By Mary Ellis Patton
One of the most common things I hear from my estate planning clients is that they want to “avoid probate.” So, I’ve started asking them “why?” They tell me one of two things: first, they have heard that probate is expensive, or secondly, they don’t know why.
In 1965, Norman F. Dacey published his well-known book How to Avoid Probate! Norman F. Dacey, while not an attorney himself, instructs the public to transfer everything they own into a Living Trust using one of the forms in the back of his book. A review of the book in the Valparaiso University Law Review stated, “The inter-vivos trust is a valuable tool in estate planning. Its use is often effective in the minimization of costs and taxes. The indiscriminate use of this vehicle by laymen without professional advice will lead ultimately to heartbreak and additional costs for many families.”[i]
1. Laws Have Changed
In the years since the publication of Dacey’s book, many things have changed. For example, when he published his book, the federal estate tax exemption amount was $60,000.[ii] Today in 2016, it is $5.45 million ($10.9 million for a married couple). You do not need a trust for tax planning reasons if your estate falls under these numbers. (The exclusion will change yearly.)
2. Some Assets Transfer Outside of Probate Already
Additionally, many people have assets that already avoid probate. Generally, most retirement accounts and life insurance policies are payable to an individual beneficiary. Payable-upon-death accounts similarly are payable to a named beneficiary. These do not pass through the probate process. If you own property “jointly with right of survivorship” with your spouse (or another person), this will likewise pass outside of probate.
3. The Real Expense of Probate
Probate assets generally include real estate (if owned without survivorship), financial accounts, and personal property. The expense of probate largely depends upon the State in which the decedent resides and the size of their estate. Court costs vary from state-to-state. In Kentucky, the out-of-pocket court costs and filing fees are generally less than $300.00. (If the personal representative hires an attorney or takes fiduciary fees, the cost will be higher.)
4. The Cost of a Living Trust
In contrast, setting up a Revocable Living Trust may cost significantly more. Costs for drafting vary from attorney-to-attorney. (Generally, it will cost several thousand dollars.) And you should use an attorney to set up a living trust; pitfalls abound and DIY trusts can cost you more in the long run.[iii] In addition, the Grantor/Trustee must be sure to trust holds all the person’s assets overtime, until death. Any asset that is not titled in the name of the trust is not subject to the terms of the trust and could possibly pass through probate. This means that your home, checking account, and savings accounts would be titled in the name of the trust.
5. Revocable Trusts Do Not Prepare You for Medicaid
Lastly and most importantly, from an Elder Law perspective, these trusts currently are not protected from Medicaid’s spenddown requirement. Medicaid’s policy is that because the trust is revocable, the funds are an available resource to the Grantors (the people who funded the trust).
Revocable Living Trusts are right in certain situations. Individuals with privacy concerns, management needs, high asset values, or supplemental needs may benefit from a revocable trust. However, you must get advice from an attorney in order to determine if one of these is right for you.