By Carey J. Messina and Kevin C. Curry

As estate planning attorneys, we receive calls from clients concerning the use of revocable living trusts in estate planning. The general public is invited to seminars on the subject, they receive literature in the mail, and, in some cases, receive in-home visits from parties, who are usually not attorneys, who advocate the use of the revocable living trust. Over the years, we have responded to clients to answer their questions concerning what the living trust will do and what it will not do. What follows is a discussion of what we call the “Six Myths” of the revocable living trust. 

Myth No. 1: A living trust saves taxes.

A blanket statement that a living trust saves taxes is subject to examination. First of all, what types of taxes are being discussed? One should know that the Louisiana inheritance taxes disappeared in 2004. Accordingly, State of Louisiana inheritance taxes do not come into play with respect to a trust or a will. The Federal Estate Tax may be applicable whether there is a will or a trust. Some parties advocating the revocable living trust indicate that the trust is necessary in order to obtain the benefit of the $5 million Federal Estate Tax exemption. This is not true. The $5 million Federal Estate Tax exemption can be obtained without the use of a will or a trust. The exemption is not utilized when bequests are made through a trust or a will to a surviving spouse; however, federal law for the years 2011 and 2012 provides for “portability” of the exemption of the spouse whose Federal Estate Tax exemption has not been used. This portability applies to the estate of that deceased spouse’s surviving spouse, at least for 2011 and 2012.

Many assets in an estate are referred to as “non-probate assets,” such as annuities, IRAs, and 401k plans. In the event that a trust is made the beneficiary of such accounts, there could be potentially higher federal income taxes. This is clearly a trap for the unwary. Income tax consequences will turn on the design of the trust and, in particular, the design for distribution of income from the trust assets.

Myth No. 2: The use of the revocable living trust avoids probate.

Most of the parties who advocate the revocable living trust also indicate that the settlor of the trust needs to make a “pour-over will.” The purpose of the pour-over will is to leave to the trust any assets that were not otherwise placed into the revocable living trust before death. The existence of the will itself requires that the will be filed with the court. Louisiana law requires that anyone having a will of the deceased must file it with the Clerk of Court’s office. The will cannot be left aside. Additionally, the major part of “probate” or the succession of an individual involves the valuation of the assets of the succession in order to get a step up in basis, not only for the deceased spouse’s community property half, but also for the community property half of the surviving spouse. Therefore, placing assets in a trust does not do away with the cost of having appraisals prepared, valuing stocks and bonds, and valuing other assets in order to obtain the benefit of a step up in federal income tax basis which can reduce future income tax costs when such properties are sold. If assets are placed in the trust, then at some point when the surviving spouse dies the assets need to be distributed, and if it involves real estate, then acts of conveyance must be prepared and recorded for the conveyance to actually be accomplished.

Myth No. 3: The cost of the living trust is less than the cost of a will.

The cost of a will depends upon what the testator wants to accomplish. If the testator simply wants to leave all their assets to a surviving spouse, then a very simple will is all that is necessary. The cost of a living trust can be anywhere from $2,500 to $3,500, even with some of the so-called living trust services.

As stated above, if a pour-over will is prepared, then such must be filed with the Clerk of Court’s office. The cost of valuing all the assets in the succession, whether a trust or a will, is involved. Unfortunately, the “upfront fees” with respect to a trust when added to the work that still needs to be done after death make the cost of the living trust substantially higher.

Myth No. 4: The living trust allows for immediate access to succession assets and management of such assets, but a will does not.

Approximately ten years ago, Louisiana adopted the concept of “independent administration.” If the executor is appointed in a will as an independent executor of an estate, then the executor may sell, lease or otherwise dispose of assets of the succession without having to obtain court authority. All that is required is for the original will to be filed with the court, and the court will “qualify the executor as the independent executor.” This allows the executor to manage the succession assets in an unimpeded manner. Therefore, real estate can be sold, as well as stocks and bonds and other securities, without having to petition the court for authority.

Myth No. 5: The living trust protects all assets.

As succession attorneys, we see that the largest asset involves non-probate assets, such as IRAs, annuities, life insurance proceeds and other retirement-type assets. Since these are non-probate assets, these assets are not transferred into a living trust and items such as IRAs and retirement plan accounts cannot be transferred into living trusts because of negative tax consequences. Therefore, the living trust is wasted because the majority of the assets are non-probate assets. During the lifetime of the settlors, the assets transferred to the trust are still subject to the claims of creditors. Most of these trusts do not attempt any type of Medicaid planning. Additionally, we have found that some “door-to-door” salesmen usually obtain the services of an attorney that is not experienced in estate planning, estate taxes or the use of trusts. These trusts have been “cobbled together” from forms obtained from Texas, or they continue the same defects and problems because they are simply copied from other documents. As always, consumers should be cautious of things that sound too good to be true.

Myth No. 6: A living trust is better than a will because the living trust cannot be contested.

With respect to capacity to make a donation “mortis causa” which involves making a will, La. Civil Code art. 1477 provides as follows: “To have capacity to make a donation inter vivos or mortis causa, a person must also be able to comprehend generally the nature and consequences of the disposition that he is making.” Further, the capacity to donate mortis causa must exist at the time the testator executes the testament. See, La. C.C. art. 1471. Also, a testament may be declared null upon proof that it is the product of fraud or duress, or is the product of influence by the donee or another person that so impaired the volition of the donor as to substitute the volition of the donee or other person for the volition of the donor. See, La. Civil Code arts. 1478 and 1479.

With respect to capacity concerning a person establishing an inter vivos trust, La. R.S. 9:1763 provides as follows: “A person having capacity to contract by onerous title may be a settlor of an onerous inter vivos trust. A person having capacity to contract by a gratuitous title may be a settlor of a gratuitous inter vivos trust.” The Comments to La. R.S. 9:1763, Comment D, provide as follows: “A person must have the capacity to make donations inter vivos and the capacity to contract in order to be a settlor of a trust gratuitous as to one beneficiary and onerous as to another.” As to the capacity to make a contract, La. C.C. art. 1918 provides as follows: “All persons have capacity to contract, except unemancipated minors, interdicts and persons deprived of reason at the time of contracting.” Accordingly, a person making a will or a person establishing an inter vivos trust must have capacity in any event. Comments by those selling living trusts that a trust is harder to overturn than a will are completely without merit.