You have been thinking about a trust-based estate plan. Many people choose a trust-based estate plan over a will-based estate plan. In our practice, most of our clients choose trust-based estate plans because they want the protections that a trust provides that are not available with a will-based plan.
Trusts can include protections for minors to avoid probate court conservatorships, for young adults so that they do not go to the University of Corvette, for lazy beneficiaries so that they have to work in order to get a trust distribution, and for addicts so that their inheritance is not used to support their habit. Trusts can also be used to protect assets from claims by beneficiaries’ divorcing spouses and from claims by Bambi or Thor whom your surviving spouse re-marries after you are gone.
Special needs trusts are used to preserve governmental benefits of mentally disabled beneficiaries. The family cottage or farm can be protected and preserved for generations to come with a trust, as can be your family pets be taken care of for the rest of their lives. Trusts can be used to fund education costs of grandchildren or nieces and nephews or to provide for your favorite charities. Your beneficiaries’ creditors cannot touch their inheritances when properly maintained in lifetime trusts.
When fully funded, a trust will avoid probate and be kept private only among the trust beneficiaries Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust.
This week, we will discuss the two most common types of trust-based estate plans I see: bare bones forms-based “simple” trusts and fully-funded trust-based plans.
Bare Bones Forms-Based “Simple” Living Trusts. 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. This type of trust is by far the most common trust-based plan I see and the one used by trust mills and attorneys who are not estate planners because they are easy to prepare.
These trust forms are usually only five to twenty-five pages long. One common provision in these trust forms is one or two doctors determining your disability, instead of your loved ones or someone you choose.
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 and probate avoidance upon a beneficiary’s death. If everything in your trust is going to be immediately distributed after your death, 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 forms-based trust plans which still had empty blanks or had the blanks completed improperly.
Forms-based trusts rarely include the funding of your trust. That is why they are so cheap. However, in order to get all the benefits of your trust, it must be fully-funded. The estate planner leaves the funding up to you. Failure to properly fund your trust may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.
In my thirty 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 without assistance from a qualified estate planning attorney. Failure to have your trust funded can result in after-death probate costs of 5%-10% of the value of the assets going through probate.
You may be tempted to get a forms-based simple trust because it can be so 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 required documents such as financial and health care powers of attorney or a will. Although they are usually cheap, I still have seen fees charged for these unfunded 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 care 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, all at the lowest overall cost to you and your loved ones.
Your fully-funded trust-based plan has five major components, among others: revocable living trust, financial power of attorney, health care power of attorney, pour-over will and funding assistance. Instead of just slapping your name on a form, your documents are prepared using a document creation system that assembles the provisions needed for your plan from a huge database. More complete instructions customized to you can be included in your trust, which is typically 80-100 or more pages.
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, you are assured of not only avoiding probate court after your death, you avoid probate court appointed guardians and conservators during your lifetime. You and your loved ones also get much more protections than you can get with a will-based plan.
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 insureds.
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, since after-death administration costs are so much lower, fully-funded trusts end up being a bargain for most families. We have found in our practice that the overall costs of fully-funded trust-based plans, including the fess upfront to set up a plan, annual updates, after disability and after death altogether are less than 5% of the value of the gross estate, which is the low end of what just the after death probate costs could be.
You should expect to pay a minimum of $3,000 for the drafting and implementation of a fully-funded trust-based plan. Depending upon the work involved, these upfront costs could be $9,000 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 now for a fully-funded trust-based plan, or pay a lot more later to administer an unfunded forms-based simple trust plan through probate. 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, 2016 in The Times Herald newspaper, Port Huron, Michigan as: With Trust-Based Estate Planning Fees, You Get What You Pay For