June 2, 2011

Living Trust Myths

The following are some myths I have seen that are related to living trusts.

Fiction: Writing a living trust will, by itself, avoids estate taxes for the decedent’s estate
Fact: Writing a living trust only allows a person to reduce or eliminate estate taxes. In order to reduce or eliminate estate taxes, a person needs to take affirmative steps. For example, assume that husband and wife establish an A/B trust in 2007. At the time of the husband’s passing in 2011, the estate is worth $8M. For reference, the estate tax in 2011 is $5M. Even though husband and wife wrote an A/B trust, wife will need to take affirmative steps to eliminate the estate tax by funding her husband’s B trust with the estate tax exemption amount, $5M, and then allocating the remainder to her trust, the A trust. In sum, simply because husband and wife wrote an A/B trust does not mean that an estate tax issue is resolved.

Fiction: Assets held in a revocable trust do not count towards the resource threshold for Medi-Cal eligibility.
Fact: If a trust is revocable, the assets of the trust are considered an available resource for the Medi-Cal applicant. 42 USC §1396p(d)(3)(A); 22 Cal Code Regs §50489.5(e); Medi-Cal Eligibility Procedures Manual (MEPM) Letter No. 192 (Dec. 18, 1997), 9J-73. However, assets held in a testamentary trust for the Medi-Cal beneficiary do not count towards eligibility requirements. 42 USC §1396p(d)(2)(A); 22 Cal Code Regs §50489.5(a)(1). For reference, a testamentary trust is a trust created at someone’s death for the benefit of another person. Conversely, a revocable trust is one created during someone’s lifetime that benefits them.

Fiction: A non-attorney, as trustee of a trust, can sue on behalf of the trust.
Fact: A non-attorney trustee cannot litigate on behalf of the trust in propria persona against a third party. Ziegler v Nickel (1998) 64 CA4th 545. For example, if a trust owned a vacant lot and a person routinely trespassed on the vacant lot, a non-attorney trustee would be required to hire an attorney to prosecute the trespass action. This is similar to legal action taken by a corporation, in that a corporation must be represented by an attorney in court as well.

Fiction: An irrevocable trust can never be modified.
Fact: Even though it sounds logically inconsistent, California law permits an irrevocable trust to be modified in the following circumstances: all beneficiaries consent (Prob C §15403); all beneficiaries and the settlor consent (Prob C §15404(a); at least one beneficiary and the settlor consent (Prob C §15404(b); principal is uneconomically low (Prob C §15408); there are changed circumstances (Prob C §15409); and to conform the trust to tax laws.

Fiction: A trust can last forever.
Fact: Only certain trusts can last forever. For example, a charitable trust may last forever provided there are ample funds. Prob C §21225(e). Conversely, a non-charitable trust will most likely last at most 90 years because of the Uniform Statutory Rule Against Perpetuities. Prob C §21225(b).

Fiction: The signatures that execute a trust require notarization.
Fact: There is no California law that says that a trust has to have notarized signatures. However, no competent attorney will allow a client to sign a trust without a notary present because it is best practice.

Fiction: Attending a living trust seminar is always a good place to find answers about trusts.
Fact: Living trust seminars are often facades to sell annuities to unsuspecting victims. The organizers of these seminars, known pejoratively as "living trust mills", are usually insurance agents, not attorneys, who use the allure of a trust as a Trojan horse to peddle annuities. This lawsuit filed by the California Advocates for Nursing Home Reform succinctly summarizes the scam that is perpetrated by these living trust mills.