By Lee R. Phillips
I had a client bring a “living trust” to me last week. The client thought the trust was going to solve all of his estate planning problems. NOT SO!! It was done by an insurance agent, and this guy had set him up with an “irrevocable personal residence trust.” The agent had made himself the trustee with one of the client’s children as a co-trustee. The client had no clue why this trust was created. I thought it might be for asset protection, but the client was actually retired when the “living trust” was established. He had almost a zero chance of lawsuit.
The mess the insurance agent / estate planner extraordinaire had created was truly extraordinary. An irrevocable trust isn’t a “living trust.” Actually, if you want to get technical, it is a living trust, because it was made when the client was living, but it isn’t the living trust people use for estate planning. Because the irrevocable trust was “irrevocable” and someone other than the client was named as the trustee, the IRS is going to treat it differently. The standard living revocable trust aka living trust has you as the grantor (guy who creates the living trust), you as the trustee (guy who manages the living trust), and you as the beneficiary (guy who gets all the benefits from the living trust). If the living trust is revocable and same guy holds all three positions in the living trust, it is know as a “grantor trust.”
With a grantor trust (the standard living revocable trust) the IRS ignores the trust. You file your 1040 tax form using your social security number, and the trust is “invisible” to the IRS while you are alive. When you move your house into the living revocable trust, you still get the tax benefits, i.e., deduct the interest, sell the house after living there 2 of 5 years and get the profit tax free, etc. However, if the trust is an irrevocable trust, plus you don’t hold all three positions, the IRS says NO, NOT your house. It’s just a house owned by a trust that you are living in. You don’t get the tax benefits. This is true even if you have a revocable “land trust.” If you don’t hold all three positions you are toast in the IRS’s eyes.
The client wanted to sell the house. The long-gone insurance agent is the trustee. He has to sign the deed if the client wants to sell the house. (This agent had taken “lock in the client” to a level I had never seen.) The mechanism written into the trust to get a new trustee was “go get a court order.” (I’ll bet the agent was planning on getting a kickback from the attorney.) We are now in the process of removing the old trustee and appointing the client as trustee, so the client can sell the house he lives in. It will cost the client about $20,000 in income taxes, because the irrevocable trust owns the house. (The client doesn’t get the benefit of selling his “personal residence.”
Irrevocable trusts are not bad things. There are types of irrevocable trusts used to get property out of your estate for estate tax purposes, and they require independent trustees. But if you are doing standard estate planning – avoid probate –pass-property-to-the-kids trust work, YOU should be the trustee, and you do not want an irrevocable trust. In only one in ten thousand cases is it appropriate for the attorney to write himself in as trustee. Additionally, it is pretty safe to say that if you don’t have an estate tax problem, you don’t need an irrevocable trust. Just use the standard living revocable trust.
Except in California your insurance agent has no business writing your living trust. (In this case the client wasn’t in California when the living trust was written, so the agent violated the law.) Make sure you are getting a true living revocable trust. I get so mad when I see what attorneys and estate planners are doing to people trying to get a living trust and do some simple estate planning. I’m on a mission to stop the abuse. For a great read and education on living trusts just click and get a discounted copy of Guaranteed Millionaire plus a free 90 minute DVD, Using the Law to Make Money and Protect Your Assets. The DVD alone has sold for as much as $149, but now you can get them both for only $14.99. We’ll even include the shipping.