I’ve noticed a trend in the language of prospective clients and even other practitioners lately indicating that there’s a creeping sentiment that the traditional living trust is becoming unnecessary as a planning tool. While I agree that a trust is not a magic, one-size-fits-all, tool to be used in every estate plan, I still believe that for many families using a trust is the most efficient and effective method of ensuring smooth succession of assets.
It has long been the case that most classes of liquid assets can be transferred outside of the probate process using transfer-on-death or beneficiary designations. However, it is a relatively recent development in Indiana that legislation has allowed us to make revocable transfer-on-death designations for real estate. Because real estate was historically the only asset that a typical client could not safely and effectively transfer outside of probate, it may seem to some that this seemingly simple change in the law has created a viable and cheaper alternative to using a revocable living trust to avoid probate. This view is, in my opinion, quite short-sighted. I would liken the comparison of Trusts vs. Transfer-on-death deeds to a comparison of a traditional gas-powered van vs. an electric battery-only commuter car. Just like a trust, the traditional gas-powered van will be able to carry more volume (people and cargo) and a greater variety of asset classes for a longer period of time (extended mileage range) and will likely be safer for the occupants in the event of a crash. The electric vehicle will, by necessity, be smaller and not able to travel as far due to mileage range restrictions. Here are some reasons why I believe this analogy to be fitting.
Transfer-on-death (“TOD”) deeds can keep the property out of probate, but they fall short in some very key areas. First, TOD deeds do not allow for any protection of the asset after the death of the grantors. Once the property passes to the ultimate beneficiaries, the property becomes immediately subject to the claims of any of the beneficiaries’ individual creditors, predators, spouses, ex-spouses, etc. It’s entirely possible for one beneficiary’s creditors to attach a lien to the newly inherited property and spoil the party for everyone. Trusts, on the other hand, may be drafted to avoid attachment of such claims, and can protect the asset for the benefit of all the beneficiaries.
Even in the absence of any creditors or claimants, a TOD deed still falls short in the ease of administration department. Consider a hypothetical in which real property is inherited by three adult children as a result of a TOD deed. Each of the children becomes a 1/3 tenant in common owner of the real property and thus all three are required to consent and execute signatures on all of the subsequently necessary documents in the event that they elect to sell the property. This paves the way for a potential partition lawsuit if the beneficiaries do not all agree on all the relevant terms of sale. If they elect to keep the property, in the absence of a trust there are no real written rules or guidelines for the maintenance and care of the property. Trusts allow for careful drafting of the terms of management of the property so that there is no doubt as to how taxes and expenses are paid and income is distributed. Trusts also allow for the appointment of one successor trustee to carry out the necessary administration, so that there is no need to have all of the beneficiaries execute every single necessary document and approve every transaction. Granting the executive authority in a trust agreement to the successor trustee can go a long way to help avoid conflicts and unnecessary administrative time and cost.
It’s my opinion that TOD deeds have their place in planning, and that in some instances they may be an appropriate method to avoid probate. However, for a majority of families I believe that a well drafted Living Trust is a preferable tool and can save considerable time, effort and money when it comes time to administer the assets.
If you have questions about Trusts, TOD deeds, or other estate planning matters, please feel free to contact Greg Halcomb at (317) 575-8222.