Revocable Living Trusts

If you are reading this article, someone has likely told you that you need or should have a “Revocable Trust” or a “Living Trust.” In fact, you might have been told a horror story about what will happen if you do not have a Living Trust. You also might have attended a seminar where you were told that a Living Trust is a cure-all and that for a certain dollar amount someone will draft a Revocable Living Trust for you and give it to you in a handsome, faux leather binder.

Is a Revocable Living Trust Right for you? These Estate Planning tools are not cookie-cutter documents that are good for everyone. A careful analysis of your goals, assets and applicable taxes is necessary to determine if the cost of setting up a Revocable Living Trust is worth the benefits.

To help you understand these documents, let me first give you some Quick thoughts. Then let me Debunk Some Revocable Living Trust Myths and Half-Truths. Finally, let’s run through the pros and cons of a Revocable Trust so you can deduce if paying the cost to set up a Revocable Living Trust Makes Sense For You.

Over 20 Years of Experience: Some Thoughts on the Good, the Bad and the Ugly of Revocable Trusts

I have been an estate planning attorney for over two decades. I have drafted Revocable Living Trusts as a member of five different state bars. I have written hundreds of Revocable Living Trusts, but only for clients for whom these trusts were a good fit. I have probably told twice as many people that they do not need Revocable Trusts and to avoid the expense of forming the trust because it was not a good fit for the client’s estate plan. There is no way to know if you are a good fit for a Revocable Living Trust without careful analysis. This is not a one-size-fits-all tool.

Is the Revocable Living Trust right for you? The short answer is that a Revocable Living Trust can be a useful estate planning tool for many people, but another unfortunate truth is that there are many people out there using lies and half truths to sell Revocable Living Trusts to individuals who do not need them.

If you attended a seminar and were told that everyone needs a Revocable Living Trust, then you are lucky to have escaped with your wallet. If you were told that your Revocable Living Trust would help you avoid Estate or Inheritance Taxes and creditors, you are lucky your car still was still in the lot when you came outside.

Debunking Revocable Living Trust Myths and Half Truths

So first, let’s debunk the most prevalent Revocable Living Trust lies and half-truths that many people have been told.

Claim: A Revocable Living Trust will help me avoid inheritance and estate taxes. False.

A Revocable Living Trust does NOT reduce your inheritance or estate taxes. This I think is the worst myth, often touted by those who sell canned revocable living trusts (in faux leather binders). These people feel comfortable telling you this lie because the inheritance and estate taxes are due when you are dead, so you will never know that they lied to you. Remember, the trust is “revocable.” Because the trust can be revoked and you can take all the assets back into your name, the IRS and department of revenue ignore the trust’s existence when calculating not only your estate and inheritance taxes but also your income taxes. If you need more proof, email me, and I will send you links to the IRS website that state this fact.

Claim: A Revocable Living Trust will shelter my assets from my creditors. False.

Again, the “Revocable” Living Trust can be “revoked,” so if you can get the asset back, your creditors can take it. The trust provides no protection from creditors during your lifetime or at your death. This differs from an Irrevocable Trust, which you cannot revoke, and can be used to remove assets from creditor’s claims.

Claim: A Revocable Living Trust will shelter my assets from my nursing home bills and Medicaid. False.

Because the trust is “revocable,” when evaluating your Medicaid eligibility all assets you place into the Revocable Living Trust are treated as if they were in your name. Use of an “Irrevocable Trust” where you have no right to the assets you gave away into the trust could shelter your assets, but never a “Revocable” trust. Again, for further proof simply review the Medicaid website.

Claim: Creating a Revocable Trust is all you need to do to avoid probate. False.

Forming the Revocable Living Trust is only the first step. To avoid the Probate Process, you have to arrange all your assets to utilize the Revocable Trust. Deeds must be filed placing your real estate into the trust. Bank accounts must be moved to the trust or must be designed to pour into the trust at your death. You must make sure that beneficiary designations are completed for other appropriate assets, such as life insurance policies, annuities and any qualified plans (IRA, 401k, TIAA-CREF, SEP, etc.). Further, as the years pass you will likely change your investments. You may buy a new CD, or open a new checking account. All of those changes must be done with the overall Revocable Living Trust plan in mind, or you might undermine the goals which caused you to form the trust in the first place.

Claim: Nothing need be filed with the state if I have correctly set up my Revocable Living Trust. Misleading.

This depends on the rules of the state in which you are a resident at your death. If you die a Floridian, Florida law requires that your successor trustee file a notice with the court in the county where you died a resident. Other states are beginning to require similar filings and, if your successor trustee wishes to start certain statutes of limitation for creditors, he or she will likely file some paperwork with the states.

Claim: My estate won’t need a lawyer if I have a Revocable Living Trust. Misleading.

The need for a lawyer to help with your estate has nothing to do with the existence or non-existence of a Revocable Living Trust. If your executor could handle your estate alone, then there is no need for a lawyer even if you had no Revocable Living Trust. Similarly, if your executor would need a lawyer to help with inheritance and estate tax returns, with obtaining releases from beneficiaries, with selling real estate or any other matter, then your trustee will still need a lawyer’s assistance even if you have a Revocable Living Trust.

Is a Revocable Living Trust Right for Me?

A thorough analysis of if a Revocable Living Trust is right for you begins with some basic information. This Article is meant to give you the truth about Revocable Living Trusts. It is not a complete analysis of your particular situation, which can only come with an interview with a competent Estate Planning Lawyer. An experienced Estate Planning Attorney will obtain a clear understanding of your assets, family standing, and your testamentary goals. Our Estate Planning Lawyers do this analysis every day in free consultations.

Until We Have Our Consultation, Here Are Some Facts About Revocable Living Trusts

A revocable living trust is a legal entity that your signature brings into existence. Once signed, it will exist, but it will state that all the terms are “Revocable.” The trust may own things, such as your real estate, but at any time you can “Revoke” the trust and take the assets back. Further, most Revocable Living Trusts state that during your lifetime all assets held in the trust are to be used for your care. In most cases, you as the Grantor serve as the sole trustee.

In contrast, an “Irrevocable Trust” is a trust you sign and bring into existence that you cannot revoke. If you transferred your house into an Irrevocable Trust, the trust owns the home like the Revocable Trust. But, you will likely not be able to ever get the house back into your name.

A Revocable Living Trust is designed to hold title to your various assets (bank accounts, real estate, personal property) during your lifetime for your benefit, and then manage and dispose of your assets after your death. If structured correctly a Revocable Living Trust may completely replace your Will. If you arrange all your assets properly, and nothing remains in your name at your death, there is no need to file your Will with the state, so you avoid the Probate Process.

If a Revocable Trust still sounds like a good fit for you, then the next question you should ask is the cost. Then analyze the cost against the cost of Probate. Is it cheaper to use the Probate Process, or is it cheaper to pay for the Revocable Living Trust to avoid the Probate Process?

Costs of creating the Revocable Living Trust include the actual drafting of the trust by an Estate Planning Attorney, the cost of transferring any real property deeds into the trust, and moving your other assets into the Revocable Trust. The costs of Probate vary from state to state.

If your only goal is avoiding the cost of probate (see below for other reasons), my experience is that it is not cost-efficient to set and funding a Revocable Trust in Pennsylvania or New Jersey. But, setting up a Revocable Trust to avoid probate in New York and Florida is cost efficient. That is a general observation.

But, There Are Other Reasons for a Revocable Trust, Which Might Have Value for You.

Aiding the Elderly or Those with Alzheimer’s: A Revocable Living Trust can be an excellent tool if you are reaching an age or a medical condition where you need some help with your finances, but do not yet wish to turn over all control. You can name a trusted person co-trustee with the right to act independently but retain the right to act alone. This way you can act now, but as your abilities diminish, your co-trustee can seamlessly take control.

Reducing the Chance and Cost of a Will Contest: If you believe that the chance of a Will Contest in your estate is high, then a Revocable Living Trust can be used as a tool to reduce that risk. You cannot stop someone from filing a Will Challenge, but you can make it much more challenging, expensive and less likely to succeed.

Convenience: A Revocable Living Trust can be used to avoid probate altogether, and even if its cost does not save your estate much money, it can certainly make it easier for the person who is handling your estate. This is especially true if that person lives far from your county.

Helping You Manage Your Assets: If properly drafted, a Revocable Living Trust can appoint someone as your co-trustee who can help you manage your assets and bills, but without you giving up control. It is an unfortunate fact that banks will work more willingly with your co-trustee than they will with your Agent under a Power of Attorney.

Real Estate in Several States: If you have real estate in several states, then at your death your estate need be opened in each of those states. This increases the cost of probating your estate. Avoid this added cost by placing each of these properties into a Revocable Living Trust, which would then avoid probate in each state.

Bank Accounts or Investments in Several States: If you have accounts in banks that do not have branches in your home state or investments in businesses outside your home state that are not listed publicly, then at your death probate may have to be opened in your home state and each of the states where these investments are held. Avoid this added cost by placing each of these investments into a Revocable Living Trust, which would then avoid probate in each state.

Replacing Your Will: If drafted properly and if you arrange your assets properly a Revocable Living Will can replace your will, but still allow you to create asset protection trusts and use other techniques to protect your heirs just as if you had put those provisions in your will.

If any of these reasons fits your specific needs, then paying the costs of setting up a Revocable Living Trust even in Pennsylvania or New Jersey will make sense.

Julius A. Andrews is the founding member of Sir Lewis & Associate Law Firm, a six attorney boutique estate planning law firm. We serve clients in Pennsylvania, New Jersey, New York, Minnesota and Florida. Julius A. Andrews received his Masters in Taxation LL.M. from NYU Law School and his J.D. from the University of Minnesota Law School. He served his country in the Navy JAGC during Desert Storm. Easy to talk to, feel free to call Julius for an appointment. We will make the process as easy as possible!