Maybe you're single, a business owner who doesn't want information relating to the value of your business made public upon your death, or a parent who wants to disinherit a child and don't want the whole world to know it. For any number of reasons, a revocable living trust can be an effective estate planning tool.
How so? A living trust can help in avoiding probate and conservatorship, which are both court administrative processes open to the public and costly, says Wonsun Willey, a tax partner at CPA firm Sensiba San Filippo. “A living trust usually is a faster way to distribute assets if there are no disputes involved,” she says.
Living trusts are one of the most misunderstood documents. There's a good reason for that. “There are a lot of twists and turns to navigate so that the trust expresses your precise wishes,” says Debra Speyer, principal at Speyer Law.
To explain it simply, the creator signs a document much like a will in terms of its dispositive provisions after death, but the trust also has provisions for the benefit of the creator during his or her life. It's completely revocable by the creator. It has no tax effect until the creator's death. The creator gives up nothing during his or her life, it's as if he or she still owns the assets, says Doris Martin, partner/director at Garfunkel Wild, the law firm where she heads the personal services & estate planning group. If you become ill or incompetent, the assigned trustee takes over the management of the trusts' assets. When you can no longer manage your affairs, the trust spells out who will make that determination.
For sure though, there is much to think about.
When to consider a revocable living trust?
Anyone and everyone can sign one, and “grow” into one over the course of their lifetimes, instead of a standard will, says Martin. However, for younger folks with many different accounts or even residences during their lives, it's going to be a project to keep up with the revocable trust administration. The older you get, the more settled financially, and the closer to the end of your life that you get, the less of a project it is, and the more important it is to transfer assets to the trust name, points out Martin. You must actually transfer assets to the trust to make it do the job intended. “This is critical, you must re-title bank accounts and do new deeds in the trust name or you will still have to probate. This can be tedious and time consuming and if you are not careful, you will end up probating a will, despite your best intentions,” she warns.
Know the rules
For the most part, banks will allow eligible accounts to be titled in the name of the trust. However, there are times when a a financial institution would not allow an account to be titled in the name of a revocable living trust. “IRAs, 401ks and other qualified plans cannot be held in a trust. They must be held in the individual's name under their own Social Security number,” says Curtis Chambers, founder of the Chambers Financial Group. “Often the financial institution will require the account holder to close the account held in an individual or joint registration and then open a new account in the name of the trust. This is because the trust is a separate entity and is essentially a new owner. The assets can then be transferred into the new account. So the assets can still be titled in the name of the trust, but it requires opening a new account and transferring assets,” he adds.
Living trusts do not reduce or eliminate income taxes. “Clients often think that revocable trusts have special estate tax saving features that wills do not. That is simply not true. The same estate tax benefits are available in both revocable trusts and wills,” says Martin.
Know too, that setting up a revocable trust properly can cost more than a standard will because of the asset restructuring required. “That cost, versus the cost of a simple probate, may not produce an overall savings for some clients,” says Martin.
For income tax purposes, the tax code treats them as if they don't exist – income earned by the trust's assets is taxed to the grantor, says Patrick Howley, a shareholder at the law firm of Shulman, Rogers, Gandal, Pordy & Ecker, who specializes in estate planning.
Living trusts do not provide creditor protection. Transferring your assets to a living trust will not protect your assets from valid creditors' claims. While most states' probate laws typically provide six months from the date of death or from the date the executor of the estate is appointed, for creditors of a decedent to file a claim against the decedent's estate, such limitation periods do not apply to claims against living trusts after the grantor's death, making it possible for claimants to pursue their claims for longer than would have been possible in a probate situation.
Says Howley, “Living trusts are a great tool in the right situation. They aren't always required, but when called for, it is essential that they be properly drafted and fully funded.”