We’re speaking with Attorney Denis Clifford, an expert on estate planning and the author of several books on wills, estates, and trusts, including the best-selling “Make Your Own Living Trust,” from Nolo.
QUESTION: Denis, I wanted to talk about one of the main reasons which a lot of people want to create a living trust, is to avoid probate. So maybe you can start by explaining for people what probate is, and why people want to avoid it so much.
DENIS CLIFFORD: Well, I’d say yes, it’s definitely the major reason people want to create and do create living trusts, is to avoid probate. Probate is a court process required of almost all wills. Someone dies, and they get the will, and then you have to hire a lawyer and the lawyer files the will with the court, and there’s a bunch of legal falderal that goes on, and forms are filed, and fees are generated, and finally a judge says, “Okay, the will’s valid, and okay, I order the property transferred to who the beneficiaries are in the will.” This process takes a minimum of several months, and often longer. It’s really an absurd process and in almost all cases has no benefit for anyone except the lawyers involved, and the court system, for making money. One of the things I’ve pointed out for years is that unlike almost all other court proceedings, in a probate proceeding, it’s almost never contested; it’s basically a clerical proceeding in which the rubber stamps are applied, and the actual proceeding isn’t too different than something at the DMV office, and it’s really no reason at all except historical accident that this goes through a court system. But it’s so lucrative, and generates billions of dollars a year for lawyers, that the system continues and goes on.
QUESTION: The will is easy for us to understand; the person dies, there’s a piece of paper telling who gets the money. A trust seems a little more complicated, so could you just walk us through an example of what happens when someone creates a living trust and what happens after they’re dead?
DENIS CLIFFORD: Well, first of all, they’re not that different. They’re a little different, but basically, a living trust is another piece of paper, or pieces of paper, that says who gets the property that the living trust “owns” when the person who set it up dies. So, to that extent, it’s really no different than a will. The difference in a living trust is you officially, legally transfer property that you own into ownership of your name as trustee of your living trust. So, instead of let’s say, a house being owned by Denis Clifford, it would now be owned by Denis Clifford as trustee of the Denis Clifford living trust, and it would actually file a deed transferring that house from me personally to me as trustee of the trust. So, there is a little bit of extra paperwork involved, but it’s not particularly burdensome. One, there’s no requirements that you file any tax returns for a living trust where you’re the trustee of the property. The IRS long ago realized, “Hey, this is just a paper thing to avoid probate; we don’t want a whole bunch of extra forms.” So you report all living trust transaction as part of your regular income tax; there’s no property tax reappraisal for the transfer, because it’s not really a transfer. So, basically you’re setting up really what’s a fictitious legal animal, but real when you die. Then when you die, that living trust actually is the legal owner of your property, and then you’re the trustee of this trust while you live, so you manage all the property. In the trust document, you name a successor trustee who functions the same as your executor in your will. He or she is the person responsible for carrying out the terms of your living trust, as they are with your will. When you die, your successor trustee reads the living trust, or presumably knows about it beforehand, and says, “Okay, here’s the property, and here’s who it’s to go to,” and then arranges for the mechanisms of the transfer, exactly as would happen under a will.
QUESTION: You put your property in the trust and then you manage it. What can’t you do with the property?
DENIS CLIFFORD: You can do anything with the property; it’s absolutely indistinguishable from property you own yourself. I mean, theoretically, you could draft a living trust that says, “Now that it’s in the trust, you can’t do this, or you can’t do that,” but no one ever does that. Certainly in the living trusts we give people, why would people want less authority over their own property in a trust then they have themselves? So in fact, it’s utterly indistinguishable. You can sell it, mortgage it, loan it, whatever you want to do with it, destroy it, or anything you want to.
QUESTION: The successor trustee then, after you’re gone, will have to distribute that to the beneficiaries. How does that person know what to do? How do they get paid?
DENIS CLIFFORD: Well, first of all, they don’t have to get paid, and they often don’t. When my mother died, and my father, I was the successor trustee for them, and there’s seven kids in our family, and all the property was divided equally, and I certainly wasn’t going to charge my brothers and sisters a fee for preparing some paperwork for them. And basically, the successor trustee himself or herself determines what’s a reasonable fee, but I would say in the vast majority of cases, there’s no fee involved. Presumably, the person who set up the trust talks with the successor trustee; it’s not a good idea to have them all of a sudden find out, “Hey, I’m a successor trustee,” I mean, maybe they don’t want to be, or maybe they’re not here. So, they talk with them and say, “Here’s my property, and here’s what’s going to happen when I die,” just as a person should with a will with their executor. Whether you want to talk to anyone else is different, but you certainly need to talk to the person who’s going to responsible for handling your property when you die, and tell them how it’s going to work. Then, the successor trustee actually needs to take some steps when you die. So, the trustee has to transfer that property. As successor trustee, he files the documents, “As a successor trustee, I transfer this property to whoever the beneficiary is.” Nolo has a couple of very good books including The Executor’s Guide that also includes, as well as executors duties, successor trustee’s duties, after the person who set up the trust dies, and it’s all clearly spelled out there what you have to do and exactly how you go about doing that.
QUESTION: Okay, two magic words that lawyers like to use but we may not understand as laypeople would be, revocable and irrevocable, as they apply to a living trust.
DENIS CLIFFORD: Yeah, that’s a good question. Living trusts are always revocable until you die, and the reason for that is one, why would you want to give up control over your property? If for any reason you decide, “You know, I want to sell it, or I want to do this, or get it out of the trust,” you could always transfer it directly out of the trust, but you can always just end the trust if you want to. The other reason it’s important to be revocable is that if you set up an irrevocable trust, that constitutes a whole different animal than a revocable trust. An irrevocable trust is a gift to a new legal entity called the trust, and if I set up the Denis Clifford irrevocable trust, that is a separate legal entity that has to file annual income tax returns, it has to have its own accounting, its own financial operations… that kind of trust is set up, for instance, if somebody wants to give a lot of money for their own charity and set up the Denis Clifford Foundation to Help Starving Artists, or whatever it would be. It’s a totally different thing than a living trust, which is revocable, which means you can change it, and you don’t have any tax consequences.
QUESTION: Let’s talk about this thing called an AB trust, and how that saves on taxes. It seems like it applies primarily to married couples, is that correct?
DENIS CLIFFORD: Well, not necessarily; it can apply to any couple who have a substantial amount of money and want to leave it to each other. Generally, it’s used by married couples, but you can be an unmarried couple. Let’s say you have, for example, four million dollars between you, and you own it equally. You can use an AB trust to try and save on estate taxes. It’s sort of complicated to explain in a short answer, but first of all, it’s an estate tax saving device, and the simple answer is, if I’m going to leave my two million dollars to my spouse when I die, she now has an estate of four million dollars. If she dies this year, her exemption will be two million dollars, and two million dollars of our property will be subject to estate tax because our property has now been lumped together. The idea of an AB trust is to split the two estates, so the property is left for the use and benefit of the surviving spouse, but it never becomes legally owned by her, so each estate is kept separate, and in this case, you would use the two million dollar exemption twice, first when I die, and then when my spouse dies, and that would mean no estate tax would be made. So, first of all, like I said, it’s only for people who are likely to be subject to estate tax. You need to read about it, and understand it, and see if you think it works, and see if you want to set it up, because it does impose some restrictions on the surviving spouse’s ability to invade the trust principle: the money and property in the trust.
QUESTION: There’s a trust you talk about in your book called “a child’s trust,” which is for the benefit of surviving children?
DENIS CLIFFORD: Yeah. A child’s trust is a trust, in this case set up through a living trust, although it can also be set up through a will, for property you leave to children. Children under eighteen cannot own any significant amount of property outright. If you want to leave property for the benefit of children or, say, young grandchildren, you need to find a way to impose legal adult supervision over that property, if they’re still under eighteen when you die. A child’s trust is one of the principle ways to create this supervision. A child’s trust, when it becomes operational, is irrevocable. In other words, you set one up in your living trust, but since you’re still alive and the whole living trust is revocable, so is the child’s trust. Once you die, then your living trust becomes irrevocable, and it can’t be changed, because you’re dead. Then, if you have a child’s trust, that child’s trust is established and becomes irrevocable, and whatever property you left that child goes into that trust and is managed by whoever you named to be trustee of that trust, and that person hands out money to the child, including principle, as that person sees fit, until the child becomes whatever age you selected as the age when that trust property, or what remains of it, will be turned over outright to the child.
QUESTION: How hard is it to amend the living trust?
DENIS CLIFFORD: It’s very easy; you amend the living trust simply by preparing any form amendment. Living trusts always need to be notarized, and you would have the amendment notarized, but you don’t even have to have witnesses; you just have it notarized. And you can amend it any way you want; there are amendment forms in our Make Your Own Living Trust and other Nolo software programs. And you simply say, “I insert this paragraph into my trust, paragraph X section 2 is now this, here’s what’s deleted,” and that’s it. So, it’s a very simple process to amend it.
QUESTION: One of the things I thought that was really interesting in your living trust book is that you suggest that people create a backup will, so maybe you could just explain your thinking on that.
DENIS CLIFFORD: Yeah, I think people always need a will. I call it a backup will; even if you’re trying to transfer all your property by living trust, you’re not always sure that you have. You know, you may win the lottery the day before you die, or you may get an inheritance, or some property you may not think about, a small bank account or some personal stuff, may not get transferred into your trust. So, it’s always a good idea to prepare a will, just in case this property exists when you die. If it doesn’t, then nothing happens; if it does, then you’ve got a document in place that says, “All property that isn’t in my living trust for whatever reasons goes to…” whoever you name it to. And given that creating a simple will like this is very easy, I can’t see any reason not to do it. It’s a kind of insurance.