WARNING! Free Lunch Ahead

Last week I met with an elderly lady (I’ll call her “Gloria”) who asked me to review an estate plan she was given at a free seminar. Well, it was not really a plan, but more like a proposal or a price list. Gloria had been invited to a “free” educational lunch seminar to learn about estate planning. As she should have expected, the presentation was not an educational seminar at all, but instead it was a sales pitch extolling the benefits of Revocable Living Trusts. So, as she and I reviewed the proposal, I asked her how long she had met with the Speaker (who I assume was an attorney) who provided her with the proposal to discuss her Estate Planning needs.  “Well,” she said, “I didn’t meet with him, personally, but there was an assistant who talked to me on the way out the door and she gave me the proposal and offered to take my order right there, and process my credit card payment.”

The first thing that should have raised a red flag was that the Speaker was offering to provide an Estate Planning service at a predetermined price before he even knew what Gloria’s estate planning needs were: Did she have tax planning concerns or incapacity concerns? Did she need Medicaid planning? What did her estate consist of: Did she have real estate, and, if so, was it located in other jurisdictions? Did Gloria own non-probate assets like IRAs and 401(k)s and insurance policies? What about other digital assets or mineral rights?  How large was Gloria’s estate?  Would her estate be subject to Federal Estate Tax or Generation Skipping Transfer Tax? The Speaker could not have known the answer to these or dozens of other equally important questions.  Yet he gave her a quote for a one-size-fits-all estate plan that, in the end, could have been disastrous.

Then I asked Gloria what the speaker was offering her.  She said the Speaker told the lunch group that by utilizing a Revocable Living Trust, they would not have to worry about estate taxes; they would be able to qualify for government subsidized long-term care benefits; and that their estates would not have to go through probate, which he described as a long and expensive process.

If you’ve gotten this far in this article, I want you to understand some of the inaccuracies and misstatements that the Speaker made during his presentation:

First, a Revocable Living Trust does absolutely nothing with regard to avoiding, reducing or minimizing Federal Estate Tax or State Inheritance Tax – nothing – zip – zero – zilch – nada – nothing!  To begin with, Louisiana has not had an inheritance tax since 2004, so that’s not even an issue.  With regard to Federal Estate Tax, your estate (or you personally, when lifetime gifts are made) is not taxed until the IRS has determined that a transfer is complete, and, a transfer is not complete in the IRS’s eyes until the transfer is irrevocable. Consequently, a transfer to a Revocable Living Trust is not a completed transfer for Gift Tax or Estate Tax purposes. The transfer, however, is complete when the assets are distributed from the trust to the principal beneficiaries, usually upon the Settlor’s death. So, if your estate is large enough to subject to Federal Estate Tax ($5,450,000 as of this writing), whether the assets are held in your name, or in the name of a Revocable Living Trust, at the point when the assets are finally transferred to your ultimate heirs or beneficiaries, it will be taxed. Taxes can be minimized by proper professional planning, but not by the use of a Revocable Living Trust.

Second, with regard to Medicaid planning, it’s even worse.  Not only does transferring assets to a Revocable Living Trust not help with qualifying for government assistance and long-term care benefits through Medicaid, it may actually be detrimental.

To qualify for long-term care benefits through Medicaid, a recipient is allowed to own a limited value of “countable resources.”  Because the Settlor (the person who establishes the trust and transfers assets to it) still has access to the assets in the trust, assets held in a Revocable Living Trust are still countable resources for Medicaid planning purposes.  Let me say that again: Assets held in a Revocable Living Trust are still countable resources for Medicaid planning purposes. Consequently, transferring assets to a Revocable Living Trust does not assist in qualifying at all.

But wait, it gets worse. Transferring assets to a Revocable Living Trust could actually hurt your chances for eligibility.  For instance, home equity up to almost $550,000 is not a countable resource for Medicaid; that is to say Medicaid will not count the equity in your home when it calculates your total countable resources when you make an application. However, once the home is transferred into a Revocable Living Trust, the home becomes a countable resource because your interest in the trust is a countable resource. Thus, by transferring your home to a Revocable Living Trust you just converted a non-countable resource into a countable resource and you’ve made yourself ineligible for benefits. So how’s that free lunch tasting now?

Although transferring assets out of your name to qualify for Medicaid benefits is sometimes advisable, when you transfer those assets for inadequate consideration, the transfer is subject to a 60-month look-back period, i.e., assets transferred out of your name for less than adequate consideration over the most recent 60 month period are included as countable resources in the eligibility determination process. If assets are transferred to a Revocable Living Trust with the hope and belief that that asset transfer will help the Settlor qualify for benefits, that transfer will be deemed as incomplete.  You will then need to complete a qualifying transfer and wait yet another 60 months before you can apply for benefits.  So, in effect, your look-back period has been extended (sometimes significantly) by the time that the transferred assets were held in the trust.

To be fair, I don’t know whether the Speaker purposely intended to mislead his audience of Seniors, or whether he just did not know the law.  The Speaker’s comments about avoiding probate were actually partially correct, albeit misleading.  If all of your assets are transferred to a Revocable Living Trust it is possible for your estate to avoid probate.  Bear in mind, however, that this means all of your assets: your home, your car, all of your bank accounts — everything. From that time forward, you will live your life out of your trust because all of your assets and accounts will be titled in the name of the trust. Many people find this prospect as untenable or difficult to achieve.  In fact, if you think the Speaker believes you can and will keep all of your assets in the trust for the rest of your life, ask him why he includes a “pour-over Will” in the package.  Hint: It’s so your heirs can use the probate process to transfer your remaining assets to your trust.

Then ask yourself should you really be concerned with avoiding probate? The Speaker’s comments about the probate process being a long expensive ordeal were, again, only partially true.  In actuality, a simple estate can be completed inexpensively in a couple of weeks using what we call an “open and close” succession. Are there estates that drag on for months and even years? Absolutely. But those estates are generally burdened by a legal challenge to the Will; for instance someone challenges the capacity of the testator, or someone claims that the testator was subject to undue influence. Or, sometimes, estate administration can become prolonged when there is a challenge to the form of a testament (someone claims that the Will was not a proper form) or where there is a dispute over the decedent’s ownership interest in assets. The Speaker, however, failed to mention that all of these same issues and challenges can arise with a Revocable Living Trust as well.  These trust challenges can surface when the trust is first drafted, or they may not arise until after the Settlor dies, and could likewise result in a long, drawn-out litigation.  

Notwithstanding the Speaker’s misstatements, there are some instances where a Revocable Living Trust is appropriate in estate planning, and it is particularly effective in other jurisdictions where avoiding probate may be a very legitimate concern, such as in California where probate costs can be very high. However, in Louisiana, that’s simply not the case.

After discussing with Gloria the Speaker’s misleading presentation, together we went over her proposal, which was really nothing more than a prop in the Speaker’s high-pressure sales pitch. The proposal listed multiple different documents and services and their corresponding charges that came to a total of over $12,000.  “But,” said the Speaker, “because you attended this seminar, you get a half price reduction, bringing your total down to under $7,000.” “And, if you sign up and pay today, you’ll receive an additional discount of 10%.”  Thus, the total package price came to just over $6,000.  That’s $6,000 for a completely impersonal, cookie-cutter plan that will take the Speaker (or his secretary) less than ten minutes to draft, and that will address none of what Gloria’s concerns!  

So, if you or someone you know has been invited to a “free seminar,” you might want to think long and hard before you accept that offer, and attend only with the understanding that there’s no such thing as free lunch.   On the other hand, when you’re finally ready to get serious about your Estate Planning, our Estate Planning & Probate Group includes some of the most prominent and well-respected Estate Planning Attorneys in Louisiana and we’re ready to provide you with a customized plan that will address all of your planning concerns. Call us at (504) 582-1540.

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