APRIL 6, 1998 VOLUME 5, NUMBER 40
Living trusts have become the most popular estate planning device in this decade. Lawyers, financial planners, insurance agents, bankers and investment firms often tout the value of living trusts. It is often difficult to see through the hype and determine whether a living trust is really appropriate for your specific circumstances, and that difficulty is not eased by the fact that the trust salesperson frequently misrepresents the usefulness of these popular planning devices.
First, some definitions. The person who establishes a trust is usually called the “trustor” or, sometimes, the “settlor.” A couple or any group of people can be trustors of the same trust. The “trustee” is the person who actually handles the trust assets and follows the trust’s instructions regarding investment and distribution. The “beneficiary” is the person (and there can be multiple beneficiaries) entitled to receive distributions from the trust; beneficiaries can be income beneficiaries (and entitled to receive income during the life of the trust) or residual beneficiaries (and entitled to receive the trust’s assets at some future time, such as upon the death of the trustor). Often, the three roles of trustor, trustee and beneficiary are filled by the same person or couple.
A “living” trust is any trust established during the life of the trustor, regardless of whether the trust is revocable or irrevocable. A trust which is only created upon the death of the trustor (usually by the decedent’s will) is called a “testamentary” trust.
When most people discuss a living trust, they are referring to a revocable living trust, usually with the trustor serving as trustee and provisions for distribution of the trust’s principal at the death of the trustor. Part of the confusion about trusts, however, stems from the fact that there are also a wide variety of irrevocable, special purpose and other trusts, any of which can be described as living trusts. It is often difficult to determine what (if any) special provisions should be considered to help minimize taxes, probate costs and family problems for a particular trustor.
Because of the strong desire of many individuals to avoid the probate process upon their deaths, the sale of living trusts has become a growth industry. As noted in a recent Wall Street Journalarticle, however, many non-lawyer organizations have gotten into the business of selling trusts without having the tax and estate planning background necessary to make reasonable decisions and give good advice. These “trust mills,” as they are often called, often “churn [trusts] out without considering whether they make sense for the particular individual.” Perhaps more dangerously, theWall Street Journal, points out that the trusts are “often sold by people who are unauthorized to practice law and have no expertise in estate planning, [and therefore] the dubious trusts can cost estates thousands of dollars in unnecessary taxes.”
The trust mills often follow predictable patterns. They advertise free estate-planning seminars at hotels, or convention halls, usually including a continental breakfast or similar inducement. Once potential customers have been drawn in to the seminars, salespeople cite exaggerated probate costs, unlikely tax scenarios and irrelevant will contest proceedings to frighten attendees into considering living trusts. They usually are encouraged to schedule follow-up appointments, where they may be sold a fill-in-the-blanks form without regard for their individual tax or personal circumstances. The ultimate irony: most trust mills charge about the same (or slightly more) than the prevailing local rate for attorneys with sufficient legal training to tailor trust terms to the specific needs of the client.
Several states have begun actions to force trust mills out of business. In Arizona, however, the industry is thriving, without any apparent check on the misrepresentations or exaggerations. TheWall Street Journal article recommends that you consult an attorney to determine whether you even need one of these specialized estate planning tools, and then to draft it if you do.