New Law, Death Knell to Living Trust Schemes?
By: Amos Goodall
Governor Rendell recently signed the Pennsylvania Uniform Trust Act, effective November 4th. Closely modeled after a national Uniform Trust Code being considered in many states, our version is the result of several years of study by the Advisory Committee on Decedents’ Estates of the Pennsylvania Joint State Government Commission.
The Law makes many important changes to trusts. A number are designed to regulate funded revocable trusts, often called “living trusts”. While living trust schemes have never been really useful for general estate planning in Pennsylvania, these changes should make it harder to mislead unsuspecting consumers by using nuggets of incomplete truths to sell expensive trust packages.
A trust is a way of owning property. It is often trumpeted as a way to avoid probate, which is important in some states, notably California. Periodically, sellers of living trust packages hold seminars at local motels seeking to sell these packages, making wonderful promises, usually at substantial fees. According to the Federal Trade Commission, “misinformation and misunderstanding about probate and estate taxes provide a ripe environment for scam artists to pray on older consumers’ fears that their estates will be eaten up by costs, and that distribution of their assets to loved ones will be long delayed. Some unscrupulous businesses advertise seminars on living trusts or send postcards inviting consumers to call for in-home appointments, ostensibly to learn whether a living trust is right for them. A common practice is to greatly exaggerate the benefits of living trusts and falsely claim that locally-licensed attorneys will prepare the documents. In others, the offer of estate planning services is merely a ruse to gain access to consumers’ financial information to sell other financial products such as annuities.”
In Pennsylvania, the Attorney General has filed criminal charges against living trust sellers who claimed that, even under the old law, living trusts which they put together for their customers were somehow better than wills. Some of the lies, according to the Attorney General’s suit, were:
• The probate process greatly reduces an estate through attorney and executor fees
• Revocable trusts will eliminate or lessen taxes
• Probate exposes a decedent’s estate to litigation but a living trust will not
• Probate will expose private maters to the public but a living trust will keep everything private
• Court costs in probate are very expensive and will result in delays
According to the Attorney General, each of these statements is untrue even before the new trust law, although the sales people have denied breaking the law.
The recently adopted statute further supports the concept that living trusts are not a cure-all for wills. Here are some of the changes:
The capacity needed for a trust is the same as the capacity for a will.
Creditors of someone who creates a living trust have the same rights against the trust as if there were no trust, whether before or after the death of the person creating the trust.
Within thirty days after the death or incapacity of the person creating a living trust, the Trustee must give formal notice of its existence to the person’s executor, husband or wife, each of the person’s children (or their guardians if minors), and all the trust’s current beneficiaries. Each person with a right to notice, has a right to a copy of the trust instrument, information on all assets and liabilities. All these persons have a potential right to challenge the trust or the trustee’s actions (including, I believe, the actions of the person who created the trust while acting as trustee), based on the same grounds as exist for contesting a will. Finally, if there is no estate within ninety days of the person’s death, the trustee must advertise the trust’s existence in the same way a probate estate is advertised now.
A person having standing may file a petition anytime within a year after the trustee gave notice. Thus, early distributions by a trustee will have the same risks as early estate distributions.
Living trusts are important options for estate planning. For example, a person may wish to provide a structure for someone else to manage financial affairs. The advice of a well informed local professional advisor will help someone to decide, since this should be tailored to the person’s individualized needs.
However, many living trusts are marketed as complete estate packages by persons who know nothing about their prospective customers’ particular needs. Poorly-drawn documents may actually make it harder to administer property and may expose more assets to creditors. For example, apart from life insurance, assets in a person’s revocable living trust can be taken by his or her creditors. Some other asset titles–such as entireties tenancies for married couples–are usually protected against the creditors of the first to die. A home in a living trust is not exempt from spend down requirements for Medicaid.
Pennsylvania has a very “user friendly” probate system, unlike some states, and scare tactics have no applicability to Pennsylvania. The best advice I can give would be to consult with your family’s local financial and legal advisers together. These folks know you and your own needs. Trusts are an important part of planning, both during life and after death. Prepackaged living trusts are expensive and often counterproductive substitutes for this planning.