Section Review

'So that's what those are for!'
A thumbnail guide to revocable trust planning

Mark W. Williamson is a partner in the Boston law firm of Casner & Edwards. He is immediate past chair of the Probate Law Section Council.
It appears that the number of dedicated estate planning attorneys is on the wane. There seems to be a paucity of new lawyers willing to devote the academic energy necessary to master this difficult, subtle, but fundamentally un-sexy discipline. Noted consortia of estate planning professionals have even addressed the deans of American law schools, asking that more curriculum focus be given to the field during the educational process.

Ironically, as America ages, the pace of intergenerational wealth transfer accelerates, and the demand for estate planning expertise continues to rise. Sadly, however, the heady lure of probate continues to fail to spark the imagination of starry-eyed 1Ls.

Since the evaporating pool of estate planning talent tends to concentrate in the larger and pricier law firms, the host of average middle-American testators and testatrices are increasingly guided to the modest general practitioner to fulfill their needs. Therein lies a fundamental problem - many general practitioners, while willing to dabble in the art when requested to do so by their clients - don't have much knowledge or experience at estate planning. Infrequent practice and rusty skills can lead to mixed results, when the documents become, to be euphemistic, operative. And although the practitioners may feel comfortable drafting a simple will, perhaps, or a durable power of attorney - the occasional homestead filing or health care proxy might be attempted - the world of complex planning remains terra incognito to many. This, in turn, can cause embarrassment to the attorney who, when asked pointed questions by a client who has attended one too many life-insurance-annuity-Medicaid-probate-avoidance-asset-protection seminars (without which today's seniors would have to buy their own continental breakfasts), stares like a headlight-frozen deer.

As a stopgap remedy to this burgeoning problem, this column addresses the most fundamental aspects of that most humble tool of the estate planner - the revocable trust.

Why do we use revocable trusts, anyway? After all, they provide no asset protection from creditors, they give no sexy income tax benefits, gifts to them aren't considered complete for gift and estate tax purposes, and therefore the trust assets are includible in the estate of the grantor. So why bother? Put in a different way, as an adjunct to estate planning, why is a revocable trust superior to a simple will?

Probate avoidance

The probate procedure in Massachusetts is not as onerous as it is in some other jurisdictions. Nonetheless, there are a number of negative implications to probate, and therefore probate avoidance is often in the best interest of the client's beneficiaries.

Probate is generally only required when there are assets that are titled in the name of the decedent alone, and the court's authority is required to properly retitle them. Therefore, assets that have been transferred to inter-vivos trusts during the lifetime of the decedent generally escape the probate procedure. Because the terms of the trust determine the disposition of the assets, probate authority is therefore not needed, and, generally, where it is not needed it lacks jurisdiction.

Caveat: There are cases in which traditionally non-probate assets have been brought back into the probate estate. For example, Massachusetts courts have found that certain joint assets were never intended to pass to the surviving joint owner, and thus the survivor was compelled to retransfer nominally joint assets to the decedent joint owner's estate. These cases are few and far between, however, and the burden of proof is high.

Time delays

The probate procedure moves at its own stately pace, generally unheeding of the needs of the beneficiaries of the estate. There is usually a gap of at least a month, and often more, before a will can be allowed. Since the fiduciary can be held liable to creditors in certain situations, many if not most executors and administrators steadfastly refuse to make distributions to beneficiaries until the one-year statute of limitations for creditor claims has run.

If there is the need to expedite the probate, due to the existence of a wasting asset or other emergency, speed can be achieved through a temporary probate or administration proceeding. However, these options are relatively inflexible and administratively burdensome, when compared to trust administration. For example, an intestate estate can be dealt with on an expedited basis through the Special Administration procedure, but the fiduciary is required to file a bond with sureties, which can be expensive and hard to obtain, especially if the estate is large and the fiduciary does not have substantial personal assets or professional fiduciary experience.

Expense

In addition to the relatively minor expense of preparing and filing the petitions and other instruments, there is the increased likelihood of litigation, for reasons discussed below. Litigation can be, of course, ruinously expensive for the estate.

Privacy

One of the principal drawbacks of probate is the public nature of the procedure. The assets of the probate estate are inventoried, setting forth the value and nature of the assets, and the inventory must be filed. The will is also filed, as well as the names, and, remarkably, the addresses of the heirs. All of this information is obtainable for the asking at the probate court. Thus, the addresses of minor children, incompetent individuals, grieving surviving spouses, etc., along with the likely benefit they will receive, is all there for the casual perusal of any individual who might find such information interesting, valuable or merely amusing.

In addition, the creditors of the decedent are constructively notified of the decedent's death, by the legal notice requirement. Remarkably, legal notices are read, notably by credit card companies, and the creditors are given the opportunity to file their claims against the estate. Such claims might otherwise lapse due to the strict one-year from date of death statute of limitations.

Another publicity-related downside is that the heirs of the decedent must be notified of the death of the decedent, even if they are not beneficiaries of the will. Thus, heirs who would never need to be involved in the settlement process are notified of their right to object to the probate of the will. This, too, greatly increases the likelihood of litigation.

There are many grounds for objection - including improper or insufficient execution, incapacity, undue influence and duress. Each of these present evidentiary problems and allow disgruntled beneficiaries the opportunity to air their grievances in court (or perhaps institute vexatious proceedings in order to force settlement discussions). This naturally increases the likelihood of expensive litigation.

Trust comparison

Publicity - There is no general requirement to notify anyone not provided for in the trust. Thus no disinherited, disgruntled heirs need be tracked down and notified. There is no filing of an inventory (unless the trust is under the ongoing jurisdiction of the probate court, which is not the usual state of affairs), so no stranger need be privy to the size or nature of the trust estate. There is generally no public notification of the names and addresses of the heirs, as there is in probate.

Ease of objections - Unlike the situation with wills, where all of the statutory heirs are notified by the petitioner of their right to object and the procedure for doing so, in the usual course of affairs there is no proactive, court-required procedure for one to object to a trust.

It should be noted that, in some instances, a trust is made subject to the jurisdiction of the probate court, and accountings must be filed for allowance. The most common reason for seeking allowance is for the protection of the trustee, because allowance forecloses the beneficiaries' rights to object in the future as to that particular accounting. In such cases, the beneficiaries are required to be notified (but not the heirs-at-law), and they do have an opportunity to object.

There are no statutory execution requirements for trusts (at least not in Massachusetts). This removes one of the most fertile grounds for objections.

•  The lack of notice and disclosure requirements make it difficult to determine whether you have standing to sue, and whether it will be worth your while, economically, to do so.

•  Legal heirs and pretermitted heirs (i.e. children of the decedent who are not mentioned in the decedent's will) do not have automatic standing to sue trusts, while they do have such standing with respect to probate estates.

•  Trusts can, to a greater extent than estates, provide that the trustee may use trust assets to defend any suit.

•  Trusts can more easily utilize in terrorem clauses, which may purport to disinherit beneficiaries who object to the size of their share. In terrorem clauses are more difficult to use in the probate/willl arena, because if the beneficiary successfully objects to the allowance of the will, then the in terrorem clause will be thrown out with the rest of the will (in many states, in terrorem clauses are void as against public policy, but Massachusetts is not presently such a jurisdiction).

Notice - There is no notice requirement for legal heirs, there is no requirement to notify creditors and there is no requirement to publicly disclose an inventory (unless the trust has been made subject to the ongoing jurisdiction of the probate court, a relatively unusual occurrence).

Speed - While the procedure for the allowance of the probate petition runs its stately course, time stands still. Trusts, on the other hand, can continue to function without regard to the grantor's death. Assets can be actively managed, payments can be tendered, beneficiary advancements and other distributions can be made, all without interruption due to the death of the decedent (of course, since a decedent's (previously) revocable trust may be subject to some liabilities of the decedent - notably, estate and income taxes - it may be advisable to prudence in making beneficiary distributions until such potential liabilities are identified and dealt with).

Partnership and LLC interests - Death of a partner or member often dissolves a partnership or LLC. Therefore, interests in partnerships or LLCs often become direct interests in the underlying assets of such entities, which can have deleterious effects on the ability of the estate to continue ongoing business of the entity, preserve any asset protection qualities which may be afforded by a LLC or limited partnership, and interfere with the ability of the estate of the decedent to receive valuation discounts for the interests due to lack of marketability or control. When such interests are held by revocable trusts during lifetime, instead of outright by the individual, the individual's death does not become an automatic termination event. Thus, business continuity can be maintained and discounts preserved.

Estate planning using revocable trusts is a marvelously rich and complex subject, and one can barely scratch the surface in a few hundred words. But hopefully, this thumbnail sketch will be useful when you evaluate whether trusts should be a part of the services you may provide for your clients.

©2014 Massachusetts Bar Association