The Pros and Cons of a Revocable Living Trust
Sometimes clients come to an attorney wanting to create a Revocable Living Trust. What this means is that a legal entity, or trust, is created to house your assets for your use during your lifetime (hence the living), which you can cancel or change at any time (hence the revocable).
There are good reasons you may want to do this, and others why it’s not the best way to go.
- Trust assets don’t go through probate. After the trustee passes away, the successor trustee (named in the original document) steps right in and becomes the new trustee. This means that all assets in the trust pass to this person (or people) without needing to go through probate.
- There’s little time delay. Because the successor trustee has access to trust assets right away, heirs don’t have to wait until these items go through probate before they dispose of them, such as selling a home.
- It affords more privacy. Unlike a will, a trust is not filed with the court, so the details of your trust cannot be accessed by the public.
- You can change your mind. If you decide at any time that you want to move your assets out of the trust and back into your name, you can do so.
- There are costs involved. A trust is a complex legal document that is best created by an attorney.
- You have to “fund” a trust. All of your assets must be moved individually into the trust. This is a time-consuming process, as you need to contact your banks, investment and insurance companies, and other asset-holders to change the ownership of each account. You also need new deeds to move any real estate into the trust.
- You still need a will—and maybe a probate. Assets falling outside the trust have to be probated by the court. I see this often in my practice, where home deeds or bank accounts were never moved into the trust, perhaps because they were acquired years after the trust was formed.
- You have to pay taxes. Despite what many people erroneously believe, income earned by the trust during the trustee’s lifetime is attributed to the person, requiring the payment of income tax. And if the value of the trust at the time of the trustee’s death reaches the IRS threshold for estate taxes, the tax must be paid.
- If a trust is lost, there is no way to retrieve it. Since this document is not filed with the court, the only version is the one you hang onto. A client recently came to me claiming she is the successor trustee, but since the trust was drafted decades ago and couldn’t be found, we had difficulty proving she was entitled to the inheritance.