From the Desk of San Diego Trust Attorney, Kristina R. Hess:
I tend to doubt that many San Diegans would believe some of the common misperceptions and misconceptions that exist around Living Trusts (otherwise known as revocable living trust, inter vivos trust, etc.). In my experience, most of the people in San Diego with whom I have the pleasure of speaking about estate planning, wills, trusts, asset protection and the like are pretty darn savvy.
So bear with me as I bring up some misconceptions from other parts of our great country…
We are launching a Legacy Building Success System TM where we are working with families to change the course of history in their lives. Seriously. Empowering generations to build on the inheritance and wealth they will one day receive. We are working with a select group of families and individuals who are ready to be very intentional and proactive about the legacy they will leave behind…
Yes. Deep, powerful and transformational stuff. I am really passionate about this work. I believe that deep down inside of all of us is a desire to fully live a life of love and significance. The desire to leave a legacy that is powerful and enduring.
And so, you can imagine when I saw the title of this book at my local Barnes and Noble Bookstore, I had to grab it — The Legacy Journey by Dave Ramsey. The topic seems to be directly on point to our Legacy Building Success System (TM). In the past I had listened to Mr. Ramsey’s Radio Show and read some of his other books, so I have respect for him.
And most of the book provides good information on not feeling guilty about the wealth you have built, putting a plan in place to provide for your family and then to bless others, having a family Constitution, etc. Good information.
The problem with the book arises from Dave Ramsey’s treatment of living trusts. Now, I don’t know what state he lives in, in the South or Midwest, but I can bet it is not California or New York or any of our states on the west or east coast.
Let me quote from the book so you can see how damaging and expensive his advice about living trusts could be for you and your family here in California:
“Estate planners are pitching this [living trusts] pretty heavily inside the church too, but I’m not a fan of these arrangements at all. Here’s the deal. I never recommend something to someone that I wouldn’t use myself. And since a living trust makes no sense in almost any situation, I can’t recommend it to you either.” p. 154
However, he then contradicts himself by saying, “While it’s true larger estates require a higher level of sophistication, detail and privacy in estate planning, a living trust probably isn’t right in the vast majority of cases.” Making no sense in “almost any situation” is translated into “the vast majority of cases” and not for larger estates. Yet, “larger” is not defined. And if the goal of Mr. Ramsey’s business and radio show is to help people build wealth, then, most of his listeners should have “larger estates” right?
He then explains his three reasons why he believes that a living trust makes no sense. I will cite his reasons and explain the problems with his contentions.
1. “Living Trusts are an Upsell in the estate planning world” — “that create an expensive and usually unnecessary add-on to estate planning.” “They also require an ongoing relationships with an estate planner because you need a representative every time you want to adjust your assets.”
If you live in California and you own a home or other real estate that is valued over $20,000 or, cumulative assets over $150,000, then, when you die, your assets must pass through the Probate Court process (unless there is a joint tenant and then you lose 50% of the basis step up – a discussion for another day). Putting aside, the public nature of probate, the time delay of Probate, cited in my previous posts on California Probate here, the probate court process in California, is very expensive. The average probate will cost your heirs approximately 5% of the gross estate. So, imagine your mom had a $600,000 house, bank accounts, and other assets that were all bequeathed in a will, then you would be paying $30,000 in probate fees. If your loved ones owned a business, or had life insurance or retirement accounts, payable to a minor (anyone under 18 years of age), then these would also be included in the probate fee and it could very easily exceed six figures! Now, given this expense, do you really think that it makes no sense to have a living trust based estate plan that altogether could cost $3,000 to $4,000? Do the math on the savings and you will see how a will could cost your family thousands of dollars in avoidable fees! A living trust that is properly funded will avoid the probate court process and save you thousands!
In addition, Mr. Ramsey’s assertion that you need a representative every time you want to adjust your assets is simply not true. Once your Trust is set up any new assets you purchase you can title to your Trust without help of your estate planning lawyer. Likewise, if you sold your home and purchased a new one, you would instruct the escrow agent to prepare a deed putting your home into your Trust. We provide our clients with unlimited guidance about these issues at no cost on an ongoing basis because we want to make sure your plan will work when you need it.
2. “Most Living Trusts are Never Fully Funded.” Mr. Ramsey claims that “the estate planners I’ve talked to say most of their clients never actually fully fund the living trust after setting it up. The hassle of retitling and redeeding everything into the name of the trust is so complicated and frustrating that only the nerdiest of the Nerds tend to follow through.”
Here is a statement that we can agree upon: “an unfunded trust isn’t really a trust at all.” Without trust res or property, it is not valid. A trust must have property in it to be valid.
Now, a partially funded trust is still better than a will because in California if the assets are listed on an attached Schedule of assets evidencing intent to create a trust, then we can petition the court to have them made part of the trust after death. This is still better than paying 5% of the gross estate and waiting 16 months or more! So even a partially funded living trust is better than a will or no trust at all.
It is true that having an unfunded living trust is like having a Ferrari with a limited engine. And historically, I think it was true that estate planning lawyers did not spend much time and attention making sure their clients have funded their living trusts. However, this is not how client centered estate planning practices work. This is certainly not the case with our office. It is a best practice to have a Funding Coordinator or other person to assist clients with funding their trust. Our Funding Coordinator’s sole job is to make assist clients with funding their trust and she provides unlimited guidance. We prepare the real estate transfer deeds and assist with other assets. Clients who have many assets, may choose a Premium Estate Protection Package that has “done for you” Funding where we will actually fund the Trust for you (with your cooperation and signatures of course).
Moreover, today, many beneficiary designations can be easily updated online. Making sure the living trust is fully funded is very important to making sure your plan works. It is unfortunate that the estate planners that Mr. Ramsey has spoken with do not have a system in place to assist clients with funding. Clients with a fully funded living trust are not the “nerdiest of Nerds” by any stretch of the imagination.
3. “Living Trusts Create a Cumbersome Problem Every Time You Want to Do Something with Your Investments or Property.” Now this argument is perhaps the most ridiculous of them all and evidences Mr. Ramsey misunderstanding of how trusts work. He claims that were he to have a living trust he couldn’t move any of his assets without the estate planner and trustee living in an office next door. Mr. Ramsey says he buys and sells real estate, looks at his mutual funds and sets up new investments all the time. He says he couldn’t do any of this “without legal approval of the trustee.”
Did the estate planners not tell him that with a revocable living trust the creator of the Trust serves in all three roles? The creator of the Trust is the 1) Grantor (thus your social security number is the tax ID); 2) Trustee – the manager of trust who controls the Trust property; and 3) Beneficiary – the Trust assets are all for your benefit during your lifetime or any period of incapacity.
Thus, there is no reason for those who set a revocable living trust to have the estate planner and the trustee live in an office next door, because it is all you (me, myself and I). If you are married, then it is you and your spouse but one person can make decisions for the couple if the Trust allows. There is no need to change your Trust because you are checking on your mutual funds, selling or purchasing new investments. Title the investments to your Trust and update your schedule of assets and be done.
In conclusion, be careful from whom you are getting advice about estate planning. Dave Ramsey’s advice could potentially cost your family thousands of dollars in California. The advice given in the book demonstrates a misunderstanding of how revocable living trusts work and could be damaging in any state where the administration of a will is extremely expensive (like California), is public and slow. In California a revocable living trust makes a lot of sense for anyone who owns a home or has cumulative assets over $150,000.
Plan your estate today and make sure your loved ones are provided for and protected.
Building Lasting Legacies,
Kristina R. Hess, San Diego Estate Planning Lawyer