Recently, we’ve been asked by an increasing number of clients if we feel that a revocable living trust is a good planning tool in their situation. It seems that while the use of trusts has become more mainstream, there’s a general lack of understanding of what revocable living trusts can and cannot do. In hopes of providing some clarity, this blog post covers the mechanics of revocable living trusts and the major advantages and disadvantages of the tool. As always, if you’re considering employing a complex estate planning tool, we encourage you to do substantial research and seek professional guidance.
The Mechanics: For starters, let’s break down the title. Revocable means that the trust can be terminated or changed while the person responsible for the trust has the mental competence to do so and is still living. Many revocable living trusts become irrevocable upon the death of the trust creator. Revocable living trusts are created to hold, own, and protect the assets of the individuals creating the trust (formally known as the grantors or settlers), including homes, investments, and personal property. Revocable living trusts are generally designed to help organize, manage, and control assets during life and at the time of asset distribution to heirs following the death of the grantor. They are not designed to mitigate or eliminate taxes at death.
- Probate avoidance and privacy: In most states, the estates of deceased people must go through probate, which is a public process by which the will’s validity is determined, and assets and debts are accounted. The proceeding is public and the records are available for anyone to review. In some states, probate is a long and expensive process. In others, it is fairly simple, but costs still exist. Using a revocable living trust allows the grantors to provide specific instructions for the handling of their estate. In addition, the assets owned by the trust pass to beneficiaries without undergoing the probate process or becoming public record. For those who value privacy, this is one of the most compelling reasons to use a revocable living trust.
- Planning for incapacity: Revocable living trusts are a valuable tool for those concerned about their ability to manage property or investments as they age. If proper planning prior to incapacity is not done, loved ones must petition state courts to obtain the legal authority to make financial decisions for ailing parents or family members. “Conservatorship” is the term used to describe this process. By providing instructions and management via a revocable living trust, court involvement can potentially be avoided.
- Upfront and continuing costs: The most immediate deterrent for many is the upfront cost of drafting and funding the trust. When using complex financial tools, the services of an expert should be used. Inexpensive, online do-it-yourself tools aren’t recommended due to the personal, customizable nature of trusts and the state-to-state differences in law. The cost of the documents depends on the complexity and size of the estate.
- Complexity: While it is true that a properly drafted revocable living trust may be helpful in managing assets during life and distributing assets to beneficiaries privately at death, the initial process of creating and funding the trust can be time consuming and complicated. In addition, revocable living trusts are only as good as the ongoing management they receive. For example, most assets that are to be included in the trust must be re-titled and moved to trust ownership, including the ownership on homes and personal property. Beneficiaries must be changed, too. Incremental changes in assets or property can affect the functionality of trusts. As day-to-day changes occur in the lives of the trust owners, continuous attention must be paid to ensure that the changes do not go unconsidered in terms of the trust.
- Inflexibility: Most trusts are initially created with very specific goals in mind. Over time, goals and priorities can shift. As a result, when changes are needed, revocable living trusts can add extra paperwork, processes, and management time. In addition, if changes are substantial, costs for professional help may be involved.
While revocable living trusts are a powerful tool, it’s important to remember that they are not the only tool and they are not the right tool in every situation. Our best advice if you’re concerned about estate management for you or for aging parents: seek professional guidance before it’s needed. Need a referral to a competent legal professional? We’re happy to provide an introduction.