How to use a trust to avoid probate?

You have heard horrible things about probate. It will be long. It will be expensive. The government will get all your money?

Before you buy into all the hype, review my post explaining probate in Oregon. You may not want to avoid it at all. For a lot of people probate has advantages, the most important of which is that it forces your family to administer your estate in the way it ought be done. With the help of modern technology, lawyers can get you through probate fairly cheaply, and the time it takes is reasonable for the amount of work that has to be done. Before you run off avoiding probate be sure you know what you are running from.

Let's assume you have read my post about probate and no matter what anybody says, you hate the whole idea of it. You can avoid it by being poor.  You can avoid it with an estate plan that relies on joint ownership and beneficiary designations. Most people, however, when trying to avoid probate, look to a trust.

Those of you who have read my post on trusts know a trust is a legal agreement between three people: a person called a settlor who puts up the money, a trustee who takes care of the money, and a beneficiary who gets the stuff that the money buys.  So how does this three-way legal relationship let a person avoid probate?

The answer is  . . . . drum roll . . . by letting one person serve as three. Instead of three people, we clever lawyers create a trust controlled by one person wearing three different hats. You, the settlor--because you settled on creating a trust rather than going through probate--transfer all of your  property to your trustee. And who serves as trustee? You do. It is your job to hold and invest your property and use it for the benefit of the beneficiary. And who is the beneficiary? You are, of course. You give all your property to yourself to be held for the benefit of yourself for as long as you shall live. And just in case anything goes wrong, you reserve the right to revoke the trust and take back your property any time you want.

You might well think that this is far to clever too work in real life. Who would believe in such a thing? A lot of people agree with you. The Internal Revenue Service is one of those people. As far as the IRS is concerned this is a sham and it will call your trust a "disregarded entity."  Money earned by this kind of trust is taxed as if it came directly to you. If you owe money, the people you owe can sue you and get at the money in the trust as if the trust did not exist. The only people willing to buy into this scheme are people who live in the world of probate and estate planning.

Here is how it works. Your trustee--who is you--owns all your property. Your trust says that if you die, your trusted son, Harold, will take over as  trustee. It says that since you can no longer be the benefiiciary--you being dead--Harold and his sister, Maude, are to be the new beneficiaries. The trust tells Harold to sell all your property, pay your bills, and divide the money between himself and Maude. So when you die, the trust lives on. While you were alive the purpose of the trust was to keep you happy. Now that you are gone, the purpose of the trust is to pass your property on to your children.

Let's compare the workings at death between a will and a trust using your biggest asset, your house, as an example.

Let's assume that you wrote a will naming Harold and Maude to receive your house. After you die, Harold wants to sell your house and split the money from the sale with Maude. He goes down to Infidelity National Title Company and they explain to him that the only way he can sign the deed necessary to sell the house is to be appointed personal representative of your estate. This means he has to take the will to the courthouse, pay a filing fee, and open a probate. He will not be able to sell the house until he does.  After he starts the probate he will have the court looking over his shoulder from then on to make sure he pays your old bills, does your taxes, and distributes the money exactly as the will says.

Next let's assume you wrote a revocable trust, transferred your house and your other property to the trust, and named Harold to be the trustee when you die. Once again, you are gone, and Harold wants to sell your house and split the money with Maude. He goes down to Infidelity National Title and says my father's trust owns the house and I am now the trustee. The title company will make sure what Harold says is true and then will allow him to sell the house. He can split the money with Maude and the courthouse is out of the loop. You have avoided probate.

That is how it works. You know the downside to probate: higher costs, public filings and the supervision of the court. What are the down sides to a trust?

Trusts cost you more money today. Trusts are harder for your lawyer to write than wills and he has to makes sure that all your property is transferred into the name of the trust. Deeds have to be written and your investment accounts all have to be changed. I explain to clients, "I am going to get your money. You can pay me now by doing a trust or you can do a will and let your children pay me later." Some folks want to make it as cheap as possible for the kids. Others think that because the kids are getting all that money for nothing, the least they can do is pay the costs involved. I don't care. I get paid either way.

One upside to trusts--freedom from court oversight--is a downside if you don't have a trustworthy, competent, and diligent person to take over the trust when you die. If the personal representative named in a will isn't doing the job, the court will replace him or her with someone who will get it done. When you have a trust there is no one to make sure your bills get paid and your property distributed. If Harold, in our example, happens to be living in your house when you die and has no inclination to sell his rent-free home and split the money with his sister, the only way Maude can get her inheritance is to hire a lawyer and sue Harold. In a lot of families, a little court oversight is a good thing.

At the end of the day the choice is yours. Think about what you own, who you can nominate to take charge when you die, and how much you want to pay for estate planning right now. Then collect your questions and talk to a lawyer.

Social Security Addresses Early Onset Alzhemiers

In February the Social Security Administration added early-onset Alzheimer's disease (and 37 other disabling medical conditions) to its list of conditions which qualify for compassionate allowance. Compassionate allowances are made for medical conditions so serious that they obviously meed the Social Security disability standard.

Applicants for social security disability are often denied benefits on the initial application and thereafter win on appeal. Time, however, is the enemy of the early-onset Alzheimer's patient. He or she needs help immediately. With this change in Social Security policy, those with early-onset Alzheimer's will be able to get Social Security disability support in a timely manner.

What to do with the property of someone who dies with very little?

After reading my post about probate, a reader asked me what happens when a relative dies with only a bank account, or a car, or some items of personal property. It is a good question.

The amount of complexity required to administer an estate is directly related to the amount of money the dead person had when he or she died. If the person died with nothing, nothing has to be done. The debts of the dead person will remain unpaid forever. The deceased owns no property, so there is nothing to distribute.

If the deceased owns property of certain types, there may be laws that apply to the particular type of property.

Bank Accounts:  If the deceased had money in the bank, but less than $25,000, a spouse or close relative can fill out a sworn statement requesting the bank deliver the money to the relative. The relative must promise to pay from that money the expenses of the dead person's last illness and buriel and all debts owed by the person when he or she died. The person who fills out this statement is normally the heir to the estate. Once the heir pays off the funeral expenses, the medical bills, and the dead person's Mastercard bill, the heir gets to keep the rest.

Cars. If the deceased own cars or trucks at death, those items can be transferred to the heirs by filling out an inheritance affidavit, that you can find at the Oregon DMV website. All natural heirs must sign the affidavit.

Accounts with Beneficiary Designations. Life insurance, deferred compensation accounts, 401(k) accounts. Pay on Death (POD) accounts and IRA accounts pass to family members through beneficiary designations. They do not pass through the probate process even if there is a will and a subsequent probate. If there is a beneficiary designation and you are the beneficiary, you get the money.

If the procedures listed do not work because, for instance, the deceased had more than $25,000 in the bank or the deceased left a will which gave the money to someone other than an heir, then there is a short form of probate specifically for the handling of small estates. To qualify as a small estate, the property owned by the deceased on the day of death has to have been worth less than $275,000 with no more than $75,000 in cash or personal property and no more than $200,000 in real estate.

If the estate qualifies as a small estate any person who has a right to some of the estate of the deceased can file an affidavit of claiming successor.  The affidavit is a short form of a probate petition. It gives the name of the deceased, the names of the heirs, and lists the property and debts of the dead person. If there is a will, the will must be attached. Copies of the affidavit must be sent to the other heirs, the State of Oregon and all creditors of the deceased. The person filing the affidavit is responsible for (1) sending copies, (2) collecting property owned by the deceased, (3) paying all the debts owed by the deceased, and finally (4) distributing the money to the heirs or the persons named in the will.

The filing fee for a small estate affidavit is currently $78. After accepting the affidavit for filing, the court takes no part in administration of the estate. There is no accounting and no judicial oversight. The administration only comes to the attention of the court if there is a dispute about the handling of the deceased's money. The small estate procedure is a fair amount of work and is easy to screw up if you don't follow the law carefully. It is, however, less expensive and far less burdensome than a full probate. If a person can use the small estate procedure, he or she should.

It is best to consult with a probate attorney about small estates, or to obtain a bank affidavit for the transfer of accounts. The legal fees are small, but the dangers of going it alone fairly large.

What happens to all that stuff in grandma's house?

Grandma is gone. The lawyer is working on how to sell her house and collect the money she had in her retirement account. There are a lot of questions about how to deal with all the stuff in her house but the lawyer doesn't seem to want to answer those questions. Why is that? What is a family supposed to do?

We lawyers call grandma's stuff "personal property." Personal property 

means her dishes, her furniture, her old car, and that collection of ceramic figurines she was so proud of. Lawyers and judges do not want to deal with grandma's stuff. We want the personal property to go away--quietly with no fighting or bickering.

Despite hating it we do hear about it. We hear about it a lot.

The reason lawyers and judges don't want to hear about personal property is because (1) it is always at the center of family battles, and (2) it is seldom worth any money. Often when a parent dies, the children go temporarily crazy. Sibling rivalries that have lain dormant for years spring up as if the parties were all ten years old again. These long-simmering disputes usually make an innocent hunk of personal property the centerpiece. 

"I don't care what the will says," one of the children proclaims, "mother always wanted me to have the toilet plunger and after putting up with my brothers and sisters all these years, I deserve it." To the lawyer, these disputes sound crazy. Elder law and probate lawyers charge over two hundred dollars an hour. Simply talking about personal property with a lawyer costs more than the property is worth. The family tells me it is not about the money; it is about fairness. No it isn't. It is about some deep seated family dysfunction that nobody understands except the family members. Lawyers don't get it; judges don't get it. We don't want to talk about it because we have no idea what the clients are talking about and why they care.

Sometimes the family is not fighting but has gone all money-eyed on the theory that mother's collection of Swedish-Korean wind chimes has to be worth at least a hundred thousand dollars. I have overseen the sale of a lot of personal property. I have learned to hate cars, jewely and collections. Cars are only valuable if you don't have one and need to go somewhere. If you have to sell grandma's car, hope for low low blue book and thank your lucky stars if you can sell it at all. Mother's jewelry may be insured for a bundle, but you can guarantee that nobody wants to buy it. Give it to the daughters and forget it. A collection is a side effect of having a hobby. The only people who make money off collecting are the people who write those collectors guides--the ones with the ridiculously high values that no one  actually pays. Collections are not investments; don't pretend that they are. 

When I file a probate petition, I have to file an inventory of the property that belonged to the deceased. The personal representative appointed in the will often looks at me incredulously and says, "But mother's house is packed from floor to ceiling with stuff. How can I inventory all that?" I tell him or her to walk through the house, wave an arm at all the stuff and say,"personal property, five hundred dollars." I put that in the inventory and no one complains unless it is somebody  in the family going wacko over the car, the jewelry or the figurine collection. Good families get together, split up what they want and donate the rest. Bad families fight and go to court over it.

Don't get me wrong. I love stuff. I buy nice stuff and don't want to lose it. The fact is, however, that once I have put my grubby hands on the stuff, it is not worth much any more. If I keep it a long time, it is worth even less. Keeping it a very very long time and calling it an heirloom doesn't change that.

So what happens to grandma's stuff? In most cases, whatever the family decides. A judge will decide if you insist, but it will be expensive and the judge will not be happy about being made to do it. You do not want decisions about your grandma's stuff being made by an grumpy judge. Follow your lawyers advice; make the personal property disappear. If you family members don't bring up where it went, nobody else will either.

Mediation Comes to Multnomah County Probate

Alternative Dispute Resolution--mediation and arbitration--has been used by the courts in Oregon to help resolve civil cases for a long time. If you sued somebody, you didn't get at trial before a judge or jury unless you first went through arbitration or mediation. That was everywhere except in the probate courts. As of February in Multnomah County that changes.

The new local court rules now provide that the judge or any attorney in the case may put a contested matter into mediation. The new rules set out the general procedure for mediation and who may serve as a mediator.

While lawyers outside of the probate world are comfortable in mediation, we who practice in Oregon elder law have not embraced mediation eagerly. I have attempted to talk other lawyers in disputed elder law cases to hire an elder law mediator (such as Pat Medford) but have had minimal success. One of the problems I faced in convincing other lawyers to embrace mediation is that court time in probate is not that hard to get. The probate world has no jury trials. Most issues can be heard and decided in a few hours. Mediation, on the other hand, can be a lengthy process. It often entails more than one meeting, any one of which can last several hours. Mediation, I believe, leads to better results; it does not however, in probate, necessarily lead to cheaper results.

I have know for some time that this was coming. In preparation, I took a course in mediation put on by the Multnomah County Court system and then a longer mediation course taught by Stan Sitnik at Portland State University Department of Conflict Resolution.

Stan's course completely changed my views on several subjects. Two of them are important.

First, I misunderstood mediation. I thought of mediation as being something like a judicial settlement conference where the mediator would listen to both sides, offer suggestions for settlement, and opine on the value of each side's argument from the vantage point of someone who had been doing probate law since Cain killed Abel. This kind of "evaluative" mediation does exist, but it is not exactly in the forefront of current practice. Mediation being currently practiced is a process whereby the mediator steers the parties toward effectively negotiating a resolution themselves. The parties--not the wise mediator--create the solution.

In my class, one young woman opined that she did not think she could be a mediator, because in the role playing she could clearly see how the parties should resolve their differences. She was unable to keep quiet about her solution while the parties struggled to arrive at an obviously inferior answer. Stan suggested she get over it.

Second, before attending Stan's course I thought I was a reasonably competent negotiator when it came to settling cases. In fact, I sucked. My idea of negotiation was to try to get the other side to take a position; I would take a position somewhere away from that and then we would grimly compromise toward a middle. It is a lousy technique that lacks intelligence, stifles creativity, and makes people mad at each other. I am still fairly embarrassed that for so long I went to work every day to deal with conflict resolution and had so little understanding of how to effectively negotiate. Mediation helps people become effective negotiators for those own interests. Those who deal with conflict a lot owe it to themselves to develop negotiation skills on their own.

I am currently a quiet member of the Oregon Mediation Association. One section in the association deals with elder mediation. I suspect that as mediation begins to play a greater role in probate litigation, those elder law mediators will see a lot more work. How this will work out for litigants remains to be seen.

2009 Profile of Older Americans

Although an Oregon elder law lawyer by trade, I am amateur gerontologist as well. My studies in gerontology at Portland State never resulted in a degree, but I do maintain my interest in the subject and my membership in the Oregon Gerontological Association. Recently the Administration on Aging of the U.S. Department of Health and Human Services issued its 2009 Profile of Older Americans.

The report sets out in very clear form the numbers about how older American's live. In 2008, Oregon had half a million citizens over the age of sixty-five. That is 13.3% of the population. It is a 16.5% increase since 1998. At the time 8.6% of elders lived in poverty.

The median income of older persons in 2008 was $25,503 for males and $14,559 for females. Of the 2.9 million households headed by older persons in 2007, 80% were owners and 20% were renters. The median family income of older homeowners was $29,899. In 2008, 6.2 million (16.8 %) Americans age 65 and over were in the labor force (working or actively seeking work), including 3.4 million men (21.5%) and 2.8 million women (13.3%).

The report has a lot of other good stuff. If you like this kind of thing, take a look.

What is a trust?

When discussing legal issues with clients I often get the question, "What about a trust?" Some of these clients want to avoid probate, some want to qualify for Medicaid, some want to protect assets, some want to provide for disabled relatives, and some want to save taxes. Everybody has heard about trusts, but a lot of folks are not quite sure what they are. Let's talk about the basics.

Most people know about contracts. A contract is a legal transaction between two people. If I want to rent a car, I put up some money, the car rental company puts up a car, and we agree to trade the money for the use of the car. The contract could last for a day or for many years.

A trust is a legal transaction among three people. The first person is the person who creates the trust. This person, called the trustor or trustmaker, makes the terms of the trust and provides the money necessary to carry out the purposes of the trust. The second person is the trustee. This person takes the money provided by the trustor and agrees to manage and spend it according to the terms and conditions that the trustor wrote down so that the purpose of the trust is accomplished. The third person is the beneficiary. This is the person who receives benefit from the trust. Normally, the trustee has to administer and spend the trust funds for the benefit of the beneficiary.

The basic trust fund baby is created this way. Uncle Scrooge creates a trust for his young nephews, Huey, Dewey and Louie to help them with their education. Scrooge puts a million dollars in the Duckville Savings and Loan and asks the bank's trust department to be the Trustee. Thereafter, Duckville Savings, invests the money and spends the income and principal, according to the directions and guidelines contained in the trust, to educate Huey, Dewey and Louie.

Seems simple. Like contracts, the devil is in the details. A full chapter of the Oregon Revised Statutes deals with how to create, administer and terminate trusts. I keep a paper copy of those laws on my desk at all times.

So can trusts do all the things that people think they can? No. Trusts can do some of those things. Trusts can be used to avoid probate, but whether that is a good thing depends on the situation. Trusts can be used to protect assets, but you need to have whole lot of assets that need protection before asset protection trusts become worth the cost and legal risks entailed in creating them. If you have too much income to qualify for Medicaid, an Income Cap Trust will allow you to qualify, but trusts will not permit elders to give away their money and have the government pay for their long term care. Trusts are good ways to provide for disabled relatives and can be used in certain circumstances to give money to a disabled person without disqualifying the person from receiving public benefits. Trusts can save you taxes if you pay a lot in taxes and are willing to give away big chunks of your money to avoid paying taxes on it.

If future posts I hope to address specific kinds of trusts. The important thing to recognize when talking about trusts is that they come in a wide variety of shapes and sizes. You can do a lot of good things with trusts, but like with other things in life, if what you hear about trusts sounds too good to be true, it probably is.