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Living
Trusts
What are they and do I need one?
John received his B.A. from LSU in 1970,
and his J.D. from the University Of
Denver School Of Law, 1981. In addition
to more than 20 years of legal experience,
John is also a Certified Financial
Planner™. He has served as an adjunct
professor at Metropolitan State College,
and has written articles and taught
attorneys, CPAs, CFPs, stockbrokers,
enrolled agents, insurance professionals and trust officers, both
academic and continuing education courses, specializing in
Estate Planning and Estate and Gift Taxation.
He is actively teaching the post-graduate Estate Planning
academic requirement course for Certified Financial PlannerTM
candidates in a number of locations throughout the country.
John maintains an active local practice in the southern Denver
suburb of Centennial and works with clients from all over the
state of Colorado.
John is actively involved in his community, having raised his
family here. He serves on the Board of Directors of the
Arapahoe Douglas Mental Health Network. He has performed
with the Colorado Symphony Chorus for over fifteen years.
7700 EAST ARAPAHOE ROAD, SUITE 100,
CENTENNIAL, CO 80112-1267
(303) 741-2400 OFFICE (303) 713-9150 FAX
WWW.JRPHILLIPSLAW.COM
JOHN R. PHILLIPS, JD, CFP™
© 2011
J R Phillips & Associates, PC All Rights Reserved
Living Trusts
What Is A Living Trust?
Often called a “Revocable Living Trust”, the technical name is a
Revocable Inter Vivos Trust. This is a trust which was created during the
lifetime of the grantor(s) (i.e. the person(s) who created the trust) who
retains the right to revoke, amend, or terminate the trust at their
discretion.
A Living Trust can be for one person, or can be for a married couple
(where it acts similar to a joint bank account – two owners, but either one
can act independently of the other.)
A Living Trust is in essence a very sophisticated tool to manage assets in
a way that is not negatively affected by the mortality (disability or death)
of the Grantor of the trust. It provides for orderly management of the
trust assets, a clear succession of trustees, and use for the benefit of the
Grantor(s) while they are alive. Upon death of the Grantors, the trust
provides for appropriate division and distribution of the assets according
to the instructions of the Grantor(s), all
without the need for Probate.
A Living Trust is created by an agreement
(almost always memorialized in a written
document) between the Grantor (the one
who creates the trust, also known in some
documents as the Trustor, Settlor, or
Trustmaker) and the Trustee (the one who
agrees to hold the assets for the Grantor).
The trust assets are held for the benefit of
the Beneficiaries. The trust agreement
contains the Terms and Conditions which
will govern the trust.
It sets up an
orderly “chain
of command”
to provide for
effective asset
management
irrespective of
disability or
death.
The Grantor(s) retain the right to alter,
amend, and revoke the trust at any time. The Grantor usually manages
the assets as long as possible followed by a carefully chosen successor to
take over in the event of mental incapacity or death. This type of trust is
usually thought of as a substitute for a Will in that the trust contains all
provisions for disposition of assets at death. The main differences in
using a Living Trust as opposed to a will are:
A. The trust is an asset management tool that allows for
complete and efficient management of assets while the Grantor
is still alive, but is mentally incompetent. This tool can be much
easier to use than powers of attorney.
B. The trust avoids probate for all assets owned by the trust.
A Living Trust is often used in estate plans of moderate to complex
sophistication as a will substitute. It serves as an asset-management tool
while the Grantor is alive.
Key element to remember: Only those assets that are actually owned by
the trust are controlled by the terms of the trust. To make a trust work as
intended, it is necessary to “fund” the trust by physically transferring
legal title of assets to the trust while the Grantor is alive.
NOTE: IRAs, 401Ks and other tax-deferred retirement plans
cannot be put into a Living Trust while the retirement plan owner is
alive.
Most estate plans utilizing a revocable living trust also have “Pour Over”
Wills that act as a “safety net” to channel any assets left out of the trust
into the trust at death via probate.
“Pros” of Living Trusts
1. More sophisticated and powerful tool. A Living Trust manages
assets while you are alive and after death. It sets up an orderly “chain of
command” to provide for effective asset management irrespective of
disability or death.
2. Private. Living Trusts are established by a contract between the
Grantor and the Trustee. Generally speaking, contracts are private
documents. Unless there is a dispute about the administration of a
contract, these documents are never filed with any court.
3. Out of State Real Estate interests. Any interest owned in real
estate located out of the state of a decedent’s domicile will require a
probate action in each and every state where any such interest is located.
This is known as Ancillary Probate. A Living Trust is most often the
preferred tool to avoid Ancillary Probate.
4. Disability Management. One of the significant advantages of a
Living Trust is that it allows for orderly continuation of management of
assets while the Grantor is alive, but
unable to manage his or her affairs.
For estate planning purposes, the
term “disability” refers to mental
disability and not to physical
disability.
Easier on
those
coming
behind
5. Harder to Challenge. If a trust
is properly “funded”, no Probate
action will be required. Thus, there
is no open court case for a disgruntled
or disappointed heir to request an easy
hearing. This makes it more difficult and
expensive for a disgruntled or disappointed person to challenge your
instructions.
6. Less Time and Costs for your Heirs. Since no Probate action is
required, usually there are minimal additional costs after death
(depending, of course, on how the Grantor funded the trust and how
appropriate the provisions of the Living Trust are in relation to the asset
and human situation at the time of death.)
7. Easier on those coming behind you. A Living Trust is the easiest
method of managing assets of the one who takes over for you, especially
in the event of disability, or if any instructions should accompany any
assets.
8. Sophisticated distribution issues. While there is practically nothing
we can do in a Living Trust regarding distribution at death that we
cannot do in a Will, a Living Trust tends to be easier. This is because a
properly drafted Living Trust contains much more in the way of rules,
procedures, and instructions (often mistakenly referred to as
“boilerplate”). Living Trusts are designed to minimize costs and efforts
when death occurs, at the expense of more time, effort, and money now.
“Cons” of Living Trusts
1. Initial Costs. Usually Living Trusts cost considerably more initially
than would a Will doing the same thing. This is because a Living Trust
is inherently more complex than a Will and requires considerably more
time, effort by both the Grantor(s) and the lawyer, and training to have it
work properly. In some states where Probate is horrendous, even bad,
cheap Trusts are preferable to probate, but that is not the case in
Colorado.
2. More Work Now. For a Living Trust to be of any use, it must legally
be the owner of the assets. Each type of asset has specific ways that the
ownership is transferred to a Living Trust. This takes time and effort.
Essentially, you are doing the work now for free so that your heirs will
not have to in the future with legal costs attached.
3. Maintenance of the Living Trust. Some “Trust Mill” peddlers
offer “Maintenance” plans or “Document Banks,” usually as an
additional profit item. Neither is required nor generally recommended
by the more respectable law firms that provide quality estate planning.
However, over the years, as
you buy, sell, acquire, or
dispose of assets, an owner
of a Living Trust will have
to go to the trouble to make
sure that the actual title
ownership of assets is legally
vested in the Living Trust.
… you are doing the work now
for free so that your heirs will
not have to in the future with
legal costs attached.
It is also important to remember that as family and financial situations
change over time, the documents need to be kept up-to-date and possibly
be amended to fit with current circumstances.
You also have to watch out for potential errors or misunderstandings by
these institutions. If not done properly, the benefit of the Living Trust
may be lost and replaced with difficulties that would have been much
easier to solve with probate.
4. Retirement Plans cannot be put into a Living Trust while you are
alive. For tax-deferred retirement plans (401k, IRA, TSA, PERA, etc.)
the person who earned the money and is deferring recognizing the
income for tax purposes is known as the Participant. The one who will
get the money after the Participant dies is known as the Beneficiary.
Under current income tax law, the Participant must be a “Natural Person”
(as distinguished from a “Non-Natural Person” such as a corporation,
trust, estate, partnership, etc.). This means that an owner of a Living
Trust cannot transfer ownership of a tax-deferred retirement plan to the
Living Trust without incurring the full tax liability upon the transfer. In
simple terms, you cannot transfer your IRAs and other retirement plans
to your Living Trust.
…you
cannot
transfer
your IRAs
and other
retirement
plans to
your
Living
Trust
If a significant amount of your net worth is in such
plans, the Living Trust is of no value to you for
management of these assets.
5. Complications of Trust Law. While probate
law is generally fairly well defined in the statutes,
trust law has evolved over the centuries outside of
the court-based system. There is significantly less
statutory and case law regarding trusts, especially
Living Trusts which have been in wide-spread use
only in the last thirty to forty years or so.
Much of the detail in a Living Trust is often
erroneously referred to as “Boilerplate”. In reality,
under trust law, there is little default in the law to
rely upon, so a proper trust should create the rules
and procedures for its own administration. The reality is that most of
these instructions will never be used, but we cannot know now which
ones will, and which ones will not be necessary. Skimping on these
instructions (or just copying old documents without realizing what it
actually says) leaves the Trust owner, and later beneficiaries,
unnecessarily vulnerable.
6. Not all after-tax assets can go into a Living Trust. In addition to
retirement plan assets, a Living Trust cannot validly own some restricted
stock options, restricted stock, stock in professional corporations, etc.
You will need the consent of the lender to be able to retitle encumbered
commercial real estate interests into a Living Trust without triggering a
“due on sale” clause.
7. More difficult to refinance a home. Federal law prohibits the
imposition of a “due on sale” clause when residential real estate of four
units or less is transferred to a Living Trust. However, there is no
requirement for any lender to grant a mortgage to a Living Trust. This
most often comes up when a Living Trust owner who has properly
transferred the title ownership of the home into the Trust attempts to
refinance the property.
Most mortgage lenders do not understand trusts and therefore are very
reluctant to issue a mortgage on a house owned by a Living Trust.
8. A Living Trust is not immune from probate. In the event that an
asset was not properly funded into the Living Trust while the Grantor
was alive, a probate is often required to let the “Pour-Over Will” put all
such probate assets into the Living Trust.
Also, in Colorado, when probate estate assets are not sufficient to satisfy
all creditors’ claims, the law provides that a Living Trust and all of its
assets can be brought back into the probate estate to make such assets
available to creditors. If all of your creditors are paid by your
fiduciary(ies) this is not an issue.
9. No Asset Protection. It is a common misconception that if you put
your assets into a Living Trust, they will be immune from Creditor’s
claims, including Medicaid in the event that long-term care is needed.
This is patently untrue. Absolutely no asset protection is gained by the
use of a Living Trust. It is possible for a Living Trust owner to give
asset protection to a Beneficiary of the Living Trust upon the owner’s
death, but it is not possible for the Living Trust owner to give himself or
herself asset protection. In fact, the mere existence of a Living Trust will
usually cause an application for Medicaid to be denied.
How to tell if you are dealing with a “Trust Mill”
At one time, there were a number of non-attorneys peddling trust
packages, usually to seniors, after scaring them about Probate. Most of
these non-lawyer schemes have been put out of business, but still crop up
from time to time. If the person who is trying to talk you into a Living
Trust is not a licensed attorney, it is likely that you are dealing with one
of these programs. Now they almost always tout that an attorney
“reviews” the documents. This is not the same as having a properly
trained and experienced trust attorney interview you, assess the situation,
offer options, and draft the appropriate documents.
Regrettably, some licensed lawyers have gotten into the “trust mill”
business. While you would think that such lawyers would deliver a
reasonable product, even if aggressively “sold”, this is often not the case.
“Trust Mill” operations seem to be preoccupied with profits more so than
with quality legal work. Trust law is complex, and is surprisingly
incomplete regarding day-to-day use as a substitute for Wills. It is rare
to find a law firm or lawyer who engages in “Trust Mill” marketing that
is considered to be very knowledgeable in the law by his or her peers.
Just as in any high pressure sales situation, the one
promoting the product is often very persuasive. Here
are a few indicators to help you determine if you are
dealing with a “Trust Mill” operation:
- The presentation tries to make you scared of
something: Medicaid, probate, creditors, nursing
homes, etc., if you do not buy their product. Fear is
the emotion that “Trust Mills” work hard to create.
- The “information” given by them supports that their
product is the solution to your problem, especially,
problems that you did not know you had before.
Fear is
the
emotion
that
“Trust
Mills”
work
hard to
create.
- The presentation appears to be pushing you toward
buying what they are selling, instead of providing an appropriate service.
- Public Seminars - Not all public seminars are given by Trust Mill
peddlers or Annuity hacks. This author often gives highly informative
seminars designed to educate, not to sell. Trust your instincts. We
generally know when a sales pitch is being given rather than real
information, even by silver-tongued lawyers.
To help determine
whether you are being targeted, listed below are some of the more typical
gimmicks used in public seminars by Trust Mills:
 “Discounts” but only if you act tonight! This is a classic sales technique
to keep you from thoroughly thinking about what you are doing.
Anything as important as your estate planning should not be subject to
impulse buying.

“Cutesy Names” for what are in reality, standard legal techniques and
choices. These could include: “Bullet-Proof” trusts, “5-Year Trusts”,
Family Protection Trusts, etc. The classic sales technique is to make a
service look like a product. Even legitimate legal services can often call
a standard technique by what it does, but be concerned when it appears
that it is overdone.
 Add-ons. Annual “maintenance” programs, Document Banks (for a fee),
etc. are similar to the old scam of car dealers pushing “undercoating” as
an option for new cars. When the add-on is not something that is
normally offered by the industry and typically purchased by most people,
it is likely to be offered for the primary purpose of enhancing the seller’s
profit margin.
 Emphasizing how vulnerable you are unless you “buy” their plan. If you
start to feel afraid of anything as a result of the presenter, be on the lookout.
 Non-refundable charge for initial consultation appointment. (May be
unethical, as well as bad business)
 Anything that pressures you to buy their product or service. Legitimate
estate planning is a process, not a product.
While it would make sense that a law firm that does a very large volume
of trusts would be good at it, this is not usually the case. Regrettably,
most “Trust Mill” operations spend most of their time “selling” and not
nearly enough time listening. You often get “canned” documents with a
lot of “fluff” fillers trying to look impressive, but, in reality, are rather
lacking in substance.
Buying estate planning from a “Trust Mill” is rather like shopping via
late night television “infomercials”. The product being sold is always
presented as the greatest thing since sliced bread, but if you call and give
them your credit card, the product, once arrived, usually does not live up
to hype and expectations. Often, infomercial products are sold that way
because they can’t stand the scrutiny of being in stores and compared to
other products.
LEGITIMATE ESTATE
PLANNING IS A PROCESS,
NOT A PRODUCT.
Other Titles In Our Information Series:
Probate: What it is and should it be avoided
J R PHILLIPS & ASSOCIATES, PC
ATTORNEYS AND COUNSELLORS AT LAW
Probate: How to avoid it
7700 EAST ARAPAHOE ROAD, SUITE 100, CENTENNIAL, CO 80112-1267
Medicaid Handbook
(303) 741-2400 OFFICE (303) 713-9150 FAX
Uncontested Divorce
WWW.JRPHILLIPSLAW.COM
Living Trusts: What are they and do I need one?
Basic Glossary of Estate Planning Terms
Wills: What are they and are they enough?
Giving Your Children and Grandchildren Asset Protection
Powers of Attorney
You can find these and other topics:
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Centennial, CO 80112
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