We have many clients ask us if they should have a revocable living trust as part of their estate plan. Most clients asking this question have attended a seminar selling “revocable living trusts”.
Whether or not you need a trust depends on what you want to accomplish in your estate plan. Trusts are the right choice for some and the wrong choice for others.
What does Revocable Living Trust mean?
While there is a lot that goes into a revocable living trust, to understand the basics, we can look at the 3 words:
- Revocable means that you can alter, change, or void parts or the entirety of the trust at any time while you are living.
- Living means that you assembled this trust while you are alive and well, meaning you are in a healthy state of mind.
- A Trust is a legal estate planning tool that holds and directs assets.
Anything of value can go into a revocable living trust, it is not just money. It can be homes, property, collections, cars, art, etc. Whatever you place in the trust during your life will pass to your heirs at death.
Why a Revocable Living Trust could work for you?
For some, a revocable living trust fits into their estate plan perfectly. There are many reasons why it might be right for you, including:
- It avoids probate.
Probate is the court supervised process of authenticating a Will. To get assets through probate takes time, and can sometimes be expensive. Assets held in trusts avoid probate, meaning your family members can get the assets almost immediately and usually without much cost. - It provides privacy and keeps your estate out of the public eye.
Probate is a public proceeding, meaning anyone can go to the courthouse and take a look at your documents. The public can find out what you owned and who you left it to.Trust documents are never filed in a court, keeping them private. For people in the public eye or someone with a very large amount of assets, this can be valuable. - It gives you larger control of how your assets are used post death.
Trusts allow you to have control over how your assets are used, spent, managed, and distributed after death. You can lay out specific terms, amounts, and timelines that you want your heirs to follow. This works well for people who might have an irresponsible or minor beneficiary. If you are worried that your beneficiary might not be able to manage the assets appropriately, you can choose to give them a small amount yearly or require them to talk to a professional before being allowed any money.If you own a farm, a family business, or even a family heirloom, you might want to put terms and regulations on how you want this asset to be used. Trustees, or the people you name as the beneficiaries in your trust, are required to carry out these wishes as long as the requests are lawful.
Why a Revocable Living Trust could not work for you?
While a Revocable Living Trusts have pros that appeal to everyone, it also has cons that need to be considered, including
- It is costly and time consuming to set up and maintain.
The cost of a revocable living trust makes it the inappropriate choice for most people. It is very expensive to not only get the trust up and going, but to continue to have it managed throughout your life.
If you take advantage of the revocable part, meaning you make changes to the trust, will add even more cost. Many think probate is costly, but a trust usually ends up costing much more.
Besides cost, funding a trust takes a lot of time and effort. You have to create new deeds and documents, contact multiple financial institutions and insurance companies, change account and stock info, and update beneficiaries.
For most people, their assets do not warrant this type of time and effort, especially when there are other estate planning strategies that would get done what they wanted to. For example, beneficiary designations on annuities and life insurance avoid probate just like a trust and still gets money to your heirs quickly.
It is also important to note that you will still need a will and other financial and health documents done to make a complete estate plan. - IRAs cannot be transferred into a Revocable Living Trust
IRA money is not eligible to be transferred to a trust while the IRA owner is alive without severe tax consequences.We had a client who was very interested in a revocable living trust due to a seminar he attended. The leader of the seminar sat down with him and had him moving all his IRA money, which was the bulk of his savings, into the trust. This is not allowed.An IRA has to be in his name for the rest of his life since he has not paid taxes on the money in it. Only when he dies can that money be passed on, but the taxes still have to be paid.We were able to find him an attorney who was able to do all the estate planning he wanted without using a trust. One of the main appeals of the trust to him was avoiding probate, which IRAs do anyways since they are required to have beneficiary designations. - It does not actually provide great protection from creditors
While a trust can provide asset protection from creditors, a revocable living trust does not do a great job of this while you are alive since you still technically own everything. It is easy for a court to force through a trust, deeming it as a way to hide assets, meaning you would still have to use the assets in the trust to pay your debt. - You must still pay the taxes on the assets in the trust
Like with the creditor protection, since the assets in the revocable living trust are owned by you until death, you still owe taxes on the assets. This is important to note if you think this will help lower your tax rate.
Everyone needs to have some type of estate plan, even if you do not necessarily have any heirs. A proper estate plan guarantees that what you want to happen to your assets will.
The benefits of a revocable living trust appeal to most, but the time and cost associated with maintaining it does not make it a feasible option. If you are interested in avoiding probate and making money easily accessible for your loved ones, there are other methods of getting this done.
It is important to note that trust laws are going to vary by state. Talking to a retirement planner who specializes in estate planning is the best way to guarantee your assets are allocated correctly when you die.
