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Seniors Beware of Living Trusts
by R. Damien Schorr
Senior citizens today are the target of more than one type of predator, many of whom prey on seniors' fears. One such predator comes to a senior's door in the guise of a helping hand, selling "living trusts". This predator uses a living trust hard sell to separate seniors from their hard earned savings. The common scare tactics are to tell seniors that a living trust will avoid inheritance taxes, will avoid horrendous probate and estate administration fees, will keep secret what assets one owns, and avoid those assets being tied up for years. None of these claims have any validity in Pennsylvania. They are only scare tactics designed to separate seniors from their money. Seniors who decide to buy a living trust are usually charged about $2,000, receive a living trust kit, but get little if any guidance on what to do next. In October of this year, Pennsylvania's Attorney General sued sixteen defendants who were involved in selling living trust schemes across Pennsylvania, seeking to stop such activity.
With that said, living trusts can be of some use. It is important, therefore, to understand what a living trust is, what it can and cannot do, and whether it really is needed.
What is a Living Trust?
A Living Trust is a vehicle by which the person or persons creating it (the "grantor(s)") transfer all of their assets into the living trust. The grantor's house, investments, checking account, and any other assets are all placed in the trust's name. The trust itself is governed by what is known as a "trust agreement". Under the terms of the trust, its assets and income from those assets are to be used to support the grantors, who also are the trust's original trustees. The grantors are free to put assets into and take them out of the trust at any time.
The trust agreement provides how the trust assets are to be distributed once the last of the original grantors dies. It provides for alternate trustees if and when the last of the original grantors either dies or is incapacitated. It usually contains some provision, too, to loan funds to the estate of the grantor to pay inheritance taxes.
What Will a Living Trust Not Do?
A living trust will not save inheritance taxes.
Pennsylvania includes living trust assets in the grantor's estate for inheritance tax purposes. It requires that a copy of the living trust agreement be attached to the inheritance tax return. Copies of inheritance tax returns are kept on file at the local register of wills, and may be examined by the public.
Inheritance taxes in Pennsylvania are not onerous. As of this date, for property passing to one's children, the inheritance tax rate is 4Y2%. The maximum rate (for certain family relations and non-family members) is 15%.
A living trust will not save legal fees.
When the last grantor dies, the alternate trustee will in all likelihood hire a lawyer to aid in administering the trust. The fees incurred in that exercise will be no different from legal fees incurred in wrapping up an estate. In Pennsylvania, lawyers are required to communicate in writing to their clients the basis for any fees to be charged. A good rule of thumb for legal fees associated with the administration of an estate is 5% of its total value. The legal fees involved in creating a living trust can be significant.
A living trust does not eliminate the need for a will.
For a living trust to be effective, it has to have all of the grantor's assets placed in it. This is called "funding the trust". What living trust salesman often fail to do is make sure that the grantor's assets are all placed in the living trust. To make sure that the living trust is funded, then, the grantor still needs a will that directs that all of the grantor's assets are paid over to the living trust, to be distributed in accordance with its terms.
A living trust will not protect the alternate trustee from individual liability.
After the grantors die, the alternate trustee will have to distribute the assets of the living trust in accordance with its terms. A living trust will n9t end the claims of creditors of the grantor. The living trust is not under the protection of Probate Court, so the individual trustee could well find himself liable to trust creditors and beneficiaries even after all of the trust assets are distributed.
Probate fees are minimal in Pennsylvania.
The cost of opening an estate (probate fees) is low. In Allegheny County, the minimum fee to open an estate is $40. The probate fee for a $400,000 estate would be $260. For every additional $100,000 of estate value over $400,000.00, an additional $110.00 in fees is incurred. Probate fees are less than 1 % of the estate's value.
Estate assets are not tied up for long in Pennsylvania.
The average estate in Pennsylvania takes approximately one year to administer. Creditors have that length of time to come forward with any claims against the estate. But if the estate has enough assets, early partial distributions can be made.
What Can a Living Trust Do?
A living trust can manage assets when the grantor is incapacitated.
The grantors of a living trust can and often do name alternate trustees when they become incapacitated. This is nothing that cannot be accomplished, however, with a simple power of attorney.
A living trust can simplify matters in some states.
If located in a state that has complicated or expensive estate administration requirements, living trusts can simplify matters. Pennsylvania, however, has simple estate administration requirements.
A living trust can help if real estate in other states is involved.
When a person dies while owning real estate in other states, a second estate,
known as an "ancillary estate" must be opened in that other state to transfer the real estate. A living trust survives its creator, and can transfer out of state real estate without an ancillary estate being opened.
How Do You Know if a Living Trust is Right for You?
Don't rely on the representations of a living trust salesman. Consult with an attorney who practices in the estate planning field. If you do not know any attorney who practices in this field, contact your local county bar association Lawyer Referral Service. Only after you and your attorney fully discuss your financial and family situation can an informed decision be made about whether a living trust is right for you. Most people in Pennsylvania do not need a living trust; for them, a will and power of attorney will accomplish all that they need.
R. Damien Schorr is a South Hills attorney. His practice area includes wills and estates. He can be reached at (412) 884-1597.
