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What People Commonly Misunderstand About Trusts
“I DON’T HAVE MUCH, SO I DON’T NEED A TRUST.” A Trust is not just for the rich. More often than not, a Trust is the best way to accomplish your goals, regardless of the size of your anticipated Estate. While a Trust can be a mechanism to reduce or eliminate Federal Estate tax, people whose Estates would not be subject to Estate Tax can benefit from a Trust just as much, albeit in different ways. Even if all you have currently own is your home and its contents, having a Trust can avoid the necessity of your heirs having to Probate your Estate. More clients state that they want a Trust because they want their heirs to avoid Probate. A Trust, when prepared and funded properly, can do just that. Further, a Trust can also provide for various contingencies that may be important to you. For example, perhaps you would not want your child or grandchild to receive his or her full inheritance, regardless of the amount, at the age of 18. Perhaps you would prefer the inheritance be used first to pay for education. A Trust can accomplish that goal, while a simple Will cannot. Further, having a trust keeps your wishes regarding the distribution of your Estate, and the size of your Estate private, because there is no court involvement.
“A WILL IS ENOUGH.” Maybe it is, but it is certainly better to be safe than sorry. If you only have a Will, any assets that are titled in your name alone will have to go through the Probate process. If you have a home in your name, a bank account, an investment account, or life insurance with no beneficiary, those assets will have to go through the probate process before they can be distributed to your beneficiaries. Going through Probate will mean that your heirs will bear the expenses of the Probate process (filing fees, Inventory fees, and possible attorney fees.) Further, since the court proceedings are public, this means that some of your information (i.e. the names and addresses of your beneficiaries and the size of your Estate) will be public record, which is undesirable for most people.
In addition, having a Trust can eliminate the need for the court to appoint a Conservator in the event you become incapacitated, while a Will alone cannot.
“IT’S TOO EXPENSIVE.” It is certainly true that having a Trust prepared does not provide any savings or financial benefit for the person creating it. However, the cost of preparation of a Trust is most often less than what your heirs and beneficiaries will pay if your Estate must go through the Probate process. At the present time, the Probate Court charges $150.00 to open the Estate, $11.00 for Letters of Authority, $89.00 for publication of a notice to creditors and an Inventory fee equal to a percentage of the Estate. At the present time, the Inventory fee to be paid to the Court on an Estate valued at $100,000 is $363.00. Those are costs that will be incurred by every Estate regardless of size. In addition, in most Estates, additional Petitions and Accounts will need to be filed at a cost of $20.00 each. Those are just the costs charged by the Court. If an attorney is needed, additional fees and costs will be incurred, which are likely to far exceed the cost of preparing and funding the Trust
Further, if there are beneficiaries under the age of 18 (perhaps a child or grandchild), a conservator would need to appointed by the Probate Court to manage the inheritance, which is an additional expense.
“WE HAD A TRUST PREPARED YEARS AGO, SO IT’S ALL COVERED.”First and foremost, having a Trust prepared is not enough, the Trust must also be properly funded if it is to have any effect. The single biggest mistake made by clients that have a Trust, is not having the Trust properly funded. Funding the Trust means that all assets owned by the individual(s) must be transferred so that they are owned by the Trust. For example, let’s assume you own a home, have a modest bank account and an investment account, all held in your name or jointly with your spouse. You go to an attorney, have lengthy talks about how you want your Estate to pass, read the lengthy Trust document, sign it and leave the attorney’s office with your mind at ease. That should be all right? Wrong. A Deed needs to be prepared to transfer your home, your bank account and your investment account need to be changed to reflect the Trust as the owner of the account. Let’s assume that you had a Deed prepared, but didn’t change the owner of your bank account. Upon your death. Your heirs have to go through the Probate process in order to distribute the bank account and investment account to your beneficiaries.
Several clients have come to the office with a Trust they had prepared years ago; or a client will come in with their parents’ (now deceased) Trust. Many clients believe that simply having the Trust means they can avoid Probate. That is only true if the Trust was properly funded and assets were properly transferred. The number one mistake made by attorneys with regard to Trusts is not assisting their clients with transferring their assets.
It is very disheartening for a client to hear that their parents paid a significant amount of money to have a Trust prepared and firmly believed that their beneficiaries would avoid Probate, only to learn that certain assets (or in some cases, all assets) were not transferred to the Trust and that Probate is still required.
Some attorneys will send a letter to their clients after the Trust has been prepared telling them to transfer their assets into the Trust, but unless they have direction and know how to do it, they may do it incorrectly, or may not do it at all. At CLOS, RUSSELL & WIRTH, P.C., we believe that preparing the Trust is only the first step.
Second, if you have had a Trust prepared, it is imperative to have it reviewed periodically by an attorney. First, laws change. The Michigan Trust Code was enacted in 2010 which created several “default” provisions for Trusts. These default provisions may or may not conform to your wishes regarding your Trust. Further, having an attorney review a previously drafted Trust, particularly if there have been any changes to your family (death, divorce, marriage, birth), can ensure that your current Trust sets forth your wishes as it pertains to your family as it changes. In addition, having your Trust reviewed periodically will ensure that your Trust remains properly funded. For example, if you have purchased a new home, opened new accounts or obtained additional life insurance, you want to ensure that it is titled properly so that it can be managed in accordance with your wishes, as set forth in your Trust.
A Trust may be necessary or right for everyone. You should consult with an experienced attorney about whether a Trust is right for you.