, or pay me a lot more later to administer a forms based simple trust. A forms based simple trust may initially seem like a bargain, but it is rarely a bargain at all. When you look at overall costs to you and your loved ones, the real bargain is usually the fully funded trust based plan.
By: Matthew M. Wallace, CPA, JD
Published edited May 20, 2012 in The Times Herald newspaper, Port Huron, Michigan as: In estate planning, money matters