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If you can’t trust a trust, what can you trust?  The answer, it turns out, is plenty.  Before exploring that, a brief word about the title of this piece.  It’s inspired by the words of former Mississippi governor Ross Barnett and a story that comes to mind whenever the subject of trusts and trustees comes up.

“If You Can’t Trust a Trusty, Who Can You Trust?”

Dale Morris

“Cowboy” Dale Morris was a drifter who had spent some time between crimes as a ranch hand in Montana and elsewhere, before eventually finding his way to Mississippi.  In 1955 in Hancock County, he shot a man who was trying to stop him from stealing his car tires.  Morris pled guilty to manslaughter and was sentenced to twelve years in Mississippi’s notorious Parchman State Penitentiary.  Conditions there were harsh, making the special privileges earned by prison “trustys” (different spelling) all the more prized.

Morris became a trusty at Parchman, for good behavior and possibly owing to the skills he had acquired as a horseman and their usefulness on an 18,000 acre prison farm.  Governor Barnett himself approved a trip to Arkansas by Morris and two guards to secure a horse the prison could use for breeding purposes.  Morris somehow convinced the guards to return to Parchman with the horse while he stayed behind for a few hours to “get married.”  Morris escaped.  Said the Governor in response to his critics on the Mississippi Penitentiary Board, “If you can’t trust a trusty, who can you trust?”

This article is about more conventional trust arrangements and whether you need a trust at all.  Some do and some don’t.  Who, when, and what are broad and complicated topics, none of which are intended to be addressed exhaustively here and all of which require individual legal advice.  But here are some things to consider when and if you sit down with an attorney to discuss the matter of trusts and estates one on one.

Should You Create a Trust to Avoid Probate?

In 1966, Norman Dacey published How to Avoid Probate!  A non-lawyer estate planner, Dacey called the probate system “universally corrupt,” railed against lawyers for charging “extortionate legal fees,” and touted use of revocable living trusts as a way to avoid the “corruption.”  Dacey’s book resonated with millions, even as it instilled a lot of misperceptions.

In Basic Estate Planning in Florida, a book that devotes a whole chapter to the advantages and disadvantages of living trusts, the authors make several good points about the value of probate.  For one thing, “[t]he probate process offers judicial oversight of a decedent’s estate passing under a will, [a process not] automatically in place to resolve questions and conflicts with respect to administration of a living trust.”

On the matter of attorney fees, a comment or two.  First, fees to draft a trust agreement and the instruments needed to fund and administer the trust are usually greater than those for drafting a will.  Fees do not stop there since, just as with wills, legal assistance with respect to post-mortem administration of trusts will usually be needed.  As the Basic Estate Planning in Florida authors state, “There usually will be professional fees regardless of whether assets are passed through probate or a living trust, and the difference is not as great as many think.”

In terms of probate “taking too long,” many of the same causes of “delay” (dealing with  creditors, the need to identify, value, and liquidate assets, concerns about federal estate tax, etc.) also apply to the passing of a decedent’s assets through a trust.  Again in the words of my favorite book on the subject, “There is nothing inherent in the probate process that causes the distributions to be any slower or faster than those distributions that would be made from a living trust after the death of the settlor.”

In short, the probate process is not the “evil” conjured by Dacey in his book, all the more so thanks to streamlining procedures subsequently introduced by the Uniform Probate Code and caps on attorney fees, all enacted in Florida and in other states.


Trusts as a Way to Avoid Estate Tax

Under the Tax Cuts and Jobs Act of 2017 (TCJA), the amount of a person’s lifetime exemption from federal estate and gift tax was doubled from $5 million to $10 million, indexed to inflation. In 2021 the exemption is $11.7 million per person ($23.4 million between spouses).  The federal estate and gift tax rate is 40% of any amount that exceeds the federal exemption amount.

Although the higher exemption amount reverts to $5 million in 2026, the IRS has said that individuals who make large gifts while the exemption is higher and die after it goes back down won’t see the estate tax benefit eroded.

Of course, all that is under current law.  Since Covid relief and infrastructure enhancement do not come free, Congress and the Administration are considering several tax changes that include the estate tax.  Under President Biden’s American Families Plan, except for charitable bequests the estate tax exemption would shrink to $1 million per-person ($2 million between spouses).

So trusts – which, when tax inspired, have been fading in use and popularity – may be destined for a re-emergence.  Why?  Because, as one advisor’s site put it, “Trusts are effective because they take assets out of your name and put them in the name of the trust.  For every dollar moved, that’s a dollar that either doesn’t count toward the exemption or isn’t taxed at the 40-percent rate.”

But beware of an important distinction, one frequently blurred in some places: that between revocable and irrevocable trusts.  Assets in a revocable living trust are included in a decedent’s taxable estate.  Accordingly, what an attorney typically will tell a client is this: if you want the money out of your estate for tax purposes, then put it in a trust for your children, and walk away, and live with the fact that you can’t have those assets back, can’t change the terms of the trust, and can’t retain any type of income stream from the trust assets.  Those are a lot of limitations, but if a client is good with them, then the attorney will put the assets in an irrevocable trust, name a third party trustee, and tell the client that he is not to have anything to do with the trust assets and can’t tell the trustee what to do with the trust assets.

Trust Alternatives, and Reasons to Consider a Trust

There are non-trust alternatives for estate tax avoidance.  One strategy, for those with the means to adopt it, is to use the lifetime estate and gift tax exemption (discussed above) while you are alive.  As Charles Schwab’s Director of Tax and Financial Planning put it in a recent article, “Lifetime gifting can be a great strategy, as long as you leave yourself enough to live on.  For the gift to count, it has to be a complete and irrevocable transfer.”  Another option is to make direct payments of tuition and medical expenses on behalf of loved ones.  Such payments, structured correctly, do not represent gifts.  Plus, the monies spent by you on the qualified medical and tuition payments reduce your net worth and taxable estate, but they do no harm to your income, gift, or estate taxes.

Finally, not to shortchange trusts, there are great reasons to create a trust having nothing to do with either tax or probate avoidance.  Kane’s Florida Will and Trust Forms Manual lists several: continuity in asset management as you become older; control of spending and investments to protect beneficiaries from poor judgment and waste; planning for a grantor’s incapacity; avoidance of probate in other states where real property is owned in more than one state; protection  of trust assets from beneficiaries’ creditors; protection of premarital assets from division between divorcing spouses; management of unique assets that are not easily divisible (e.g. vacation homes, recreational vehicles, mineral interests, timber and commercial real estate); management of closely held business assets for planned business succession; providing structured income to a surviving spouse that protects trust assets for descendants if the spouse remarries; and for other purposes.

If you have questions about these subjects, please feel free to contact me.

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