What’s the fuss with revocable living trusts, anyway?
If you’ve looked into estate planning, chances are you quickly came across revocable living trusts. These trusts reign as the king of estate planning tools. But are revocable trusts worth the expense or is it all just hype?
The short answer is that revocable living trusts really are just that good. There are a number of reasons to establish a trust and several of them are explored below. Please note that these are not all of the benefits that a revocable living trust can offer, but these are some of the key reasons to consider establishing a trust.
avoid probate With a Revocable Living Trust
Probate is the court process for the distribution of a person’s estate upon their death. If there is a will, a court will determine whether the will is valid and operative and then oversee the administration of your estate consistent with the will. However, if you do not have a will (or trust), then the court will determine how your assets will be split in accordance with California law.
If you haven’t gone through probate, thank your lucky stars. Probate in California is expensive, time consuming, and public.
California has a statutory fee scheme for probate matters. It is a cap on fees (not a minimum) but because the probate process is relatively complex and time-consuming, most of the time lawyers (and personal representatives, depending on the situation) will not agree to a lessor fee unless the estate is very large. To add insult to injury, the fee is based on the gross total value of the estate which means that if the estate has a significant mortgage or other debt, it won’t be taken into account when the fees are assessed.
As an example, let’s say that a hypothetical person died with only her house, personal property (car, jewelry, etc), and $3,000 in the bank. She had a $800,000 mortgage on the house which was worth about $1.2 million at her death. Let’s say her personal property is worth about $2,000. In assessing probate fees, the gross estate would be $1,205,000 since the mortgage is ignored for the purposes of calculating the fees. This would come to fees of $25,050 each for the lawyer and the personal representative, or a total of $50,100. Plus court filing fees and costs are extra. This means the fees eat up over 12% of her estate – money which could have gone to her beneficiaries instead if her estate avoided probate.
Probate generally takes anywhere from 9 months to 2 years from the start of proceedings until the estate is closed. While your estate is going through this process, you have to wait until the court has given the personal representative authority to take the actions required to administer the estate. Until that authority is granted by the court, the house cannot be sold, there is no access to bank accounts, etc., which means your beneficiaries may not be able to take advantage of a hot real estate market or may be stuck in a position where they don’t have liquidity to pay outstanding bills or funeral expenses.
In contrast, a trust allows your trustee to access your trust accounts and have authority over your house or other property without having to deal with a court process. Additionally, it allows you to instruct or permit your trustee to distribute funds before the entire estate is wrapped up whereas with probate your beneficiaries have to wait until the very end to receive any distribution(s).
Have you ever wondered how the juicy details of celebrity estates or conservatorship proceedings end up splashed all over entertainment news? Well, it’s simply because court proceedings are public (unless sealed). The same thing can happen to you if you do not set up a trust. If your estate ends up in probate, financial details, beneficiary allocations, and any disputes or fights between family members are public.
However, if your assets are all within your trust, you avoid the spectacle entirely. Even if you fail to transfer all of your assets into your trust, if you have a pour-over will (which “pours over” the estate into your trust) only limited information becomes publicly available keeping your privacy intact.
have more control Distributing Your Estate WIth A Revocable Living Trust
If you die without a will (intestate), then your assets will be distributed according to the terms of California’s probate code.
However, if you have a trust (or a lawyer drafted will), you can dictate terms in detail. For example, you can ensure that if, after you die, your partner or spouse re-marries that your selected beneficiaries stay the same even if your spouse gets the benefit of your assets until their death. You can have distributions spread out over multiple years, such as giving 25% of the inheritance away at age 21, 25, 30, and 35. You can designate certain uses for the inheritance such as education, health care, or other specified uses.
However, there is less flexibility with a will than there is with a trust as a trust can build in flexibility for changes in tax laws, circumstances, and other factors that a will cannot handle with the same flexibility. Also, with a trust you can make sure your trustee is empowered to set up special needs trusts or other tools so that if one (or more) of your beneficiaries ends up being eligible for government benefits, that their inheritance doesn’t make them ineligible for those benefits (thereby simply replacing the benefits they receive) but are used solely to supplement and enhance their lives.
Obtain better tax treatment options With a Revocable Living Trust
Depending on the size of your estate, you may not need to worry about fancy methods of avoiding estate tax. However, tax laws continue to change and while you might not need to worry about it today, tomorrow could be a different story.
By going through the process of evaluating different trust options that may suit you based on your objectives and the size of your estate, you can set your estate up for the best chance of minimizing or avoiding estate, capital gains, and other taxes all together.
Protect Yourself In IncapacitY With a Revocable Living Trust
If you are incapacitated, a well drafted trust will allow your trustee to step in and manage all of the assets in your trust on your behalf. Without that protection, your family may have to petition the court to appoint a conservator of the estate so that they can manage your financial affairs.
By pairing a trust with a power of attorney and advance health care directive, you can avoid having to deal with conservatorship entirely as the combination of those three tools will allow those you love (and trust) to immediately step in to handle all of your affairs and medical decisions without requiring court proceedings.
In addition, depending on how the trust is set up you can empower your trustee to take steps to qualify you for government benefits, such as Medi-Cal, so instead of your estate being depleted to pay for long-term care, you can preserve those assets (and prevent clawback) for your potential recovery and/or your beneficiaries.
secure your child’s (or pet’s) future With a Revocable Living Trust
Many people think of estate planning as an end-of-life step: something to worry about after you retire. However, if you have minor children or if you have fur babies, putting together an estate plan can be one of the best steps you can take to protect them.
If something happens so that you and the child’s other biological parent are unable to care for your child (or fur baby), what happens next depends on whether you’ve set up a trust and nominated guardian(s).
If you do not have a trust, your family or friends have to petition the court for guardianship of the estate of your child. Not only does that mean they have to go through a court proceeding, but it also means the person you would like to take over managing your child’s assets may not be appointed. Also, there could be a big (public) family fight over who gets control of the assets. In addition, when your child is 18 years of age, all of the money goes to them with no strings attached.
If you set up a trust, no court proceeding is needed and your trustee immediately steps in and manages your child’s estate according to your wishes. This also means you can control the age (or age(s)) at which the child receives assets which means you can make sure those assets won’t get counted against them when applying for financial aid for college, won’t be available for them to borrow against to get into debt immediately, etc.
The guardian who will handle the day-to-day care for your child is called the guardian of the person. While the court still has to appoint a guardian of the person, by nominating a guardian in your will, you can give both the court and your family clear direction on who you want appointed to care for your child. Your child’s trustee and guardian can be two different people if you choose, but if you leave it entirely up to the court there’s no telling who will make the persuasive argument for custody and win guardianship even if they are someone you do not want raising your children.
If you have a fur baby but no pet trust, your pet will go to your beneficiaries (or “heirs at law”) and they will decide what to do with them. That might be a good thing or it might not. If you set up a trust, you can have a pet trust within your overall revocable trust and assign a trustee and caretaker for your furry friends to ensure they are taken care of.