The virtues (and pitfalls) of living trusts

STAYING AHEAD

September 27, 1992|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

New York -- Who's afraid of the big, bad probate court? Everyone, it seems. The biggest financial hype in this country today is for living trusts, which keep your property out of probate.

Probate ensures that your will is valid, your debts are paid and your property goes to the people you named. In many states, the process is simple. But other states condone "horror courts" that can tie up your assets and bleed you of money. That's when you want a living trust.

But whose trusts? They're being aggressively sold today by insurance agents and financial planners who say their trusts are cheaper than those drawn up by "greedy lawyers." The salespeople sell you standard forms, prepared by a lawyer (often in another state). You fill in the form with the agent's help; the agent may send it for review to a lawyer in your state. But the reviewer can't be sure that the terms of the trust actually follow your intent. Furthermore, you may be subjected to a deceptive sales pitch or given documents that don't comply with your state's law. Here's what's going on:

* Maine and Washington state brought lawsuits against the American Association for Senior Citizens (now apparently out of business), charging that it exaggerated the price and perils of probate in order to sell its own high-priced trusts.

* Iowa got an injunction against Midwestern Academic Research Services (MARS) of Sparta, Wis., also known as Timeless Living Trust, for the unauthorized practice of law. MARS' co-founder, Philip Arneson, says the Iowa suit was about "one trust mishandled by an agent. We paid back immediately."

* The State Bar of Michigan won an injunction against an Illinois lawyer who helped sell "trust kits" to Michigan senior citizens. Purchasers complained that they had been given wrong information.

* Twenty-five states have joined a task force organized by the National Association of Attorneys General to combat deceptive sales of living trusts.

The pity of it is that a living trust can be a valuable instrument. You need to distinguish between the trust itself and the questionable way it is sometimes sold.

If you write a will to dispose of your property, or have no will at all, your estate goes through probate. Twenty-one states have greatly simplified procedures -- even allowing "unsupervised probate," where courts don't have to intervene. In "good" probate states, lawyers' fees on modest estates are reasonable.

The average estate can usually be probated in six to nine months. High-pressure trust salespeople may tell you that probate freezes assets for two years or more. But in fact, any money the family needs to live on is generally available immediately, says Theodore Pasquesi. a lawyer in Highland Park, Ill.

In "bad" states, however, probate remains a mess -- dragging on too long and costing too much. If you own property in more than one state, you face multiple probates, unless the property is jointly owned.

Living trusts avoid probate. You put your major assets -- your house, your financial investments -- into the trust. That's done by changing the ownership from "Joan Jones" to "Joan Jones trustee of the Jones Trust dated Oct. 1, 1992." You keep the right to manage your property. If you become mentally incompetent, a successor trustee takes over. When you die, the trustee distributes the property according to the terms of the trust.

Any new assets you acquire, like stocks or CDs, must also be put into the trust, which means a bit of extra paperwork. Any assets left outside the trust will go through probate, so you need a will to cover them. In practice, attorneys say, people almost always leave assets out and wind up in probate anyway.

Trust salespeople may say that you need a trust to save on death taxes. Not so. You can get the same savings by doing a will.

Typically, lawyers charge somewhat more to prepare a living trust than to prepare a will. But counting probate, the trust should be cheaper in the end, Mr. Pasquesi says, especially if simplified probate is not available in your state.

A simple trust drawn by an estate-planning lawyer can cost less than the insurance agents' trusts (although the agents claim otherwise). But even if they don't, the agent lacks the knowledge to answer your tax and estate-planning questions correctly. So do yourself a favor. Even if you think you hate lawyers, go to one if you want a living trust.

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