Fixing (Not Destroying) Social Security


Orrin Onken Orrin Onken writes the twice-monthly TGB Elderlaw Attorney column in which he discusses legal issues of concern and interest to elders. He is an elderlaw attorney licensed to practice in the state of Oregon. He also keeps his own blog, Oregon Elder Law, and you can read more about his background here. All his Time Goes By columns are collected in this list.

Okay folks, I finally got up the nerve to address trusts and how to use them to avoid probate. I offer this with a warning that applies to a lot of things in life: Just because you can do something does not mean that you should.

Remember my last post where I suggested that when it comes to estate planning you first need a plan. A trust may or may not be part of your plan. If it is, here is how it works.

We all know about contracts. A contract is a legal transaction between two people. At Walmart, I make a contract with the Walmart corporation by offering a dollar for a can of soup. The clerk accepts the offer, Walmart gets my dollar and I walk out with the soup. I have completed a contract. Lawyers study contracts for a year to get a handle on this.

A trust is a legal relationship among three people. The first person is the trustor. The trustor puts up money. In my example today, the trustor will be Uncle Scrooge.

The second person is the trustee. The trustee protects and manages the money. Our trustee will be Stern Bear Trust Company.

The third person is the beneficiary. Let's make our beneficiaries, Huey, Dewey and Louie.

In the normal trust case, Scrooge writes a trust and puts a bunch of money in it. Stern Bear manages the money and doles it out to Huey, Dewey and Louie so that the three nephews go to college instead of spending it all on sex, drugs and rock-and-roll. Lawyers don't spend a year studying trusts, but they probably should.

So how does this three person legal relationship help people avoid probate?

It is a legal trick.

Having too much time on their hands, lawyers came up with the idea that instead of having three different people make up a trust, they would do a trust with one person wearing three different hats.

Let's say that Uncle Scrooge doesn't really want to hand over control of his money to Stern Bear at all. He wants to have full control of all his money until he is dead after which Huey, Dewey and Louie can have it and use it however they want. And he doesn't want probate judges snooping around his estate. Here is what he does.

Scrooge creates a trust in which he is the trustor. That part is just like the normal trust. This trust, however, does away with Stern Bear because Scrooge names himself as the trustee too. Being trustee, he gets to manage the money he put in the trust.

Then he names himself as the sole beneficiary for as long as he lives. Thus, he is able to spend the money on himself or anyway he wants for the rest of his life. Rather than having three people in this trust, we have Uncle Scrooge wearing three hats.

Just to make sure that nothing goes wrong, Scrooge also makes his trust revocable. That means he can close down the trust, change it or take money out of it whenever he wants.

Most people's first response to an arrangement like this is to say that what Scrooge did is really not a trust at all. It is just one guy with three hats who gets to do whatever he wants with the money.

If this is what you think, a lot of people agree with you.

One of the people who agrees with you is the Internal Revenue Service. That organization calls these kinds of trusts "disregarded entities." Trust income is taxed directly to Scrooge as if the trust did not exist, and most other trust transactions will be attributed solely to him.

So who does recognize these things? Well, a lot of people but most importantly, banks, brokerages and title companies.

Under normal conditions, if Scrooge were to die with title to his mansion in his name, there is no way the mansion could be transferred to Huey, Dewey, and Louie unless a court gave someone the legal authority to sign the deed. That person would be the executor of the estate, and executors only exist if there is a probate.

If, on the other hand, Scrooge dies and title to the property is in the name of the “Uncle Scrooge Three Hat Trust,” the trust will contain the name of the person who takes over as trustee when Scrooge dies. That person has the authority to transfer the mansion, the brokerage accounts, and all other trust property to the nephews, and the trust tells him to do just that.

If the trust is carefully done, Scrooge has successfully used the three hats to avoid probate.

You should notice that Scrooge's plan works only if, right after creating his Three-Hat Trust, he transfers his mansion and all his bank accounts into the name of the trust. We lawyers call this “funding the trust.”

If he fails to transfer anything to the trust, the trust is an empty container and therefore worthless. If he transfers only half of his property to the trust, Huey, Dewey and Louie get to do both a trust administration and a probate - the worst result of all.

I don't put much faith in the idea my clients will fund their own trusts so I write the deeds. I make sure the bank accounts are closed and reopened in the name of the trust.

For all this extra work I charge more. Trusts are harder to write than wills and the funding takes time and effort. That means trusts cost more. Trusts probably save money in the long run, but you can never be sure about that.

I tell people who are undecided about a will or a trust that they are facing a pay-me-now or pay-me-later choice. If you want to make your death as inexpensive as possible for your kids, pay me the big bucks now to write the trust, record the deeds and deal with the broker.

If you figure the kids are getting a big wad of free money in the form of an inheritance and the least they can do is pay a few legal fees, you hire me to write a will. The kids will pay me later out of their inheritances.

Some folks pay up front, others leave it up to the kids to pay. For me, it works out about the same.

At The Elder Storytelling Place today, Marcy Belson: The Great Sauerkraut Fiasco


Just so you know. You write a LOT more clearly than the usual professional writer.

That's the best explanation of trusts that I have ever seen.
Thank you for making it so simple that even I can understand it.

This is wonderful work, Orrin. I hope you are considering these posts as chapters in a future book. It would be a great service to elders (and a lot of not-so-elderly).

Succinct. Informative. Thank you.

I've got one of these things for complex reasons and your explanation is WAY clearer than my attorney's.

Orrin, I'm sending you a big Montreal hug.

You rock!

You are SO clear! Thank you.
Now on to irrevocable living trusts...
IE- Parents have this trust.
Dad passes
Mom has half the money of trust
she is in charge of decedent's trust but not the recipient.
So confusing.

I understand there is also something called a special needs trust.. I would like to know more about them.

Had a trust. Got rid of it on att'ny advice. She said I could accomplish my goals with a good Will. Now I understand why. Thanks for clarifying.

Question: I thought you are only required to file if your estate has combined gross assets and prior taxable gifts exceeding $5,000,000. Which means this advice doesn't apply for most of us. Is that wrong?

Thanks for our succinct clear explanations.

Suze Orman berates her viewers regularly for not having a revocable living trust. After reading your article, I have a clearer understanding of this subject. Still, I remain unconvinced that we MUST have one. It seems to me that they are very expensive to create, and I'm not certain we'd break even in the end.

We're ordinary middle-class retirees (actually I'm a semi-retiree since I still work part time). We're definitely part of "the 99%". We'll consider ourselves fortunate if we can leave small bequests to care for our two cats. We plan to meet with an elder law attorney soon to update our wills and healthcare directives, and I feel somewhat better prepared to discuss the issue of whether or not we need trusts. Thank you.

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