By Laura Noble Walker, JD
I recently asked an advisor, “What is the one question you have right now as it relates to estate planning for your clients?” His answer was, “Why do I get different answers from different attorneys?” My initial response, one that is common when he comes to me for consultation on a particular client matter and a response that is not uncommon from an attorney…”It depends!”
The advisor went on to give me examples of his experiences. “One attorney recommended a Testamentary Trust; another recommended a Revocable Living Trust.” “The attorney advised the client to place their personal residence into their Trust, another attorney advised the client to use a Transfer on Death Affidavit (Ohio).” Or, “The client has a Traditional IRA, one attorney recommended their Revocable Trust as a contingent beneficiary, and the other attorney advised against it and recommended the client’s adult children be contingent beneficiaries.” The advisor is a Certified Financial Planner and appreciates the importance of good discovery and understanding a client’s desired outcomes to implement a plan that provides tools and solutions for a particular client’s unique situation. Not unlike a Certified Financial Planner, the same can be said for a similarly skilled estate planning attorney and there may be more than one tool or solution, and the attorney may know something about the client’s particular desired outcomes and circumstances that lead him or her to make a particular recommendation. Sometimes an estate planning attorney simply has a preferred tool or solution that they use; to quote Abraham Maslow, “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”
Let’s take a look at the particular examples the advisor gave me. Testamentary Trust or Revocable Living Trust? To recap, a Testamentary Trust is established through a Last Will and Testament and therefore requires Probate to come into existence as well as to be administered. I often surprise advisors and clients when I say “Probate is not necessarily a bad thing.” Probate is the court administration and supervision of an estate or trust. It is orderly and provides certainty that an individual’s intentions will be carried out as there is an extensive amount of accountability by the Trustee to the Court. An estate planning attorney who spends a significant amount of time in Probate may be more than comfortable with this arrangement. However, I also share the following perspective with advisors and clients regarding Probate, it is often public record and clients may prefer to protect their privacy and Probate can cause delays. Also, it is true that the Probate process involves court costs that a Revocable Living Trust will likely not. In both cases, the Trustee will likely need the advice and counsel of a competent estate planning attorney so attorney fees are not necessarily eliminated with a Revocable Living Trust. A Trustee is also accountable under a Revocable Living Trust, but the burden of that accountability is upon the Trust beneficiaries.
Let’s now look at Trust Funding, in particular, whether or not to title assets into the name of the Trust or to include the Trust as beneficiary. Again, this will depend on each individual client(s) situation, the nature of the assets, the estate planning outcomes and the estate planning attorney’s preferences based upon his or her experience. Should the personal residence be in the Trust or could an alternative such as a Transfer on Death Affidavit (Ohio) be utilized? Does the client have a mortgage on the property and is it likely or even possible that they might refinance the property at some point? If so, many lenders are reluctant if at all willing to finance a mortgage within a Revocable Trust; in fact, they will often require the borrower to retitle the property into their individual names and back into the Trust. This request is often made just before closing, when everyone is anxious to lock in the rate; it requires the preparation of Deeds and therefore attorney fees and recording fees in the County where the property is located. As an alternative, in Ohio, there is the “Transfer on Death Affidavit” which is a recorded document naming a beneficiary; in this case, the Trust could be named beneficiary upon the death of one or both owners (if owned Joint with Right of Survivorship). Other states may have similar tools specific to their state law and requirements but with the same outcome. With this in mind, why would an estate planning attorney recommend titling the real estate into the Trust? One possible reason is that in the event the client and Grantor of the Trust becomes disabled or incapacitated, some lenders, title companies, and/or buyers are more willing to transact business regarding the real property with a Successor Trustee of a Trust rather than an Agent under a Durable Power of Attorney. Also, if property is owned jointly, upon the death of the first owner, the surviving owner, likely the spouse any time before his or her death could change the beneficiary. With a Trust, it is possible to make the Trust, or portions of the Trust irrevocable upon the death of the first spouse thereby preserving the couple’s intended estate plan.
Finally, let’s consider whether or not a Trust should be the beneficiary of a Traditional IRA. Most financial advisors understand the potential risks in naming a Trust as beneficiary of a Traditional IRA. Unfortunately, there are also many misperceptions about the use of a “qualified Trust” as beneficiary. Once again, different attorneys and even the same attorney will make different recommendations for clients, possibly even the same client. The first misperception is any absolute statement that a Trust cannot and should not be a beneficiary of a Traditional IRA because doing so prevents the opportunity to “stretch” the income tax-deferral upon the death of the IRA owner. This will not be true if the Trust is properly drafted so as to be a “qualified beneficiary “for purposes of determining the life-expectancy of the oldest beneficiary under the Trust to set Required Minimum Distributions. Now, I could author an entire article on the technical and practical aspects of Trusts as a “qualified beneficiary” but that is not the purpose of this article. What I want you to appreciate is that there will be situations based upon the client’s desired outcomes, the estate planning attorney’s advice to the client and to you as their advisor assisting the client with preparing or updating beneficiary designation forms when it will be appropriate to include the Trust as a beneficiary and situations when it will not. For example, because the option to “stretch” an IRA is an optional election for an individual beneficiary, a Trust may be the appropriate beneficiary if there is a second marriage, minor beneficiaries, beneficiaries who need asset protection from themselves, high-risk professions, divorce and other potential creditors. If however, none of these scenarios are applicable, or there are significant age differences among the beneficiaries and the client doesn’t want the complexity and cost of individual, separate IRA Trusts, it may be appropriate to name individual beneficiaries.
What does a financial advisor, in an effort to best serve his or her client, do when he or she gets a different answer from one or more attorneys on the same matter? Start with client outcomes. Good discovery questions and a thorough understanding of the client’s desired outcomes is the first step. Don’t make assumptions based upon other client situations or even the particular client’s situation. Don’t hesitate to inquire of the attorney, with statements such as, “Help me (as the advisor) and/or the client to understand…” Do so professionally, respectfully and if appropriate, with the permission of the client, discuss one on one with the attorney so as to not put anyone in a defensive position in front of the client. In a collaborative team environment, each participating advisor can offer a potentially unique perspective or experience, or tools to help the client achieve their desired outcomes.
DISCLOSURES: Please be aware that Camelot Portfolios, LLC is not authorized to practice law and the considerations provided herein are intended to be educational in nature and should not be relied upon as legal or tax advice. A client should consult with their personal estate planning attorney and/or tax advisor(s) as to their particular situation and the implementation of any strategies. A437