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Shattering Myths About Living Trusts

Occasionally a client tells me they were contacted by someone selling living trusts. In some cases, that someone is not an attorney and makes money by demonizing lawyers. Often their pitch about living trusts is a come-on to find out about your money so they can make commissions by moving your savings into their investments. Let’s consider some of the issues involved in these schemes.
First, in Illinois it’s a crime

If such a salesperson comes knocking, beware: when “a non-lawyer” engages in “the assembly, drafting, execution, and funding of a living trust document or any of those acts” it is called “Consumer Fraud and Deceptive Business Practices”…and is a misdemeanor. The second offense is a felony.

Our legislature realized that the complexity involved in living trust planning must be reserved for licensed attorneys. So if a non-lawyer slips into your kitchen and tries to sell you a living trust, help you decide what it should say (drafting), help you sign it (execution) and help you re-title assets to it (funding), they are engaged in criminal activity. Should you trust a criminal, even if he has not yet been convicted?

Second, it’s based on myths

A client brought me copies of the sales materials they were given. I browsed through the papers and just shook my head. Most of the claims were misrepresentations with a kernel of truth. Let’s compare some common myths to the whole truth.

The first myth is an exaggeration, that wills require “a probate of 6%”* (and the handwritten note from this particular salesman said, “8 – 12% on average”). This “expense of probate when you die” is the foundation myth upon which many others are built. The truth is, the attorney’s fees and court costs for probate in Illinois are more like 4% to 6% on small estates, and 1.5% to 3% on large estates.

“Eliminates costs associated with probate” is the next classic misrepresentation. You just read that probate costs at least 6% of your estate, so to “eliminate” that would mean your costs go from 6% to zero, right? Wrong! The whole truth is that the professional assistance needed to wind up a living trust upon death can be expected to cost 1/2 to 3/4 as much probate. You replace one expense with a different, somewhat smaller expense. Imagine the salesman telling the whole truth: probate on an estate like yours would cost around 4%, but if you use a living trust, the costs are more likely 2 – 3%.

“Possible reduction or elimination of estate taxes” and “flexibility for future changes” are supposed advantages of a living trust. The truth: a will can provide estate tax planning and can be changed almost as easily as a trust. Each is just a paper document!

“Protection for dependents with special needs” and planning that “lets you keep assets in Trust until Beneficiaries reach ages you want them to inherit” may be important goals. But once again, you can do these with a will or a living trust. In our practice we use living trusts in part because details like these (protective trusts, age-based control, conditions on beneficiaries, etc.) do not have to go on public record; wills have to be publicly recorded, and would put these details in the public eye.

One handout shows an exaggerated 33-step flowchart of what has to be done by the “executor” of your will but is supposedly not necessary with a trust. The whole truth? Your trustee must take substantially the same steps, like safeguard and inventory your assets, collect insurance and interest, get appraisals, pay debts, file tax returns, and distribute the estate. Doing those things without going to court should reduce the fees, but it certainly does not eliminate them.

Even mythical “disadvantages”!

Ironically, the sales material claims the following to be a disadvantage of living trusts: “Your trust needs to be funded (assets titled to the name of your trust) … we will show you how and help you through this stage.” The truth is, even with a will you have to change asset titling and beneficiaries in order to make your will work. Unfortunately, this is often overlooked in will and living trust planning. When you do estate planning with a will or trust, be sure to get appropriate assistance to make sure your estate will actually follow the plan. That requires a lot of paperwork and is essential if you want the plan—will or trust—to work.

True peace of mind

The “benefits of a revocable living trust” are said to include “peace of mind,” but if you actually believe their bill of goods, you will end up with a false sense of security!

I recommend living trusts as a planning tool for many clients. By working closely with families from year to year we have been able to reduce estate settlement costs to about one-half of one percent. But a trust is only a tool in a much more thorough planning process based on the truth, the whole truth, and nothing but the truth; a process that provides fully justified peace of mind.

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* This and all subsequent quotations are from printed sales materials of non-lawyers selling living trusts.
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