The Art of Avoiding Probate

TRUSTS & ESTATES

Most Americans know the folly of dying without a will. Under the widely different state formulas devised for such cases, a widow can lose one-half of her husband's estate to his relatives. Equally alarming to newly affluent Americans is the high cost of dying with a will. For good reasons, a will must be proved valid (probated) in state courts known variously as probate, surrogate, orphans or chancery. Unfortunately, many such courts' archaic methods can tie up an estate for years, devour 20% or more of its value in legal fees--and force the dead to subsidize politicians in one of U.S. law's darkest scandals.

In many states, probate judges appoint favored lawyers to help executors appraise estates for taxes. Appraisers' fees come out of the estate, and are often based on the size of the estate as the appraisers calculate it. As to how appraisers get their jobs, Detroit Probate Judge Ernest C. Boehm could hardly be franker: "Naturally I select men who have helped me in my campaign."

In New York, "special guardians" are often named to protect the interests of "infants," meaning heirs under 21. The state's surrogate judges appoint guardians without public notice of their names or fees. One guardian recently got $15,000 for ten hours' work on a $700,000 estate. Rumor has it that New York's guardians return about 30% of their fees to party coffers, which suggests the political leverage of Manhattan's two surrogates (annual salaries: $37,000), who last year appointed 428 guardians while handling estates with a gross value of $941 million. Not surprisingly, the big prize in Manhattan's primary last week was a 14-year term on the surrogate bench (see THE NATION), which Fiorello La Guardia once called "the most expensive undertaking establishment in the world."

Invitation to Disaster. Since all will-distributed property is subject to probate, the man who wishes to avoid the process is well advised to reduce the amount of his property that need be willed. One method, which also avoids federal gift taxes, is for a married couple to give away assets of $60,000 in one chunk, plus yearly chunks of $6,000 to each child. Another way is to put assets into life insurance, payable to a named beneficiary other than one's estate; the proceeds escape probate. Other assets can be disposed of by "joint tenancy with right of survivorship" such as joint bank accounts, which pass directly to the surviving tenant. Under that method, though, when the survivor dies, the probate process will take over unless something is done to head it off.

More and more lawyers are now advising clients to set up "revocable inter vivos [living] trusts," which in effect act as a conduit during a man's lifetime for the transfer of his property to his heirs. The creator of such a trust, however, retains full control of it, and as a result he escapes federal gift taxes, though not estate or income taxes on whatever the trust earns. He can change the trust as he pleases until he dies. The trust thus takes the place of a will--and all property that goes into it bypasses probate.

One measure of national interest in this device is a sleeper bestseller titled How to Avoid Probate (Crown; $4.95). Written by Norman F. Dacey, who calls himself "America's best-known estate planner," the hefty paperback consists of a 50-page blast at lawyers and 300 pages of assorted forms that readers are urged to use in setting up revocable living trusts. In Dacey's version, a man puts most of his estate into life insurance, makes a bank trustee but directs the bank to invest the estate in a mutual fund. While the bank pays his heirs out of the trust income, the mutual fund turns a tidy profit in assorted fees.

Dacey's book appalls lawyers--and not just because the author is a nonlawyer whose main business is selling mutual funds. The charge is that Dacey's do-it-yourself forms can hardly be relied on amid the wildly disparate laws of all 50 states. Last week the American Bar Association denounced the book, warned that using the forms without the help of a local lawyer is an invitation to disaster--to say nothing of almost inevitable probate.

The A.B.A. itself sponsors a far sounder predecessor of Dacey's primer -- a highly sophisticated film, written and narrated for U.S. lawyers by Harvard Law Professor A. James Casner, one of the country's top trust experts. To really beat probate, Casner stresses that the creator must "fund" a revocable living trust with as much as possible of his income-producing property before he dies--the more the better. Setting up such a trust may cost more than probate in lawyers' fees, trustees' fees and stock-transfer taxes. Even so, in many cases the trust can save post-death administrative expenses equaling as much as 10% of the estate. Moreover, it may be a godsend to older citizens yearning to let others take over their business headaches. In sum, the creator of a living trust can:

> Set up the trust in another state with more advantageous laws than his own state.

> Watch his trustees in action and change the trust if necessary, while providing continuous, legally invulnerable management of his affairs in the event of his illness or incompetency.

> Deter attacks by disgruntled heirs and creditors--largely because the trust, unlike probate, is an unpublicized fait accompli.

> Avoid the endless probate delays that may disrupt his business, derail his investments, and otherwise cut his family's income after his death. With a trust, his affairs flow smoothly on.

Get Help. Clearly, a revocable living trust may be a wise move for those able to fund it--for example, people who own their own businesses or substantial stockholdings. But what of today's typical corporate executive, who may control relatively little tangible property? Affluent as he seems, most of his wealth may be locked in group life insurance and deferred retirement benefits. To name his wife as beneficiary may overwhelm her with unaccustomed financial problems, but to set up a trust in his will consigns her to probate.

His solution may well be a kind of pilot trust--a form of revocable living trust that is funded at his death by his life insurance proceeds and corporate benefits. Many bankers recommend splitting such a trust into two parts--a "marital trust" and a family or "non-marital trust." The surviving spouse gets the income from both trusts, while being allowed to use the principal of the marital trust if necessary. When he or she dies, federal estate taxes apply only to the nonmarital trust and only to the amount that exceeds $60,000. The principal of the nonmarital trust passes directly to the children, and both trusts escape probate.

However alluring, such plans have so many built-in problems that they obviously require skilled help as well as constant review in the light of changing assets and laws. Whatever the pros and cons of revocable living trusts, one thing is clear: don't use a do-it-yourself book--get a first-rate lawyer.

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