Revocable Living Trusts (to avoid probate)
Trusts have been used for centuries. Use of trusts today is even more important considering estate taxes as well as probate. The use of trusts gives the Trust creator (“Settlor”) great flexibility in avoiding estate taxes, protecting assets and distributing assets in tax-preferenced ways. During the construction of your trust(s), there are several other instruments that will be integrated in the planning process. The Health Care Proxy, Power of Attorney, Living will and Pour over will are just some of the ancillary documents that should be created along with a trust. Some of these are critical in controlling your assets should you become incapacitated. But before you die. In the past, many trusts were constructed to take advantage of each spouse’s “exclusion amount”, but with the new tax laws, each person’s taxable estate may reach $11,580,000 before it becomes subject to estate taxes. And, with portability (the ability of the first-to-die spouse to give his exemption to the surviving partner), a couple today can pass an estate worth $10,680,000 tax-free to their heirs. Prior to these tax law changes many revocable living trusts were established as AB or ABC trusts with and without disclaimer rights and/or powers of appointment granted to the surviving spouse. While these types of trusts can still be desirable, they are no longer always necessary if planning mainly to minimize estate taxes. If you are the beneficiary of one of these older trusts, be assured that we are well versed in dealing with any trust structure and can help you administer your trust efficiently and economically.
Myths About Revocable Trusts:
Myth #1 – A Revocable Trust Reduces Estate Taxes
FALSE – A Revocable Living Trust does absolutely nothing to reduce your estate tax bill. Its main purposes are to protect your privacy, plan for disability, and avoid probate. Period. With that said, married couples can reduce their estate taxes by incorporating AB Trusts into their Revocable Living Trusts, but AB Trusts can also be incorporated into Last Will and Testaments. The difference is, a Revocable Trust will protect the couple’s privacy and allow them to plan for disability and avoid probate. A Last Will and Testament can’t and doesn’t do any of these things.
Myth #2 – A Revocable Trust Always Avoids Probate
FALSE, for two reasons: (1) A Revocable Living Trust can’t avoid probate by itself – the trust must be fully funded to avoid probate, and (2) Sometimes quirks in state law make probate necessary. An unfunded Revocable Living Trust won’t avoid probate – the Settlor has to fund the trust by retitling accounts and real estate and updating beneficiaries of life insurance and retirement accounts, otherwise, any unfunded property will need to be probated. Aside from this, even with a fully funded Revocable Living Trust the laws of the state where you live at the time of your death may require a probate proceeding to cut off creditors’ rights, obtain state estate tax waivers, secure a homestead determination for a primary residence, and/or limit the time that a challenge can be made to the trust. In these situations, however, the probate process should be less time consuming and also less costly than with a full probate administration.
Myth #3 – A Revocable Trust is Fancy and Complicated
FALSE – These days a Revocable Living Trust is the basis of a solid estate plan for the majority of people. Why? Because the benefits of a Revocable Living Trust far outweigh those of a Last Will and Testament: A trust protects your privacy, while a will becomes a public probate record for the whole world to see. A disability plan can be built right into your trust, while a will only goes into effect after you die. In most situations, a fully funded trust will avoid probate, while in most situations property that passes under the terms of a will has to be probated.
Myth #4 – A Revocable Trust Protects Your Assets Against Lawsuits Absolutely
FALSE – A Revocable Living Trust does nothing to protect your assets against lawsuits for two reasons: (1) You can change the terms of the trust at any time and put assets in and take them back out, and (2) You still personally own the assets titled in the name of the trust. Asset protection planning involves an analysis of your long term financial and estate planning goals and then positioning or re-positioning your assets to be exempt from creditors’ claims. Depending on the laws of your state, this could include investing in a primary residence, life insurance, retirement accounts, annuities and/or limited liability companies; titling assets in one spouse’s name or as tenants by the entirety; and/or setting up one or more irrevocable trusts. Unfortunately, a Revocable Living Trust can’t shield your assets from the claims of creditors – you’ll need to create a comprehensive asset protection plan in addition to your trust.
Myth #5 – A Revocable Trust Eliminates All of the Work After the Settlor Dies
FALSE – This is a common misconception about Revocable Living Trusts – it’s as if people think that their trust will literally grow arms and legs and run around cleaning up their affairs after they die. Even though your loved ones won’t have to go to court and open up a probate estate, your Successor Trustee will still have quite a few responsibilities and duties to fulfill before your beneficiaries can pick up their checks. The key is that your successor Trustee can settle your affairs without having to worry about a probate attorney or judge overlooking their shoulder. With a Revocable Living Trust, things will be more streamlined and can be accomplished faster by the Successor Trustee. Why? Because your Successor Trustee won’t have to wait for a court order to do their job.
Myth #6 – Revocable Trusts are Only for Wealthy People
False – Your net worth is only one factor to consider when deciding if you need a Revocable Living Trust. There is a multitude of reasons why you should consider creating and funding a trust that has nothing to with your net worth: You have minor children and naming a trust as the beneficiary of your life insurance or retirement accounts will keep these assets outside of probate and a court-supervised guardianship. Your own real estate in two or more states and a trust will help your loved ones avoid two or more probate administrations. You want to create a disability plan that will keep you and your assets outside of a court-supervised guardianship. You want to give your loved ones essentially immediate access to your property after you die instead of waiting weeks or even months for access through the probate court. You want to keep your financial matters and the identity of your beneficiaries private after you die. Only you, in conjunction with your estate planning attorney, can determine if a Revocable Living Trust is right for you, regardless of your net worth.