Should You Set up a Revocable Living Trust?
Do you ever worry about how your beneficiaries will manage their portion of their inheritance when you pass away? One solution that allows you
to still exert some control over your money–even after passing–is with a revocable living trust (RLT).
Establishing the Living Trust
The trust is established by a written agreement or declaration that appoints a trustee to manage and
administer the property of the grantor. As long as you're a competent adult, you can establish an RLT. As
the grantor, or creator of the trust, you can name any competent adult as your trustee; some people prefer
to choose a bank or a trust company to fill this role. You the grantor can also act as trustee throughout
your lifetime.
Once it's set up, you begin by placing your assets—including
investments, bank accounts, and real estate—into the trust. At this point you no longer own those assets;
they belong to the trust. And because your assets belong to the trust, they do not have to go through the
probate process upon your death. (In essence, the trust is like a rule book for how your assets are to be
handled when you die.)
However, as this is a revocable living trust, you retain control of the assets,
even though they no longer belong to you, while you're alive. You can amend or change the trust at any time.
Income earned by the trust's assets goes to you and is taxable; but the assets themselves do not transfer
from the trust to your beneficiaries until your demise.
Advantages of the Living Trust
Avoiding probate is the main advantage of establishing a living trust, but other benefits like privacy
protection and
flexibility make it a smart choice.
Avoidance of Probate: Probate is
the legal process for transferring your property when you die. It requires presenting documents to a probate
court and going through a multi-step process – or processes if you have assets or property in different
states. Establishing an RLT avoids expensive probate proceedings, allowing assets to be transmitted to
beneficiaries faster. Assets named in trust bypass the costly courts and typically take precedence over the
property designated in your will.
Changeable and Flexible: The living trust allows you to make changes (or amendments) to
the trust document while you are still alive, at your own discretion.
Privacy Preservation: Revocable trusts are a good choice for those concerned with keeping
records and information about assets private after your death. The probate process that wills are
subjected to can make your estate an open book since documents entered into it become public record,
available for anyone to access.
Eliminate Challenges to the Estate: The standard will may create family disputes at your
death and be challenged for alteration by any member of your family. By using a trust, you can specifically
disinherit anyone who posts a challenge to your wishes upon your death.
Segregation of Assets: This is useful for married couples with substantial separate
property that was acquired prior to the marriage. The trust can help segregate those assets from their community property assets.
Assignment of Durable Power of Attorney/Guardianship: A living trust can be used to
help control a guardian's spending
habits for the benefit of your minor children. It can also authorize another person to act on your behalf if
you become incapacitated and need someone to make decisions for you. Should you become impaired or disabled,
the trust can automatically appoint your trustee to oversee it and your financial affairs with no
requirement to obtain durable power of attorney.
Continuous Management: This allows the wealth that you've accumulated to continue to
grow for multiple generations by using a professional trustee to manage your property. You can limit the
number of withdrawals to income only, with special emergency provisions if you wish.
Estate Tax Minimization: While the RLT is not a good tax minimization tool on its
own, provisions can be included in the trust documentation to transfer wealth by establishing a credit
shelter trust in the event of your death. The CST is a very effective tool to help reduce
estate taxes
for large estates that exceed the combined
estate tax exclusion amounts.
Disadvantages of the Living Trust
While there are many advantages to establishing a revocable living trust, there also some drawbacks:
Expense of Planning: Establishing a trust requires serious legal help, which is not
cheap. A typical living trust can cost $2,000 or more, while a basic last will and testament can be
drawn up for about $150 or so.
Maintaining Trust Books and Records: And once you create the trust, your work isn’t
done. Most people need to monitor it on an annual basis and make adjustments as needed (trusts do not adapt
automatically to changed circumstances, such as divorce or the birth of a child). You should consider the
added inconvenience of making sure that future assets are continuously registered to the trust and providing
other professionals with access to the trust documents to review trustee powers and duties.
Re-titling of Property:Once the trust is established, property must be
re-titled in the name of the trust. This requires additional time, and sometimes fees apply to processing title changes.
Minimal Asset Protection:Contrary to popular belief, revocable living
trusts offer very little
asset protection
if you retain an ownership interest, such
as naming yourself as trustee.
Administrative Expenses: Expect to contend with additional professional fees such as investment advisory
and trustee fees if you appoint a bank or trust company as the trustee.
No Tax Break: For all your hard work, you will not receive a tax benefit from a
revocable trust. Your assets in the trust will continue to incur taxes on their gains or income and be
subject to creditors and legal action.
Unpredicted Problems: Hassles such as problems with title insurance, Subchapter S stock
and real estate in other countries can create a whole host of new issues. More problems can crop up if you
fail to adequately educate your spouse on the terms and purpose of the trust.
The Bottom Line:
Compared to wills, revocable trusts provide increased privacy as well as more control and flexibility over
asset distribution. With a revocable living trust, you do most of the work up front, making the
disposition
of your estate easier and faster. But they also require substantially more effort and higher costs. As
with
any major legal issue, you should consult with a trusted professional, in this case, someone well versed
in
estate planning, before embarking on a project of this magnitude.
What Happens When a Will and a Revocable Trust Conflict?
A will and a trust are separate legal documents that typically share a common goal of facilitating a unified
estate plan. While these two items ideally work in tandem, due to the fact that they are separate documents,
they sometimes run in conflict with one another--either accidentally or intentionally.
By definition, a revocable trust is a living trust established during the life of the grantor, and may be
changed at any time, while the grantor is still living. Since revocable trusts become operative before the
will takes effect at death, the trust takes precedence over the will, when there are discrepancies between
the two.
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A will and a living trust are both part of a comprehensive estate plan, that sometimes are inconsistent
with one another.
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When there are conflicts, the trust takes precedence.
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A will has no power to decide who receives a living trust's assets, such as cash, equities, bonds, real
estate, and jewelry
A Trust Is a Separate Entity
From a legal standpoint, a trust is a separate entity from an individual. When the grantor of a revocable
trust passes away, the assets in the trust do not enter into the probate process along with a decedent's
personal assets.
When a person dies, his or her will takes effect in a legal proceeding called probate, which aims to
distribute the deceased individual's property, according to the terms dictated by the decedent's will. But
probate does not apply to property held in a living trust, because those assets are not legally owned by the
deceased person. In other words, the will has no authority over a trust's assets, which may include cash,
equities, bonds, real estate, automobiles, jewelry, artwork, and other tangible items.
Consider the following example: Let's assume a family patriarch named Calvin has two children named Donna
and Maxine. Let's further assume that Calvin places his home into a living trust which states that Donna and
Maxine are to inherit that house. Several years later, Calvin remarries. But just before he dies soon after,
he executes a new will that purports to leave his house to his new wife, Paula. In such a scenario, Calvin
would have needed to amend the trust, in order to make the transfer to his wife effective. Consequently,
that home becomes the property of Donna and Maxine.
This can be a confusing subject to many individuals, who write wills and expect the stipulations to be
carried out without incident. Therefore, it's vital to remember that a revocable trust is a separate entity
and does not follow the provisions of an individual's will, upon his or her death. It's prudent to seek the
advice of a trust and estate planning attorney, to make sure proceedings go as planned.
[Important: Although a revocable trust supersedes a will, the trust only controls those assets that have
been placed into it. Therefore, if a revocable trust is formed, but assets are not moved into it, the trust
provisions have no effect on those assets, at the time of the grantor's death.]
