Even though revocable living trusts have been used in estate planning for many years now, they are still misunderstood. Many people have the misconception that revocable living trusts are part of complicated and sophisticated estate plans that are created only for the very wealthy, when in reality this could not be further from the truth. These days a revocable living trust can be used as the basic building block of a good estate plan for people of all ages, personal backgrounds and financial situations. When considering whether or not to include a Revocable Living Trust as part of your estate plan, you’ll need to understand the pros and cons of using a trust instead of a Last Will and Testament.

Setting Up a Revocable Living Trust

This type of trust is established by writing a trust agreement and involves three primary players: the Grantor, also called the Settlor, the Trustee, and the Beneficiary. In the typical situation, when the trust agreement is created the three players – Grantor, Trustee and Beneficiary – will be one in the same person.

Once the trust agreement has been signed, the Grantor will proceed with funding the trust with all of his or her assets and designating the trust as the beneficiary of retirement accounts, life insurance and annuities. The Trustee (who, as mentioned above, is also the Grantor) will then manage, invest, and spend the trust property for the benefit of the Beneficiary (who, as mentioned above, is also the Grantor).

How a Revocable Living Trust Avoids Probate

Because the Grantor will not own any property in his or her individual name after the assets have been funded into the name of the trust – they will instead be owned by the Trustee for the benefit of the Beneficiary – when the Grantor dies, the trust assets won’t need to be probated. In other words, when the Grantor dies, the trust itself will continue to live on and the Administrative or Successor Trustee named in the trust agreement will have the legal authority to step into the Grantor’s shoes. The Administrative Trustee will then be able to take over control of bank and investment accounts and business interests, collect any life insurance proceeds, retirement accounts and annuities, pay all of the Grantor’s final bills, debts and taxes, and then distribute the balance of the trust funds to the Grantor’s ultimate beneficiaries who are named in the trust agreement.

Pros of Using a Revocable Living Trust

• Avoiding Probate – This is probably the biggest advantage of using a Revocable Living Trust. Why subject your loved ones and your property to the restrictive rules of probate when you can easily avoid it with the use of a fully funded Revocable Living Trust? This is particularly important if you own real estate in more than one state because without a trust, your loved ones will be faced with two or more probate proceedings. A Revocable Living Trust will also give your loved ones almost immediate access to cash during a difficult time. Compare this with the time it takes to open a probate estate and gain access to your bank account.

• Avoiding Guardianship or Conservatorship – This is an advantage of using a Revocable Living Trust that’s often overlooked. Why subject your loved ones and your property to the restrictive rules of guardianship or conservatorship when you can easily avoid it with the use of a fully funded Revocable Living Trust? After following the trust provisions for determining your incapacity, your loved ones will be able to take over control of your trust assets without interference by a judge. Aside from this, the value that a Revocable Living Trust offers to your loved ones in avoiding guardianship can be more than the value created by avoiding probate. Why? Because probate will only last for a fixed period of time (usually a year or two at the most), but guardianship can last for five, ten, or even twenty years.

• Keeping Things Private – As required by state law, probate is a public proceeding. This means that anyone can go to the court house and take a look at each and every probate file being stored there. In fact, in some jurisdictions you can look up court dockets and filings online. Contrast this with a Revocable Living Trust – it doesn’t need to be filed with the court, so it won’t become a public record for everyone to see, while anyone can read a Last Will and Testament that’s been admitted to probate.

• Forcing You to Get Organized – When you set up a Revocable Living Trust, you’ll be required to fund your assets into it, and this, in turn, will force you to find account statements, stock certificates, corporate minutes, car and boat titles, and deeds to real estate. And this will continue to benefit you in the long run because once you’ve taken the time to get organized and fund your trust, you’ll stay organized and it will be easy for you to understand how your property is titled – in the name of your Revocable Living Trust.

Cons of Using a Revocable Living Trust

• Up Front Costs are High – In general, it will cost more time and money to set up and fund a Revocable Living Trust than it will to simply write a Last Will and Testament. But in the long run the overall time and money spent on the trust will be lower. Why? Because the trust will allow your loves ones to avoid a costly court-supervised guardianship if you become disabled and a costly court-supervised probate proceeding after you die. Aside from this, the trust will benefit your loved ones by allowing them to avoid all of the emotional costs associated with guardianship and probate.

• Funding a Trust is a Pain – Once your trust has been signed, you’re not done – you’ll need to contact your banks, investment and insurance companies, and transfer agents to change account and stock ownership and update beneficiaries; issue new stock certificates or assign partnership or LLC interests for closely held businesses; retitle cars and boats; and sign and record new deeds for real estate. For many people, this is the major drawback to using a Revocable Living Trust – if it’s not fully funded, then it’s really not worth any of the money spent on it. The type of assets that you own and what will need to be done to get them funded into a Revocable Living Trust should be carefully considered before you decide to use a trust.

• You’ll Still Need a Last Will and Testament – The previous drawback, Funding a Trust is a Pain, leads right into the next one – you’ll still need a Last Will and Testament even though you’ve taken the time to create a Revocable Living Trust. Why? Because if you get frustrated or side-tracked or you simply don’t have enough time and your trust is only partially funded when you die, then you’ll need a special type of Will, called a Pour Over Will, to “catch” your unfunded assets and “pour” them into your trust. And what’s so bad about that? Your Pour Over Will must be probated, which is another reason why funding your trust is so important and a factor you’ll need to consider when deciding if you should use a trust since you’ll still need a will anyway.

SITUATIONS FOR USING A REVOCABLE LIVING TRUST

Wills vs. Trusts – Planning for Mental Disability

Regardless of your net worth, and particularly if any of your assets are titled in your sole name, then you should consider a Revocable Living Trust for mental disability planning. A well drafted Revocable Living Trust should contain provisions for determining your mental capabilities outside of a court proceeding as well as how to take care of you and your finances if you do become mentally incapacitated. This will literally save you and your family thousands of dollars by keeping you and your assets outside of a court-supervised guardianship or conservatorship.

Wills vs. Trusts – Estate Planning for Minor Beneficiaries

Often when I meet with young parents their largest asset is either a life insurance policy or retirement plan. This becomes a problem if the parents later divorce or if one parent dies and the children are still minors when the other parent dies. What will happen to the life insurance or retirement account? These funds will be placed in a court-supervised guardianship or conservatorship for the benefit of the minor until age 18 or 21. A Revocable Living Trust can be the primary or contingent beneficiary of the life insurance or retirement account. That way the successor Trustee will have the legal authority to accept the funds instead of a court-supervised guardian.

 Wills vs. Trusts – Estate Planning for Singles

Anyone who is single and has assets titled in their sole name should consider a Revocable Living Trust. The two main reasons are to keep you and your assets out of a court-supervised guardianship and to allow your beneficiaries to avoid the costs and hassles of probate.

Wills vs. Trusts – Estate Tax Planning for Married Couples

If you’re married and the estates of you and your spouse exceed $11 million then you should consider establishing Revocable Living Trusts to take advantage of both spouses’ exemptions from estate taxes. This is accomplished by setting up AB Trusts or ABC Trusts and then dividing your assets roughly in equal shares between the two trusts or by establishing a Family Trust. Note that while this type of estate tax planning can be done in your wills, you and your spouse will need to divide your assets into separate names, in which case the assets will need to be probated after each spouse dies. The use of Revocable Living Trusts insures that probate can be avoided after each spouse’s death. * Note that while the federal estate tax exemption is currently “portable” between married couples, this provision is set to expire on December 31, 2025.

Wills vs. Trusts – Estate Planning for Couples in Second or Later Marriages

If you are in a second or later marriage and you and your spouse will have different beneficiaries such as your own children or grandchildren, then you should consider establishing Revocable Living Trusts in order to insure that each spouse’s estate will go where he or she wants it to go outside of the probate process. In fact, often I will advise a his, hers, and ours trusts to keep assets separate and control who gets what.

Wills vs. Trusts – Estate Planning for Real Estate Located Outside of Your State

If you own real estate in more than one state or outside of your home state, then you’ll need to establish a Revocable Living Trust and deed the out of state property into the trust. Otherwise, your family may be faced with separate probate estates – one in the state where you live, and a second, or third, etc in the state(s) where your real estate is located.

Notwithstanding the many benefits of the revocable living trust, revocable living trusts aren’t for everyone. For example, if your main concern is avoiding probate after you die, then, depending on your family and financial situations, this can be accomplished without the use a revocable living trust. The same goes for protecting your assets in case you need long term care – in fact, this should be accomplished without the use of a revocable living trust.