The Connecticut Estate Planning Blog

Attention All Summer Cottage Owners!

Since it's still early January it might be a little early to start thinking about your summer cottage.  I always try to avoid catching "spring fever" until late February at the earliest!  But if you own real estate outside the state of Connecticut then I'd like to take this opportunity to alert you to a potential "probate pitfall" that may be an issue for you.

When you pass away with real estate in your name (either solely or jointly) your name has to be officially removed from the title to the property.  Otherwise, you have what's called a "cloud on title" which will make it impossible to pass on good title to someone else if someone tries to sell or transfer the property.  The only way to remove a decedent's name from the property is to go through a probate procedure, the extent of which will be determined by the size of the estate and how it's titled.

This process of removing a decedent's name from a deed is true in all states.  So...if you happen to own real estate in more than one state then you will be leaving your family with not just one probate headache, but multiple probate headaches since each state will require a probate process.  Yikes.

Now, I don't agree with many attorneys who believe that every person needs a revocable living trust no matter what.  But in a case where a client owns real estate in Connecticut and another state, I almost always recommend a living trust, and I do so strongly.  That's because if you set up a living trust and you transfer ownership of both houses into the name of the trust then you end up with no probate for either property instead of double probate.

It's also worth mentioning that I'm talking about probate, not taxes.  Each state would be able to levy an estate tax, if the state has one, and the trust wouldn't avoid that (unless it has some special tax planning provisions).  Still, avoiding double-probate for your loved ones is usually more than enough reason to set up a living trust to own both houses.

Beware of "Living Trust Mills"

I try my best to keep an ear to the estate planning blogosphere, and one of the more recent issues in the world of estate planning is the surfacing of "living trust mills".  The loose definition is an organization that markets revocable living trusts (usually by way of a lunch or dinner seminar at a nice restaurant) and tries to convince the public that living trusts are documents that virtually everyone needs and purposely misrepresents how estate tax and the probate courts operate in order to make living trusts more appealing.  The result is people (usually seniors) spending four-figure amounts on estate planning documents that they don't actually need.

The growth of these mills are evident in recent class action lawsuits initiated by clients who claim that they were misled when they purchased living trusts.  And Kudo's to Florida estate planning attorney, David M. Goldman for listing recent articles on these scams.   

I have posted on the danger that financial predators pose for our elderly population, but it's deeply saddening to learn how prevalent such predators have become in my own industry. 

I will throw my two cents into the blogosphere discussion by saying that there certainly are a lot of people who could benefit greatly from living trusts, specifically if the focus is avoiding the probate process.  But I would argue that they are not documents that everyone needs.  Perhaps these living trust marketers genuinely believe that living trusts should be as widespread as living wills. But I don't agree, particularly since trusts are much more expensive than wills and require much more leg-work in regards to re-titling assets into the name of the trust.  And I don't believe in counseling my clients to take on the added expense and hassle if they truly don't need to do so.

So...if you do attend one of those living trust seminars, I strongly recommend that you look into the background and experience of the presenters and be very wary of anyone claiming that there is a universal need for living trusts.

Can I Name a Trust as an IRA Beneficiary?

It wasn't too, too long ago when it was downright dangerous to name a trust as a beneficiary of an IRA.  As far as the rules were concerned, a trust could not have a life expectancy, and therefore all of the IRA funds would have to come out of the account and go to the trust within just 5 years of the death of the IRA owner.  All of the distributions during those 5 years were taxable as income and the wonderful benefits of potentially stretching out the tax liability over a much longer time period were lost. 

But suffice it to say that the rules have been changed...in a big way.  And although the rules changed back in 1997, I'm surprised at how many clients still have the "old rule" mentality a decade after the old rules were overhauled.

Nowadays, the tax deferral benefit is still available even if the IRA beneficiary is a trust and the life expectancy of the trust beneficiary is used to calculate the required minimum distributions each year.  If there are multiple trust beneficiaries, then the life expectancy of the oldest beneficiary is used.

However, the following requirements must be met:

1.  The trust is valid under state law (this is a relativley low hurdle to get over).

2.  The trust becomes irrevocable upon the death of the IRA owner.

3.  It's clear who the trust beneficiaries are.

4.  The IRA custodian (the financial institution managing the IRA) receives a copy of the trust by October 30th of the year immediately following the year in which the IRA owner dies.

Although the above requirements are not particularly onerous, it's always a good idea to chat with your financial planner, accountant and estate planning attorney before designating a trust as your IRA beneficiary to make sure you comply with all of the requirements.  They would also apprise you of any developments in the law that you will need to knwo about.  This is definitely not an area in which you want to make a mistake...the consequences could be very costly for your beneficiaries.

Vital "Step #2" of the Living Trust Process

I've published posts on the overall scheme in regards to revocable living trusts (Part I and Part II), but the issue of funding your living trust is so important that it warrants a post of it's own.

It's essential to remember that setting up your living trust is a two-step process. Step #1 is having the document prepared and formally executing it.  Step #2 is funding it.  Too many clients complete Step #1 and think that the process is over when they are really only halfway done.  If you do not complete Step #2 then your estate will have to go through probate, which would obviously be a shame since the main reason for setting up a living trust is to avoid probate.

In regards to your real estate, your attorney should prepare a "quitclaim deed to trust" for you to sign which will transfer ownership of your real estate to your living trust, thereby funding the trust with your real estate.  This normally takes place at the same time that you execute the trust itself.

As far a bank and investments accounts go, you will usually just need to fill out and sign a one-page document.  Again, just like with the real estate, you are changing the title to the account so that the records of the financial institution indicate that your trust is now, technically, the owner of the account.

Please note that anything that has a designated beneficiary (life insurance, qualified retirement accounts, annuities, etc.) are already set up to avoid probate, regardless of whether you have a living trust.  But it is generally a good idea to name your trust as the beneficiary of these assets, especially if you are a married couple and your attorney has set up credit shelter planning in your trusts to address estate tax concerns or if you have set up trusts for children in your living trust.  Be sure to check with your attorney.  Again, remember that this would be a change of beneficiary, not a change of ownership.  Closing one of these accounts out and opening a new one in the name of your trust might trigger unnecessary penalties and taxes.

"Do I Really Need a Living Trust?" (Part II)

Now that we have a general idea of what a living trust is...do you really need one?

Many estate planning lawyers will tell you that essentially everyone would be better off with a trust instead of a will, but I disagree.  You need to remember that there are some downsides to having a living trust.  First, your legal fee will be higher.  Even for simple trusts you're probably looking at a four-figure fee instead of a three-figure fee for a will.  Then there is some legwork involved in regards to "funding" the trust (or re-titling your assets), which is a step that you do not need to take with a will.  This can be a significant time commitment if you have a bunch of accounts spread out among many different financial institutions.

So when is the higher cost and extra work warranted? 

First, I would say that if you own real estate in another state (many of my clients have a condo in Florida or a cottage on the Cape) then the need for a living trust is nearly a given.  The reason is that if you die without a trust then your family will have a "double probate" situation...a full-blown probate process in Connecticut and the other state.  This is an administrative headache that you should try to avoid at all costs.

Second, if keeing your estate planning private is a priority then a living trust is the best way to go.  Marilyn Monroe's Will is all over the Internet for everyone to see because a will is a public document after you die.  Literally, anyone can walk in off the street, go to the probate court and ask to see a copy of your will without giving a reason why.  Trusts are private documents.

Finally, if you have a relatively small and straightforward estate then going through probate shouldn't be a big deal, regardless of the bad press that the Connecticut probate court system has received over the last few years.  If you have a large and complicated estate then you should at least consider setting up a living trust.

Please remember the following important facts about trusts: (1) even if you have a fully-funded trust, upon your death your successor trustee will still need to file a few documents with the probate court, including an estate tax return even if no tax is due, (2) a simple living trust, with no credit shelter planning, does not avoid estate tax, and (3) even if you have a trust the probate court will still be entitled to charge a probate fee based on your gross taxable estate, which most of my clients are unpleasantly surprised to hear.  In other words, living trusts do not avoid probate court fees.

Hopefully this post and the previous one has given you a better idea of what trusts are and how they work.  But you should not determine whether you need one or not until you sit down and discuss them with an estate planning attorney.

"Do I Really Need a Living Trust?" (Part I)

Based on a lot of e-mail messages I have been receiving recently, this is the post that a lot of readers have been looking forward to...some honest commentary on how vital it is for one to own a "Revocable Living Trust" (RLT).  Public interest in RLT's has been running high for the last several years.  This interest has been fueled a great deal by some attorneys who convince every client that they absolutely have to own one.  They create this concept of RLT's as documents that can do accomplish everything for you short of slicing vegetables.  This isn't the case because every client is different and RLT's simply are not for everyone.

First, we should start with a quick sketch of how RLT's work.  When you sign an RLT you essentially create a legal entity that is separate and apart from yourself, and it is a document that directs how and where the trust assets are distributed when you die, just like a will does.  You then transfer ownership of your assets (bank accounts, investments, real estate, etc.) into the name of your RLT.  So when you die and the Probate Court wants to know what you owned when you passed away so that it can go through the probate process, the answer is that, technically, you owned nothing...your RLT owned eveything.  Therefore, no probate. 

Here is a message well worth repeating:  Planning with living trusts does not end when the trust documents are signed (which is the case with wills).  Please notice that a vital step in this process is actually putting assets into your trust, which essentially means re-titling certain assets so that they are legally owned by your trust.  Otherwise, you'll end up going through probate and defeating the primary purpose of having a trust.  In other words, there are two very important steps to this process.  Skipping step #2 (funding the trust) is, hands down, the most common mistake made with living trusts...and it's a big one!

Please note that it is extremely important to sign a "pour-over" will along with your trust.  It is a very short and simple will which simply says that upon your death, anything that is not already owned by your trust is poured over into your trust.  This ensures that all of your assets are distributed in accordance with the instructions in your trust.  Ideally, everything will already be owned by your trust when you die.  But just in case you forgot to re-title a particular asset or just didn't get around to it, then the pour-over will finishes the job and gets that asset into your trust.  The considerable downside is that the asset now must go through the probate process, which is precisely what you were trying to avoid when you set up the trust in the first place!