In fact, living trusts may be the right estate planning instument for your client, but probably not for the reasons he or she thinks.

Misconceptions

"The big selling point of a living trust for most of the promoters is that it allows you to avoid taxes and probate costs," said Walter Zukowski, LaSalle-Peru lawyer and member of the ISBA Estate Planning Section Council. "In fact, it does nothing more than a properly designed will would to maximize estate and income tax savings. And while it may avoid the direct expenses of probate – filing fees, the costs of preparing documents to open up the estate, and the like – for most estates, these add up to only a fraction of the total costs."

After the initial grantor/trustee dies, a successor trustee often needs to hire various professionals – a real estate appraiser, for example, or a lawyer or other expert to properly prepare the estate tax form if one is required,

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Zukowski said. Even if taxes are not an issue, the successor trustee may have to spend the time and money required to transfer assets from the decendent trustee to a successor trustee or to the various beneficiaries. "People who think they’re going to avoid all of the costs associated with probating or closing an estate by way of a living trust are in for a big disappoinment," Zukowski said.

Zukowski delivered his remarks at the ISBA Young Lawyers Division program, "Future Planning for Your Clients: Guardianship and the Alternatives," held at last December’s ISBA Midyear Meeting in Chicago.

He also offered tips on funding living

trusts at the ISBA Estate Planning Section Council’s Refresher Course

on the Drafting and Use of Living Trusts," presented iln Chicago, Bloomington, and Effingham last February. There are plenty of other misconceptions about living trusts,

Zukowski said. "Contrary to what many clients believe, a living trust does nothing to protect you from creditors, including the Department of Public Aid. People often think a living trust will help them avoid potential levy and execution by the state for its contribution to nursing home care. But because a living trust is revocable, it doesn’t qualify as a medicaid trust.

"Nor, iincidentally, does a living trust limit claims after death as the probate process does by putting creditors on notice that they have six months to file or be forever barred. A trust doesn’t require that a notice be filed anywhere, so creditors could potentially come back much later with claims against the trust.

A car without gas

"What’s more, creating a functioning living trust can cost considerably more than creating a will," he said. Many clients don’t recognize this truth until they’ve already paid a modest fee for the trust document itself, he said.

"With a will clients historically have said, ‘I want to leave everything to my wife – call me when the will is ready and I’ll sign it,’" Zukowski said. "Clients can’t do that with a trust. They have to do a lot more work at the outset. "People don’t appreciate

CONTINUED

that creating a living trust is a two step process: the first step is execution; the next step is funding. We do a thriving business for people who have set up a trust through mail order purveyors but have done nothing about actually putting their assets into the trust.

Often tell clients that setting up a trust and not funding it is like buying a car and not putting gas in it."

Properly filling the trust vehicle’s tank can be time-consuming work for clients and their lawyers, Zukowski said. "As part of creating a trust, clients have to thoroughly analyze what they have and where they want it to go. They’re pre-probating their estates in many respects. We take the time to discuss what they own and how they own it, who they want to get what, and issues that may arise by way of disabled beneficiaries, or divorce, or adopted children."

Living trust advantages

None of which is to say that living trusts don’t have their advantages, Zukowski said. In fact, the effort that goes into creating a trust can be a blessing as well as a curse.

"It makes clients aware of the size of their estate, for example," he said. "I’ve never had clients who, after

going through the process, said they owned fewer assets than they thought. Clients may think that they have no estate tax considerations,

but then find out when they look at their estate – the personal property, the stock they’ve purchased, the deferred compensation plan that their employers have been contributing to on their behalf – that it’s significantly above $600,000."

Other advantages, which may or may not apply to a given client’s situation, include the following:

Avoiding ancillary probate. "Clients who own property in Florida or Arizona, as many do these days, would have probate in both of those states unless they used some probate avoidance technique," Zukowski said. "You can avoid probate by jointly owning assets wilth others, but because of potential problems with joint ownership many with a living trust."

Preserving privacy. "Some clients are very private, and they don’t want their neighbors to be able to go into the probate clerk’s office and see the files on their estate. They don’t want them seeing whom they were and weren’t going to provide for or the extent of their assets and liabilities. The living trust is a way to keep these matters private."

Reducing delay. "This is often a big issue with clients. They’ve heard the horror stories about how long probate can take – two years, five years. Obviously, those are rare cases, but minimizing delay in distributing assets to a spouse or children is often a priority with clients.

"You don’t have the filing requirements and claims period for a trust that you do for probate. You can wrap things up quickly – in my experience, two to five months is long enough to retitle the assets in the trust, contact the insurance companies, banks, and stock companies, do the various successor deeds, and complete the other necessary work."

Providing for disability. The living trust can provide for uninterrupted management of assets if the client becomes disabled or incapacitated. The living trust allows clients to designate a successor trustee to replace the client/initial trustee if that first trustee becomes disabled. The successor can continue to manage the assets during the disability to make sure bills and taxes get paid, various investments that come due get rolled over or reinvested, and the like."

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A limited number of "Refresher Course on the Draftilng and Use of Living Trusts" course books are still available; to order, send a $35 check payable to ISBA to CLE Regostrar. Ollinois Bar Center, 424 S. Second St., Springfield, IL 62701.