Trust Planning Smooths Way for Survivors

Alex Miller, an attorney at Reece Moore Pendergraft  LLP in Fayetteville,  says everyone needs to plan for the inevitable.
Alex Miller, an attorney at Reece Moore Pendergraft LLP in Fayetteville, says everyone needs to plan for the inevitable. (Beth Hall)
Jennie Clark Stewart is a partner at Kutak Rock in Little Rock. She uses her family as an example of how a revocable trust works.
Jennie Clark Stewart is a partner at Kutak Rock in Little Rock. She uses her family as an example of how a revocable trust works. (Karen E. Segrave)

Alex Miller asks and answers a lot of questions when clients seek his services, but one question he returns to again and again is, “What happens if one of y’all dies?”

Miller is a partner at Reece Moore Pendergraft LLP in Fayetteville, a law firm that specializes in trust management and estate planning; nine of the firm’s 18 attorneys are estate planning specialists. Miller said not every client who comes in wants to establish a trust to manage his or her wealth, but 90 percent of them do by the time they leave his office.

“Everyone needs estate planning of some sort; it may not be a trust,” Miller said. “Everyone should at least talk to a professional and understand what their options are. The No. 1 thing they need to explain to them is what happens when we die and what happens to our assets. What is the process that the family we left behind is going to have to go through?”

Miller said most people think that that is what wills are for. It’s a popular culture trope: Family members and others get together to hear the reading of a will.

The problem with wills, Miller said, is that they lead to probate because a judge has to provide the legal authority to pass assets from the deceased to the beneficiary. Probate has two drawbacks for many people: It can take months even in simple procedures, and all matters in probate court are public record.

“One of the first things I’m trying to do when a client comes into my office is avoid probate,” Miller said. “That’s usually where a will gets thrown out the window. A will only controls property that goes through probate. A will does not help you avoid probate.”

Jennie Clark Stewart, a partner with Kutak Rock in Little Rock, said setting up a trust fund is more expensive than writing a last will and testament, but the long-term benefits more than make up for short-term costs. Setting up a trust can cost between $1,000 and $2,000, but going to probate court isn’t free, she said.

“I tell people you can either pay now or pay later, but at the end of the day it ends up being a little bit cheaper setting up the trust now,” Stewart said. “When I first started practice, probate didn’t bother me that much, but the more I do probate, the more I want to avoid it. It is a pain. People don’t want their property tied up for six months to a year or more.”

How It Works
The most common form of trust is perhaps the best known, the revocable trust.

Stewart, who is married with a young daughter, said the procedure is to create the trust — in her example, the Jennie & Michael Stewart Family Trust — and then have assets like homes deeded over to it. The trust becomes the “owner” of the home, and the Stewarts are trustees of the trust.

Stewart said the tax advantage of trusts has declined since recent changes have increased the inheritance tax exemption $11.2 million per person but, for her example, she gave herself and her husband a $25 million estate. When one of the trustees dies, Stewart said, the trust could split into two trusts — a bypass trust — to ensure the inheritance exemption is taken.

“I always kill off the husband first, so my husband dies and it dumps into the marital trust, the bypass trust,” Stewart said. “We’re going to make sure $11.2 million of that is exempt from the tax and the [remaining $13.8 million] goes to the surviving spouse. What goes to the surviving spouse, you get a marital deduction.

“At the second death, let’s say that $14 million grows to $18 million, we’re going to shelter $11.2 million of that from tax and you’re only paying taxes on $18 [million] minus $11.2” million.

Financial experts are quick to point out that you don’t have to be a millionaire to reap a trust’s benefits. The tax benefits are obviously geared to helping the wealthy, but there are other nontax benefits of trusts.

“A trust works best for an individual or family that is trying to make sure there is a smooth transition of wealth to their beneficiaries,” said Bill Kerst, president and CEO of Community First Trust Co. in Hot Springs. “That can be applied at any dollar amount. That is one of the misnomers; most people think they have to be overly wealthy and that’s not it. It can be applied a lot of different ways.”

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Not Just for Taxes
Trusts can be a huge help for people before they die, Miller, Stewart and Kerst all agreed.

The trust can be used in case an individual become incapacitated because the successor trustee can take action. Without a trust — or a financial power of attorney — someone would have to hire an attorney and go to court to get guardianship over the incapacitated person.

“As soon as you become incapacitated, they get to step into your shoes and manage your assets for you,” Miller said. “With a guardianship, if you’re incapacitated for 20 years, that sucker is a 20-year long court process.”

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Trusts can also provide a financial control over inheritances left to minors. A trust can be set up to provide a nest egg for children, but with a third-party trustee overseeing the funds to ensure they are properly spent on education and other necessities until children are old enough to make their own decisions.

“Let’s say you die next year — you wouldn’t want these kids getting a big payout that young. They’re going to blow it, right?” said Stewart, offering another worst-case example. “You could keep it in a trust. Let’s say on down the road, your oldest daughter, when she is in her 20s, develops maybe some substance abuse problems. You don’t want her to get a payout at 35 because that could be a death sentence for her. You can keep it in trust for her life, and the trustee would only pay it for her health or education.”

Miller said trusts that are set up so a beneficiary can protect those assets from future creditors (or ex-spouses). It can also help keep assets in the bloodline in blended family situations; Miller said if a widow remarries and doesn’t make plans, then her assets would go to her second husband — and any family he has.

“Estate planning is the bread and butter of this firm,” Miller said. “We also do a lot of clients like me, who aren’t taxable estates. Estate planning is pretty selfless because you don’t see the benefits. They don’t kick in until you’re incapacitated or die. The clients are worried about their spouse and their kids; they don’t want them going through a mess.”