Beware Living Trust Scams
By: Amos Goodall
Suppose someone told you if your estate goes through probate it will cause significant delays and court costs, necessarily result in large attorney and executor fees, and require court hearings.
Now suppose that same person told you that living trusts would avoid this, would lessen or eliminate taxes and would protect your privacy. These sound like pretty good reasons to buy a living trust package, but in Pennsylvania these are all wrong.
In fact, the Pennsylvania attorney general recently filed a civil lawsuit alleging that not only were these representations wrong, but they are actually misleading and a violation of consumer protection statutes.
Furthermore, in hearings before the U.S. Senate, there was testimony that costly living trust packages are used to obtain confidential financial information on clients in order to sell them expensive annuities which are unsuitable. Finally people sometimes wrongly suggest that living trusts will avoid Medicaid spend-down procedures.
What is a living trust?
Trusts are not new; they are a form of ownership that has been around for many years. A trust involves someone (the trustee) holding property for the benefit of someone (the beneficiary) pursuant to a contract with the person who created the trust (the settlor). Often there is a beneficiary entitled to income or some other form of current payment from the trust (often called an income beneficiary), and someone else who will receive the property when the trust ends (often called the remained beneficiary). These contracts can be changed or ended (revocable trusts) by the settlor, or they can be unchangeable once created (irrevocable trusts).
A living trust is typically a revocable trust with the settlor, trustee and income beneficiary, the same person, with the person’s heirs as the remainder beneficiaries. At the time of the person’s death, the trust can terminate in favor of the remainder beneficiary or it sometimes continues.
There are many good reasons to consider trusts in Pennsylvania: To hold property for a child, an incompetent person, or to hold real property in another state are some of the reasons to consider a trust. There are tax reasons to consider irrevocable trusts. Finally, some attorneys prefer to consider trusts as will substitutes.
In some other states, the advantages falsely attributed to living trusts do apply. In California, for example, according to Dennis Sandoval, director of education at the American Academy of Estate Planning Attorneys, in a typical $1 million probate estate, fees set forth by law for filing, attorneys and executors (if not waived) amount to more than $46,000. In New York, there are fees charged into an estate and coming out, so if an estate sells the decedent’s home, receives the sale price and distributes it to the heirs, the same dollar forms the basis for two fees – both coming in and going out of the estate! In other states, it is very difficult to waive any probate requirements.
There are formal probate processes in Pennsylvania that are designed to protect heirs. However, a cooperative and trusting family can waive most of these. What living trust package salesmen don’t tell unsuspecting consumers is that there are formal accounting processes which can apply before finishing living trusts as well. For a quick, informal distribution, these need to be waived as well!
Living trusts are appropriate for some families. What they should do is consult with a family attorney who knows them, their individual situations and their desires. Estate planning is not only concerned with saving taxes or avoiding costs, and it can involve a lot more than simply deciding between a will and a living trust. Together, the family and the lawyer who knows them can design a plan which carries out all their wishes. To put your family’s future into the hands of someone who may or may not be an attorney, who cannot make a living in his or her home territory and needs to come here to try to sell packages, and who may or may not know your individual needs is courting disaster.