The answer might surprise you. Clients often come to us asking specifically for a living trust-based estate plan. This notion generally stems from the advice of a friend, advisor, or something that they have read about somewhere. There are a wide range of opinions about the pros and cons of planning using revocable living trusts. In our opinion, living trusts can be incredibly useful in limited situations, but they do not make sense for everyone. Good estate planning attorneys have a wide variety of tools in addition to trusts that may be used in the estate planning process. For some clients, carefully-tailored wills, financial and medical powers of attorney, beneficiary designations, transfer-on-death (TOD) designations, and joint ownership will do the trick. For other clients, proper planning may involve complex trust implementation. Each client’s estate planning goals must be carefully evaluated to determine what estate planning tools are most appropriate to achieve those goals.
What is a Revocable Living Trust?
A trust is a legal agreement for a trustee to hold certain property for the benefit of others. The trustee manages the assets held in the trust. A living trust is one that’s created while the property owner is alive. Many people only have a trust created at death to distribute their property to their heirs—this is called a testamentary trust. Some people use a will and a trust to distribute their property. They may use the trust to transfer property that has a title, such as a house, and use the will to transfer all other property.
Revocable Trust Advantages
- Avoid Probate–Assets held in a trust avoid court probate proceedings. However, there are circumstances in which the expense of setting up and administering a trust outweighs expense of going through probate proceedings. As I mentioned above, the circumstances and goals of each client’s situation must be carefully considered in making this type of estate planning choice.
- Avoid Multiple State Probate Proceedings–When you own real estate or other property in multiple states, probate proceedings must be initiated in each state. The time and expense of administering assets in multiple states may make setting up a revocable trust to save expense and administrative time down the road well worth the investment.
- Plan for Non-probate Assets–A trust may be used to enhance the distribution options of certain non-probate assets including retirement accounts, jointly-owned property, and life insurance policies.
- Make Plan Adjustments Easily–Making adjustments to distributions, trustee designations, and assets held by the trust is rather simple to do while you are living.
- Privacy–In North Carolina, probated wills are public information. Friends, family, creditors, and anyone else who is interested may view the contents. Trusts allow the transfer of your assets to remain a private matter.
- Reduce the Likelihood of a Challenge to the Estate–The contents of your will can trigger family disputes when you pass away, and may be challenged by any member of your family. Using a trust may help to avoid contests. A trust document is not public information, so a challenger would have to spend quite a bit of money and file a lawsuit just to discover the provisions of the trust.
- Plan for Incapacity–A well-drafted living trust plan will include coordinated financial and medical powers of attorney that will allow your designated agent to act on your behalf in managing your assets in the event that you are unable to do so during your life.
- Create Flexibility in Planning–For couples with children from prior marriages or property they wish to keep separated because it was acquired prior to marriage; a living trust provides methods of providing for the surviving spouse during his or her life while allowing those assets ultimately to be distributed to certain children. Further, a trust can be used to transfer property over time, rather than all at once. Many parents do not want to give large lump sums of money to children if they feel that those children are not mature enough to handle the money wisely.
- Plan for a Disabled Beneficiary–A parent may wish to make provisions for a disabled child in a way that allows that child to continue to receive government benefits.
- Reduce Estate Tax Exposure–For certain clients, there may be some tax planning benefits available by planning using a revocable trust. Any trust tax planning must be completed under the advisement of an estate planning attorney.
Revocable Living Trust Disadvantages
- Expense and Time-Implementing a trust-based estate plan is generally more expensive than setting up a will-centered plan. If you are considering setting up a trust, it is important to talk with your attorney about the cost of probate (court costs and attorney fees) versus the cost of setting up and administering a trust. A trust can save a lot of time and expense in the long run, but it is important that it be done well. A poorly-drafted trust can be ineffective, confusing, and expensive to unravel.
- Assets that Are Not in the Trust Do Not Avoid Probate–Typically, a “pour over” will is drafted along with a living trust that funds any of your property into your trust when you pass away. However, any probate assets (such as real property and bank accounts) that were neither re-titled into the trust nor passed outside of probate, will be subject to probate.
- Potential Problems in Dealing with Trust Assets–Sometimes, there can be unforeseen complications in dealing with assets held in trust. For example, some banks will not allow a trustee to refinance real property held in trust.
If you are considering whether or not to establish a living trust-based estate plan, it is important to consider a wide range of issues that are unique to your particular planning needs and goals. Often, a client’s estate planning objectives can be accomplished using tools that do not include trusts at all. Other times, a living trust may be the best tool for the job.