CINCINNATI BUSINESS COURIER
April 22-28, 1991
Investments
by Charles D. Vaughan
Quick and cheap often means slow, expensive
QUICK AND CHEAP! When times get tough, business people look for new ideas to perk things up. Certain areas of the financial services business are very tough right now. So, with a dearth of new ideas, some folks are digging into the archives of “golden oldies.”
Few things seem to draw interest as easily as a quick and cheap way to solve problems. One concept that is currently being recycled as such a panacea is the revocable inter vivos trust, better known as the living trust. Ever since Norman F. Dacey first published his doityourself manual, “How to Avoid Probate” in 1966, financial service people have periodically jumped on this idea to generate easy business.
Properly used and specifically applied, the living trust can indeed solve many potential problems. On paper it has all the markings of a great generic planning concept. It makes so much sense and it looks so simple. Several new books (complete with fill-in-your-own-forms) have been published on living trusts. A number of brokerage firms and financial planners are offering seminars on this concept.
The idea seems irresistible. After all, everybody knows that taking an estate through probate is painful, cumbersome, slow and costly. It also makes family finances public. This frequently creates feuds and attracts unwanted attention and solicitations. A funded living trust seems to solve all these problems and to offer many other advantages. These include flexibility, control of assets and continuity of management. In addition, the living trust can usually preclude the need for a guardianship hearing on incapacity.
While it is true that all these and other advantages are possible, few sources bother to discuss the several disadvantages. Knowledge of the latter can help you determine whether or not the idea is valid for you.
Generic living trusts overlook several problems:
1. State laws vary. Ignorance of state specific issues can destroy an otherwise sound plan. For example, a recent appeals court in Ohio set aside a living trust settlement on the death of the grantor and gave the assets to an heir who would have taken under the will. This was due to the doctrine of merger (only three states have it) which says that if the grantor, trustee and beneficiary are the same person, the trust is equivalent to a “straw man.” That means the trust is regarded as being the same “person” as the grantor and does not replace the will. [Note: This has been repealed in Ohio since this column was written.]
2. The grantor loses protection of the Probate Court. Trustees are subject to fiduciary responsibility statutes, but with no court oversight the statutes are honored only in the breach. A dishonest trustee could pick the trust clean and any recovery action might be ineffective.
3. An inexperienced or incompetent trustee could lose the assets without being negligent. Again, recovery could be hopeless.
4. A chosen successor trustee might be unwilling or unable to serve. This would throw the entire trust into Probate Court creating more problems than having no trust.
5. Changes in the tax regulations may require that living trusts in which the grantor is not trustee or cotrustee obtain a tax identification number and file annual 1041 forms. No added tax, just added hassle.
6. Using the trust form to register property often makes negotiating assets more difficult. Nervous intermediaries such as banks and transfer agents examine such registrations carefully before acting.
7. Privacy is not complete. Institutions that handle trust assets such as brokerage firms demand a complete copy of trust documents before accepting accounts. This leaves the entire plan open to the view of outsiders.
8. Changes to living trusts are theoretically simple. In practice when there are copies in other hands, the process can get sticky.
9. When an estate passes through probate, it clears the claims of all potential heirs and creditors. Use of a living trust to avoid probate on all assets can leave heirs subject to residual claims.
The living trust can be a powerful tool for asset control and probate avoidance. It is well worth the time and effort. But, professional advice for your specific case is a must. The actual documents need to be drafted by an attorney with expertise in this highly specialized field.
The “quick and cheap” approach can turn out to be slow and expensive.