living trusts

[Demosthenes]

Trusts are state specific. One size fits all is a bad idea. Spend the extra bucks and hire a lawyer, fuzzy.

[Cpt Banjo]

We split our time between California and Hawaii. One home in each. Now what? Our tax address is California (so we can write off trips to the farm).

California is a community property state; Hawaii is not. This alone is reason enough not to rely on prefabricated forms. Demo's right -- get an attorney to help you.

[finvik]

they are state specific. so if you want to decide whether a living trust is right for you depends on the size of your estate, what kinds of assets it contains, and what plans you have for yourself and your family.
Vik

[DoingHomework]

>>but too often people forget to properly transfer assets to the trust(s). A good attorney will ride you like a mule until it is done

A good attorney will have staff do it for you. We just went through this, a full estate plan, about a year ago. Our lawyer, a specialist in our state and a long term family acquaintence, did everything for a very modest fee. It was very useful to have his office take care of the funding and asset title changes. Several of the companies involved made errors that had to be corrected. We would have spent an awful lot of time dealing with all this. It took almost a year to get everything switched into the trust. There were various reasons for this but our situation was relatively simple. Clearly it could have gone faster but most of the delay was with the various brokerages, insurance companies, and fund companies.

I think you will also find that you can't just leave this alone. Laws change and you will want to have the documents reviewed every few years. Suze Orman is probably not going to do that for you. Your lawyer will and will keep up with changes to know when it has to be done.

At the very least, if you can't afford a lawyer and your situation is simple, have a paralegal do it before using the DIY forms.

[DoingHomework]

>>CFP looks at what the future may bring, can provide guidance and can help coordinate the lawyers and the CPA so everyone is on the same page

I beg to differ here. Even if you need a CFP, the lawyer should ALWAYS do the coordinating. You have nothing to lose from doing it that way and priveledge to gain.

And to the original poster - our situation is similar to yours - no kids, property in Arizona, a community property state, and Hawaii - not CP. You will need a second lawyer in Hawaii to draw up the deed there. You MIGHT be able to find one licensed in both states to handle both. Hawaii also has a conveyance tax and a special capital gains tax on real estate that you might need to look into when putting the property into the trust. I am not sure whether transfering to a living trust triggers that tax in the state. As you probably know, Hawaii is a bit different when it comes to land than other states and a local attorney will need to draft the docs.

[Prof]

yes, the lawyer rides herd on the lawyer stuff, but your financial advisor can ride herd on you to make sure it gets done and can even check with the lawyer to see what else needs doing. Think of the financial planner as the traffic cop, directing traffic and making sure you get where you need to go.

The financial planner is the event coordinator who leaves specific functions to the specialists (like the caterer, or the decorator).

The "lawyer stuff" is important. I still think that if you transfer your home into a trust, the trust can't have/hold a homestead exemption. There is one CA case to the contrary, and one of the Bankruptcy judges in Texas followed it recently, in an unpublished opinion, but in neither case was there enough equity in the house to fight over. If someone pushes this issue up the the District/Circuit level, I think the bankruptcy creditors will get the house, irrespective of the homestead claim. This gets more complicated in states like Alaska that recognize self-settled trusts.

[DoingHomework]

This is interesting. So it seems like there might be a compromise between avoiding probate the main purpose of a living trust) and asset protection (the main purpose of the homestead exemption). Is that correct?

Are you suggesting that it might make sense to keep real property OUT of a living trust? We will be reviewing our estate plan with our attorney in the spring, a regular periodic review. Is this something worth raising or is it still a speculative and unsettled issue that would not warrant a change to an existing trust at this point?

[Prof]

This is interesting. So it seems like there might be a compromise between avoiding probate the main purpose of a living trust) and asset protection (the main purpose of the homestead exemption). Is that correct?

Are you suggesting that it might make sense to keep real property OUT of a living trust? We will be reviewing our estate plan with our attorney in the spring, a regular periodic review. Is this something worth raising or is it still a speculative and unsettled issue that would not warrant a change to an existing trust at this point?

I think the proposition is simple: homesteads are for the protection of humans who live in a household. A trust is not human. To analyze the problem, you must first examine the exact language of your state's homestead exemption. Then, you must determine if your state recognizes transfers to self-settled trusts as valid (Texas, for example, does not; Delaware does). Then you need to look at very limited case law -- all in the bankruptcy courts, as far as I know. The one reported decision I can think of off the top of my head is a CA decision; the Texas case, in which I represented the Trustee, was not reported or appealed. Both cases treated the living trust as a sort of fictional transfer which did not disturb the homestead exemption. I would have appealed Judge Monroe here, but the equity available for the trustee would not justify an appeal.

This is an issue worth raising with your counsel. I'll bet it never occured to her that a person in your position -- a person engaged in estate planning -- could ever get into a situation where preservation of the homestead exemption was important.

[DoingHomework]

This is an issue worth raising with your counsel. I'll bet it never occured to her that a person in your position -- a person engaged in estate planning -- could ever get into a situation where preservation of the homestead exemption was important.

Let's hope preserving the homestead exemption never is an issue for us. Thanks for the information.

[Cpt Banjo]

To analyze the problem, you must first examine the exact language of your state's homestead exemption. Then, you must determine if your state recognizes transfers to self-settled trusts as valid (Texas, for example, does not; Delaware does).

Transfers to self-settled trusts are valid under Texas law, but what one can't do is create a self-settled spendthrift trust. The real issue, however, is whether the homestead protection from creditors survives the transfer to the trust. Put another way, does the change in the settlor's interest from fee to equitable ownership affect the homestead exemption? I can't see why it should, especially since other types of partial owbership (e.g., life estates and leaseholds) can support the exemption.

[LDE]

My father put his assets into a living trust on the advice of an attorney, who turned out to be in cahoots with shady financial advisers, but that's another story. Now he's suffering from dementia and the trust has been nothing but a headache. Our new lawyer said that trusts are useful in states like California but in Texas probate is different and there is no need for the trust. My dad is incapable of paying his own bills accurately so I had him execute a power of attorney in my name. That gave me no access to his bank account because it was in the name of the trust. It took several months and several hundred dollars in legal fees to draft a document allowing the new lawyer to speak to the bank on his behalf. Then we had to remove his money from the bank account in the name of the trust (but leaving some of it in the old account in case there are still checks out) and create a new account with both of our names on it.

Financial assets such as annuities are not subject to the terms of the trust even if they're in the name of the trust. (However, there's one advantage: an adviser acting in the name of the trust has a fiduciary duty to the client, but if the assets are taken out of the trust there is no such duty and they can be looted legally without repercussions, which is what happened to Dad.) The provisions that give control to the responsible party in case of incompetence require two physicians to certify incompetence, which they won't do just based on financial incompetence; he would actually have to be in a coma. Meanwhile they all yell at me that I have to do this, that, and the other thing for him which I have had no legal authority to do and he thinks that, since he's the dad, he doesn't need to do what I say. I may yet have to go to court and seek a guardianship. Another wrinkle: Unless you file with the county appropriately, if the homestead is in the name of the trust, it may not receive the old-age property-tax exemption. When he took out the trust I told him it might be a bad idea and you can't just trust an attorney or financial planner because he has a diploma on the wall and a nice suit. I read through the thing and it appeared fine and, as you say, Suze Orman and Jane Bryant Quinn were recommending these vehicles. It might be fine in a state such as California, but here in Texas it's been nothing but an expensive nuisance.

[LDE]

Think of the financial planner as the traffic cop, directing traffic and making sure you get where you need to go.

I would encourage you to think of the financial planner as a potential saboteur who may well direct traffic directly into your path and sell what's left of your vehicle for parts.

[Demosthenes]

Financial assets such as annuities are not subject to the terms of the trust even if they're in the name of the trust. (However, there's one advantage: an adviser acting in the name of the trust has a fiduciary duty to the client, but if the assets are taken out of the trust there is no such duty and they can be looted legally without repercussions, which is what happened to Dad.)

Financial advisors can indeed have a fiduciary duty to their clients in Texas. See Western Reserve Life Assurance Company of Ohio vs. Graben, No. 2-05-328-CV (Tex. App. 6/28/2007) (Tex. App., 2007).