One of the most popular estate planning tools is a Revocable Living Trust. The main reason for its popularity is that it allows you to pass most assets to your heirs without going through probate — a court process that is expensive, time consuming and open to public scrutiny. A living trust also provides for the management and control of assets during lifetime and after death. When developing an estate plan, a revocable trust can provide many benefits that, in most cases, significantly outweigh the cost of setting one up.
A trust is a written legal document under which a person who is creating the agreement, commonly known as the Grantor or Settlor, transfers assets to hold for the benefit of beneficiaries. The trustee is the person or entity responsible for managing the property that the grantor decides to title in the name of the trust.
Trusts generally fall within two categories:
- Living Trusts, also know as “inter vivos” trusts, are created during your lifetime and include:
- Revocable Trusts that you create and control during your lifetime. You can be the trustee of your own living trust and keep total control over the assets in the trust. You can add or remove assets and revoke or amend the trust as long as you live.
- Irrevocable Trusts, in which the grantor cannot be the trustee and where the trust cannot be modified or terminated without the permission of the trustee(s) and beneficiaries. Transfers to an irrevocable trust are typically done for asset protection, tax, charitable and Medicaid planning purposes.
- Testamentary trusts created upon the death of an individual through an instrument such as a Will.
Trusts can be arranged in many ways and can specify exactly how and when the assets pass to the beneficiaries. The type of trust that is suitable for you will depend on your needs and estate planning goals. It’s important to select the right to attorney to help guide you through the trust selection process.
Benefits of Revocable Living Trusts
Benefit #1: You gain more flexibility when you plan for your estate. The living trust allows you to be the Grantor, Trustee, and Beneficiary to maintain complete control of your assets. Unlike a Will, the living trust also plans for incapacity, due to an accident or disease, by naming a successor trustee that will act when you are no longer able. You can make changes to the beneficiaries at any time or cancel the trust altogether. Nevertheless, extreme care should be taken before creating, amending or canceling a trust to ensure it is handled properly.
Benefit #2: A revocable trust avoids probate and limits the costs that your estate and heirs will generally have to pay. Probate is the public court proceeding in which the executor named in the Will petitions the court to declare the document as valid and allows the executor to collect and distribute assets according to the terms set out in the Will. This process can be very time consuming and expensive.
Along with submitting the Will for probate, the executor must give notice to beneficiaries listed in the Will (and cite heirs). This welcomes an opportunity for a Will to be contested. If an estate winds up in litigation, it may be years before the assets are fully dispersed. In addition, the court can place restrictions on how the executor can distribute assets. For example, if the estate contains real property, such as a home, the executor may have to obtain court permission to sell it. And even for modest size estates that are less complicated, the process could be costly, cumbersome and time consuming.
With a living trust, the trustee can more efficiently distribute the assets. Moreover, the cost savings can be significant because the trust avoids all the paperwork, court intervention, hearings and legal filings that make up the probate process. These savings typically offset the initial costs of setting up the trust.
However, a living trust is only effective to the extent that it is fully funded. This means that assets need to be in the trust prior to your death. You might use a “Pour Over Will” in addition to the trust (even if the living trust holds most of your assets). A pour over will supplements a living trust by providing instructions for the disposition of any assets that aren’t included in the trust for whatever reason. In particular, it can be a valuable document if you forget to transfer an asset to the trust, but still must be submitted for probate.
Benefit #3: The trust can be used as a beneficiary for certain assets that are distributed outside of a will. These are assets that do not require probate, such as life insurance and certain brokerage accounts with a payment upon death beneficiary (along with joint accounts). With care and proper advice, an individual can name the trust the beneficiary for some of these assets. When the assets are distributed to the trust, the trustee then disperses them according to the terms of the trust. This allows for more control instead of giving the assets outright to the beneficiaries. Provisions can be tailored to hold assets for minor children until a certain age, manage assets for persons with disabilities, substance abuse issues or other special needs, and help protect the beneficiary’s assets from future divorce and creditors. IRA Trusts can be established to receive proceeds from retirement accounts.
Disadvantages of Revocable Living Trusts
Despite the many advantages, there are a couple disadvantages. Most notably, the living trust does not have the asset protection features commonly found in irrevocable trusts. Assets are treated as if they belong to you, as far as creditors are concerned and will not be protected against bankruptcy, lawsuits, estate tax or Medicaid eligibility. The initial cost to set up a trust is more than a simple will. However, as noted above, the cost saving achieved by a trust may greatly outweigh the initial expense.
A trust can offer many benefits as part of a well-crafted estate plan. Working with estate planning attorneys will help you decide what plan is best for you and your family.