July 18, 2009

Living Trust Myths

These are the most common misperceptions I have been asked, read and heard about in regards to living trusts:

Fiction: If I hold assets in a living trust, creditors will not be able to attach their claims to it, thereby making me judgment-proof.
Fact: Creditors can attach their claims to assets you hold in a revocable trust for your benefit. Prob C §15304(a). For example, suppose that a substantial judgment was rendered against you in a California court because you negligently ran over your neighbor’s beloved dog Muffy. The fact that you transferred all of your assets into a trust for your benefit would not prevent your neighbor from attaching the judgment to the assets held in trust per Prob C §15304(a).

Fiction: A living trust is the perfect estate planning document.
Fact: A living trust is usually the best estate planning document given your range of choices, but is most certainly not a perfect estate planning document. For a single person, there are essentially three ways to transfer property at death: probate, non-probate transfers (joint tenancy real property, payable on death accounts, life insurance designations, etc.) or a trust. For a married person, the surviving spouse is entitled to use a spousal probate petition as well as the three aforementioned procedures. While each of the methods has its strengths and weaknesses, a trust provides the best combination of flexibility, cost and timing in comparison to the others. Again, writing a living trust is not a panacea, rather it is best option in most cases.

Fiction: I need to have a living trust done because I heard it is the smart thing to do.
Fact: If you do not own a home, have children or have more than roughly $100,000 in assets it is not recommended to draft a living trust because there are quicker and cheaper methods to administer your estate upon death than through a trust.

Fiction: A living trust requires little or no post-death administration.
Fact: This is the most commonly propagated myth about living trusts. Many individuals have turned to living trusts to avoid the necessity and cost of probate, under the impression that administration will be easy, inexpensive and expedient. However, the administration of a trust typically requires the assistance of professionals: lawyer, accountant, appraiser, etc., who require appropriate compensation. Granted the administration of a trust is commonly more expedient and economical than probate, it still nonetheless is similar to probate: assets need to be collected, debts need to be paid and the remaining assets need to be distributed.

Fiction: Once I draft and execute a trust, the process is complete.
Fact: A valid California trust requires trust property. Prob C §15202. Thus, the person who created the trust needs to transfer some asset into the trust in order for it to be valid. For example, suppose John Smith created a trust and owned a home. A grant deed that transfers title from John Smith to John Smith, Trustee of Smith 2009 Revocable Trust dated 6/12/09, would provide the trust with the required element of property.