L.A. Daily News

Living Trusts Can Have Advantages

By Barbara Correa
Staff Writer

The love of money proves to be a root of all kinds of evil when it causes a family to fight over an inheritance.

Even with the recent stock market bust, over $20 trillion will pass from estates to heirs in the next 50 years -- the largest transfer of wealth in U.S. history, according to a study by the Social Welfare Research Institute at Boston College.

It seems a safe bet that not all of that money will pass on to succeeding generations smoothly, often because of common mistakes that can easily be avoided.

The first mistake many people make is to assume that since they don't have much in the way of assets, any wealth transfer will be very simple after they die.

Les Kotzer, a Canadian attorney and author of "The Family Fight: Planning to Avoid It," said he had one client who's mother had always claimed to be broke, so she didn't do any planning for her inheritance.

After her mother's death, however, several letters from ex-presidents -- including Harry Truman and Franklin D. Roosevelt -- to her father were discovered in the house. They turned out to be worth a substantial sum, which the children immediately began fighting over.

The first action toward estate planning should be taking stock of assets, regardless of how meager they seem to be. Second is that the person to pass on an inheritance must communicate with the heirs what they intend to do in as much detail as they can.

"What I find is there's a gap between Depression-era parents and their baby-boomer children," Kotzer said. "People are calling who have never spoken about these issues with their parents -- whether they have a will or power of attorney."

It's crucial to have in place some kind of a plan about who is going to get what.

"Parents will assume goodwill between their children. They think, my kids will work it out. And I tell people no, usually it's not the kids who work it out, it's the lawyers."

While that can happen whether there's a plan in writing or not, a written will or more elaborate mechanism can take out a lot of that guesswork.

Ambiguity over inheritance has grown as people live longer, often requiring a full-time caregiver. Frequently, that caregiver is one of several children who are heirs.

"The mother has given the caregiver the same as the other kids, and there's a disgruntled child who gave up a lot of their life. There's an assumption that the other kids will say, take this extra money. But it very rarely happens."

Another problem is that when one child is made an executor of a will, the other kids feel slighted.

To avoid that, Kotzer favors all of the participants sharing equally in the execution, or at least having a conversation with the others to make sure there isn't any ill will about having one executor.

If the size of an estate -- including all personal and real property and economic assets -- is tiny, that might be the extent of the planning.

However, in real estate-rich California, anyone who owns a home might fall into a category of wanting to protect their assets or have control over how they are managed.

"If you own a condo in Westminster or Sylmar you're over $100,000," said John Trommald, an estate and probate lawyer with offices in Encino, Seal Beach and West Los Angeles.

That $100,000 marker is the threshold for opening a living trust because that's California's cutoff for when an estate may be subject to a probate court process, whereas smaller estates are generally exempt.

Living trusts have skyrocketed in the past five years, particularly in California, where real estate has appreciated so rapidly. One of their main selling points is that they help avert probate, perceived as an expensive and lengthy legal process to be avoided at all costs.

The primary tax advantage would be for a husband and wife, who can protect up to $2 million from estate taxes in California if it's in a living trust, Trommald said. If the assets are outside a trust, only $1 million is protected. For a single person, it's $1 million regardless, so there's no tax advantage.

But living trusts -- basically legal shells protecting assets from taxes and unwanted claims on those assets -- have stirred some controversy as their popularity has inevitably attracted scam artists looking to prey on the unassuming.

Earlier this year, Attorney General Bill Lockyer issued a warning targeted to seniors to be on the lookout for "living trust mill" sale agents posing as trust experts or professional estate planners.

In addition to fees paid to set up a trust, an investor who signs over their assets to some other trustee is risking everything, the warning said. Opening a trust should always involve a qualified attorney. Financial planners can't write one on their own.

There are all kinds of trust options available and each is tailored by the lawyer to the specific circumstances and goals of the client. The average cost to set one up runs between $800-$1,500, depending on complexity, said Robert Goldsmith, a financial planner in Simi Valley who acts as an attorney liaison for clients interested in a trust.

One reason to open one is that, unlike a will, a living trust manages assets during your lifetime in the event you become incapacitated.

For example, a living trust that includes power of attorney prevents a situation where the trustee falls into a coma and the family fights over whether to pull the plug or not.

A will doesn't kick in until after death, and even then, all it does is tell the court what you wish will happen with your estate.

"A lot can happen until it gets to the heirs," Goldsmith said.

A living trust can certainly be contested, but it's much harder to do than with a will. And since most trusts include a no contest provision, none of the beneficiaries can fight over it.

Carolyn Strickler, 72, a writer and Los Angeles historian in Pasadena, already has a will and power of attorney with a private conservator. But she's considering setting up a living trust anyway, mainly to control the distribution of her 1,500-volume book collection and her husband's paintings to 10 nieces and nephews as well as other relatives.

"The living trust would make it easier if I were living but couldn't manage this stuff myself. If you're incapacitated they will deal with it."

Another benefit to a trust for her is that it maintains the privacy of the estate, whereas a probate process puts it into the public record.

Gift that keeps on giving

In terms of shielding from taxes a specific gift to an heir, a trust doesn't necessarily have an advantage over a will.

Say a parent paid $30,000 for a suburban house years ago, and now it's worth $300,000 to $400,000. The parent puts the child's name on the title and walks away.

The property will be subject to capital gains taxes because to qualify as an inheritance it has to be recovered at the time of death, through a transferring vehicle, such as a will or trust.

"Even with the tax cut we got, you add state taxes and you'll still be paying 23 percent in taxes," Trommald said.

There are some instances when a trust may not be the best option. One disadvantage for homeowners is that mortgage companies generally won't loan to a trust. So refinancing, buying or selling requires taking the property out of the trust until that's done. The only real downside there is that it's a paperwork hassle.

But any trust demands a certain amount of record keeping and management, said Goldsmith. Since it's "living" it can't just be written up and put away in a drawer.

Sometimes people want their estates to go through the probate process because they don't trust their natural heirs with the inheritance.

"Once every three years or so I'll come across someone whose family are fighters," Trommald said.

"I tell them to go to probate. With probate, the judge has to oversee the collection of bills and money. If you think your natural heirs are not trustworthy, you want probate involved."

"The Family Fight" isn't available in bookstores, but you can order it at www.familyfight.com, at www.amazon.com, or by calling 1-877-439-3999.