In the right situations, revocable living trusts can pave the way for a smooth, quick transfer of assets at death without the hassles of probate, the court-supervised process of settling an estate.
But revocable living trusts, which are trusts that you can revoke or change while you are alive, are also widely misunderstood and often aggressively marketed to the wrong people.
The hard sell is most often targeted at retirees. Financial planning and law firms, for example, may sponsor coffee-and-donut seminars to drum up business. Meanwhile, so-called trust mills pump out poorly drafted, one-size-fits-all living trusts that are promoted as essential estate-planning tools for everyone to avoid the supposed horrors of probate and reap tax benefits that won't actually materialize with the run of the mill trust.
Here are some FAQs to help you put them in perspective for your estate.
Do assets in a living trust bypass probate?
Yes, and depending on how your state handles probate, that may or may not save time and money.
Some states have simplified their probate procedures, but elsewhere the process can be costly and time-consuming, eating up perhaps 6% to 10% or more of a probate estate (but keep in mind that a chunk of that may be the fee to the executor, which may be your child). In some states, such as California, revocable living trusts are commonly used to bypass probate.
But only assets you own in your own name at death are probate assets -- so your probate estate may be smaller than you think, making avoiding probate less of a necessity. Assets not subject to probate include property you own jointly with the right of survivorship, the proceeds of life insurance policies on your own life that have named beneficiaries and balances in IRAs and 401(K) plans that have named beneficiaries, as well as the assets owned by a revocable living trust. And remember that probate has some benefits, such as shutting down the rights of creditors who do make their claims within the allotted amount of time.
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Are there other advantages of revocable living trusts?
Yes. One of the most valuable benefits is that the trust sets up a blueprint for handling your affairs if you become incapacitated. Your successor trustee (or co-trustee, if you named one) can take over for you.
Trusts allow great flexibility in carrying out your wishes. For instance, you can specify in the trust exactly how you'd like your money to be spent, right down to what kind of nursing facility you'd want to be in.
In addition, actions by trustees may be accepted more readily by some financial institutions than actions by agents under durable powers of attorney (durable means it continues after you become incapacitated). Some financial institutions honor only their own durable powers of attorney forms, for example, so always check their requirements.
Revocable living trusts generally are private documents, whereas wills become public record when filed in the courthouse. However, in some cases, the trust may have to be filed as well, perhaps when you transfer real estate to the trust. And, says Shenkman, "if there is litigation over your estate, then everything comes out."
If you own real estate, such as a vacation home, in another state, transferring it to a revocable living trust avoids having to probate it in that state.
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Does a living trust save taxes?
No. This is one of the biggest misconceptions about revocable living trusts. The income of the trust is considered yours. If you are the creator of the trust as well as the trustee or co-trustee, you report the income on your personal income tax return.
If the trust is in effect when you die, the assets are included in your estate for federal estate tax purposes. However, if your estate is large enough to be hit by the federal estate tax -- $1 million -- your lawyer can incorporate tax-saving measures into your trust, such as charitable gifts, a marital deduction trust and a credit-shelter trust.
Also, a living trust doesn't protect assets from creditors while you are alive and in control. And the trust doesn't protect assets if you are sued.
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Are living trusts hard to set up?
A trust is more work to create than a will because to make it work you have to actually transfer assets to the trust. This can be tedious and time-consuming. It may mean changing titles on real estate, for example. And when you deal with trust assets, you have to act as trustee, signing checks and other transactions in your capacity as trustee.
A notorious problem lawyers see time and again is that people fail to transfer assets to the trust when it is created or forget to transfer assets acquired after the trust has been set up. If assets aren't in the trust when you die, it's basically useless. Lifetime disability planning suffers and the assets left out have to go through probate, defeating one reason you may want the trust in the first place (and underscoring why you need a pour-over will).
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Who should be named as beneficiaries, and who should serve as trustee?
You and your spouse are typically the primary beneficiaries of the trust with, perhaps, your children and grandchildren as beneficiaries after your deaths.
Typically, you serve as your own trustee (or co-trustee with, say, your spouse or child or a financial institution), meaning you retain control of your assets as long as you are able to manage your own affairs. If you become unable to manage your own affairs, another trustee, known as the successor trustee, takes over.
When you die, the trust becomes irrevocable, and the trustee distributes the assets as the trust document specifies or keeps them in trust for the beneficiaries, if that is what you have arranged.
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Who should I get to draft a revocable living trust and how much will it cost?
A good, custom trust should be drafted by a skilled estate planning lawyer, not the real estate lawyer who helped you when you bought your house and not by the person pushing trusts as the only solution to all of your estate planning concerns.
You can draft a revocable living trust and pour-over will yourself using such software as Nolo.com's Living Trust Maker, included in Quicken Lawyer 2003 Deluxe ($49.95).
If you have a complex estate or you have more than one marriage and children from each, don't do it yourself. But if your situation is straightforward and you draft your trust yourself, it's a good idea to find an estate planning lawyer to review your work.
The cost of a living revocable trust depends on the going rates where you live and the complexity of your estate. Generally, though, a revocable living trust might add $750 to $2,000 to a married couple's plan that also includes a pour-over will and durable powers of attorney for financial matters and health care.
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GETTING STARTED
