Articles of Interest: Wills, Trusts, and More

CHANGING THE TERMS OF A LIVING TRUST

I've written about revocable living trusts before. As you might remember, I'm not really a fan of living trusts.

A living trust is a Will-substitute. In other words, people use a living trust like a Will - it is a document designed to pass their property to others after they die.

People want a living trust, instead of a Will, for one of two reasons. Primarily, they think that by using a living trust their estate will avoid probate, which they view as a difficult and costly process. Secondarily, they believe that the use of a living trust reduces or eliminates death taxes. The overall theme is simplicity - people think that a living trust will simply their estate for their heirs.

As I've mentioned, a living trust, typically, does not allow an estate to avoid probate, and a living trust, in and of itself, does nothing to reduce or eliminate death taxes. In fact, there are no planning techniques that a person could not do through the use of a Will that he could do using a living trust.

What a living trust does do, at least in my opinion, is make a person's life more complicated than it has to be and costs the person more money.

Stated simply, to draft and to implement a living trust - which inevitably involves re-titling a person's assets so that the living trust holds title to those assets - costs more money than having a Will drafted. Once the living trust is drafted and a person's assets are titled into the trust, their life is more complicated for two reasons.

The first reason is that people don't understand trusts. Even people who want a living trust typically fail to understand the workings of a trust instrument. Assuming the person who has a living trust drafted never has to change the terms of the trust, he will probably also never understand exactly how the trust works.

This lack of understanding will be a source of confusion and concern, and could be the source of problems. For instance, if he doesn't understand how a living trust works, he might not fully understand the implications of owning assets outside the living trust. If he sets up a living trust twenty years before he actually dies, in that twenty-year period of time, he might open an account (bank or brokerage) in his name. This account would then not be owned by the living trust and would cause him to have probate property at the time of his death, which would mean that his estate would have to go through probate.

Probate, of course, being the thing that he was trying to avoid by having the living trust - and paying for the living trust - in the first place.

The second reason is the problems associated with modifying a living trust. I typically don't recommend living trusts and I almost never recommend a codicil to a Will, as opposed to having a whole new Will drafted. I don't recommend codicils for several reasons. One of the reasons is the confusions codicils can cause.

If you draft a Will, then modify that Will later, using a codicil, the person who finds your Will might not find the codicil. In that case, the modification that you hoped to accomplish using the codicil will never be carried-out. The person who finds your Will might not like when you said in the codicil, so he might just toss the codicil in the trash. Who's to know?

With a living trust - if you're one of the few people who actually bother to re-title your assets into the living trust, which is the only way a living trust has the hope of helping you avoid probate - you're assets are titled into the trust. So, you can't just draft a new trust, because you would then have to re-title all of your assets again, this time into your new trust.

This causes attorneys to draft amendments to existing living trusts. I just finished drafting the fifth amendment to a living trust. My client first had a living trust drafted ten years ago and has changed it five times already.

To say the least, it's messy. Five amendments. If my client had a Will, I could have just drafted a whole new Will, and he wouldn't have to worry about the Wills that came before this one. Now, after he dies, his trustee will have to find his living trust and the five amendments to the trust.

Is this simplifying things? I don't think so.