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Should You Incorporate a Revocable Living Trust into Your Estate Plan?

Introduction

One of the most common tools in estate planning is a revocable living trust. Unfortunately, while it is a wonderful tool, too many people are “sold” a trust when, in fact, they might be better off simplifying things with a slightly upgraded Will.

The Basic Question

The basic question boils down to two parts: 1) For whom are Living Trusts most appropriate? and 2) What are the pros and cons?

Living Trusts are useful estate planning tools, and they have an important place in many people’s estate plans. If you find any one of the following benefits appealing, then a Living Trust may be appropriate for you.

Benefit #1: No Probate. When a person dies, most properties pass either under a person’s Will or under a Living Trust. Some properties–such as life insurance, IRAs, and certain types of bank and brokerage accounts–pass directly to named beneficiaries. If property passes under a Will, then the Will must be probated at the courthouse. Probate entails hiring a lawyer, filing a number of papers with the court, attending one or more hearings, and providing a written inventory to the court valuing the properties which passed under the Will. Some people do not want this type of involvement with the court, so they opt for a Living Trust. By transferring all properties which would otherwise pass under your Will to a Living Trust, you can avoid the probate proceeding. For estates which owe no estate taxes, there is usually less work for the lawyers, and that translates into reduced estate administration costs. Court involvement is not eliminated entirely however. Florida now requires the Trustee of a Living Trust to file a Notice of Trust with the appropriate court containing information about the person who created the Trust and the Trustee. Also, in certain circumstances, the Trustee may be required to pay expenses of administering the decedent’s estate as well as the claims of creditors against the decedent’s estate.

Benefit #2: More Privacy. As mentioned above, when a person dies with a Will, an inventory must be filed with the court. You may not want your friends, neighbors, or the media to be able to read a listing of what you own and what it is worth. After all, an inventory is a public record. With a Living Trust, your properties and their values remain private.

Benefit #3: Plan For Future Incapacity. You may be worried that one day you will not be able to manage your own finances, and you may want to name someone to handle these types of matters for you. You can address this potential problem with a Power of Attorney or with a Living Trust. A Power of Attorney will usually be accepted by banks, title companies and the like, but there is always the risk that an institution’s legal department will reject it. The same person who may be denied the ability to use a Power of Attorney will likely be allowed to do anything he or she wants when acting as Trustee of a Living Trust.

Benefit #4: Harder to Challenge. If you are planning to disinherit one of your children or grandchildren, you may be better off with a Living Trust because there is nothing filed at the courthouse. Also, it is a little harder to contest a Living Trust than a Will. Many people are interested in doing as much as possible to prevent a successful challenge to their estate plan.

Benefit #5: Avoid Out-of-State Probate. If you own property in another state, you can avoid a costly probate proceeding in that state by transferring the property to a Living Trust.

Benefit #6: Tax Planning. If your estate is above the threshold for Federal estate taxes, then there are several tools that can be used to create a tax savings for your estate, and therefore your heirs.

Benefit #7: Planning in Second Marriages. If you are now married with children from a prior marriage, specific provisions can be inserted in a trust to protect assets and ensure that children receive an inheritance regardless of which spouse is the first to die.

Benefit #8: Corporate Fiduciary. If your estate is significant enough to bear the costs of a corporate fiduciary and there is concern that the beneficiaries/heirs will fight amongst themselves, a corporate fiduciary can cure many of the problems in naming one child the successor trustee. Many times the fees and costs are negligible, and by having a corporate fiduciary, you can be sure the proper procedures
are followed in administering your trust.

Before you establish a Living Trust you need to understand the downsides, which include the following:

Disadvantage #1: Time-Consuming to Set Up. Depending on how many different types of properties and accounts you own, it can take quite some time to switch everything over to the name of your Living Trust.

Disadvantage #2: Complicated. Wills are usually shorter and simpler to understand than Living Trusts. Also, with a Will, you can sign it and forget about it. But with a Living Trust, you need to put your property into the trust and run your life out of it for as long as you live. For many people, this downside outweighs all the potential benefits.

Disadvantage #3: Time-Consuming to Revoke. A year after you set up the Living Trust, you may decide you do not want it any more. At this point, you will need to return to every bank and brokerage house, and undo everything you had done to establish the trust. You can expect more lawyers’ fees too.

Disadvantage #4: Post-Death Costs Not Eliminated. If you have a taxable estate, there will be a lot of work to be done after death regardless of whether probate is required. Typically, there are tax returns to file, trusts to establish, assets to value, and more. Avoiding probate will only marginally reduce the cost of administering a taxable estate.

Disadvantage #5: May Still Need to Probate Will. If you leave just one bank account or one piece of real estate out of the Trust, probate will still be necessary. And probate takes about as long when there is one asset as when there are twenty.

Conclusion

While a trust is not for everyone, it can be an effective tool for planning for the proper administration of your estate. Further, there are several different types of specialized trusts that assist with special demographics such as second marriages, taxable estates, and spendthrift children. The best place to start is a consultation with your attorney.


FLORIDA ESTATE PLANNING, PROBATE, GUARDIANSHIP, & ELDER LAW IS COMPLEX AND CANNOT BE COVERED COMPLETELY IN AN ARTICLE. WHENEVER A SPECIFIC QUESTION OR PROBLEM ARISES, YOU SHOULD CONSULT AN ATTORNEY. PLEASE FEEL FREE TO CONTACT MY OFFICE TO SCHEDULE A FREE CONSULTATION: (941) 256-3965.

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