What’s Missing From This Trust? Not Knowing Could Cost You Thousands

August 24, 2011
109403306 26c1db655c m6 What’s Missing From This Trust? Not Knowing Could Cost You Thousands

Image by wilhei55 via Flickr

There are plenty of articles, books, blog posts, etc. that explain the benefits of hiring a lawyer to do your estate plan, rather than doing it yourself.  Similar articles, books, blog posts, and et ceteras also recommend that you hire a lawyer instead of using an online company.

On the other hand, fewer resources explain why you should probably hire an estate planning attorney instead of an inexperienced general practitioner to do your estate plan.

Through a recent example, this post will explain why the latter point can be very important.  I must admit that I have some hesitation in making this recommendation for the following reasons:

  • I do not wish to disparage the work of my colleagues;
  • The recommendation feels self-serving, as I am an estate planning attorney;
  • I recognize that the cost of hiring an experienced practitioner instead of a generalist during hard economic times almost feels like a luxury.

However, perhaps this recent “war story” can underscore the underlying principle despite my internal reservations.

A Widow’s Trust

I was recently asked to review a non-client widow’s will and trust.  The widow’s husband was an attorney who owned and ran a successful law firm that rarely did any estate planning.  However, the firm created this couple’s plan.

At present, the widow’s assets are all held in her living trust, and she is the sole trustee.  She also has a typical pour-over will stating that upon her death, any assets held outside the trust will be transferred in.

Below, I have condensed all of the clauses in the widow’s trust that dispose of its assets after she dies.  The specifics and amounts have been completely changed to protect the widow’s privacy, but these are not necessary to make the ultimate point.  Our widow’s trust leaves her estate as follows:

  • $100,000 to Charity 1;
  • $50,000 to Charity 2;
  • $250,000 to a Charitable Trust on behalf of Charity 3;
  • $200,000 outright to Child A;
  • $200,000 outright to Child B;
  • $200,000 outright to Child C.

This seems fine, doesn’t it?  The estate is intended to be split between the kids and the charities so that the widow can leave a legacy and be remembered fondly.

However, something crucial is missing from these seemingly uncomplicated instructions.  If the trust remains unchanged, it will potentially cost the widow’s estate thousands of dollars in unnecessary estate and legal fees to fix the problem.

To those who wish to write their own wills or trusts, can you honestly say what is wrong here?  If not, given that a well-prepared estate plan comes as a result of dozens of answered questions, tough decisions and detailed choices, are you still confident in your ability to create one by yourself?

Will an online company, who does not “review your answers for legal sufficiency, draw legal conclusions, provide legal advice or apply the law to the facts of your particular situation”, fix the oversight or even inform you that there is one?

The firm that created our widow’s trust may be quite highly-rated, but the drafter seems to have overlooked something fairly basic.  Is it a stretch to imagine that a less-experienced drafter may have missed something else?

This is not to say that estate planning lawyers are above making errors.  However, as in any profession with its own lingo, procedures, and practices, they would be able to spot this specific problem pretty easily or understand it fully after being given a two- or three-word answer.

A Relevant Joke

A man was having problems with his boat, so he sailed to the nearest marina to try to get it fixed.  He looked online for the best options in boat repair and was able to find a highly-rated carpenter who was able to do a same-day appointment.

An hour later, the carpenter arrived and climbed aboard.  He looked around for a minute or two, then took out his hammer and tapped on a spot on the starboard side near the mast.

“All fixed”, said the carpenter, “that’ll be $1,000”.

The boat owner was flabbergasted.  “$1,000?  You were here for 5 minutes!  What is the basis of your price?”

The carpenter responded, “$10 is for the labor cost.  $990 is for knowing where to tap.”

The Lesson

Paying a higher fee for experience can actually save time and money.

Oh, and by the way, the trust is missing a “residuary clause”.  A residuary clause states something to the effect of “I give the remainder of my property to my spouse if (s)he survives me.  If not, I give the remainder of my property in equal shares to …”.

The idea is that at the time you draft your will or trust, it is impossible to know exactly how much or what will be in your estate when you die.  The residuary clause acts as a “catch-all” – it gives out any remaining property that is otherwise unaccounted for.

This is crucial because without it, your personal representative, your beneficiaries, the court, and/or any other interested parties will need to come up with some interpretation of how you would have dealt with any excess or shortfall in your estate.

Let’s illustrate using our earlier example:

  • If our widow’s estate exceeds $1 million at her death, the residuary clause would give the excess to whomever she listed.  Without it, how should the excess be split?  All to the children?  A 60-40 split between the children and the charities?  Should state intestacy law be applied instead?
  • If the widow’s estate is less than $1 million at her death and no residuary or other clauses account for this possibility, the gifts will be subject to state law on “abatement”.
 What’s Missing From This Trust? Not Knowing Could Cost You Thousands
 What’s Missing From This Trust? Not Knowing Could Cost You Thousands

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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