Revocable Living Trust Information Sheet

 

What are Revocable Living Trusts?
 
A revocable living trust is a form of title for holding your assets and designating how they are to be distributed when you die.  While you are alive you still own them and have total control over them. You treat gains and losses on your assets just as if they were held in your own name.

 

An individual (trustor) creates a revocable living trust, usually naming himself/herself and spouse if applicable, trustees of the living trust.  Should the original trustee become incapacitated, the trust document lists alternative trustees.  Revocable living trusts are not one size fits all. A trust can be very basic or very complex depending on the individual trustor’s circumstances and wishes.  The trust document lists the beneficiaries to whom the assets are to be disbursed upon the trustor's death. While the trustor is alive he/she can change or revoke his/her revocable living at any time for any reason.

 

 

 

What benefit are Revocable Living Trusts?

 

1. Unlike a Will Revocable Living Trusts Avoid Probate: 

 

Having a Will does not avoid probate. A will just directs how your estate will be distributed.

 

Formal Probate proceedings take a minimum of six months. There is a statutory attorney's fee starting at 4% of the probated assets. In addition there is a statutory executor's fee equal to that of the attorney's fee.
 
The statutory probate fee schedule based on the estate’s gross value is:

 

  4% on the first $100,000.00
  3% on the next $100,000.00
  2% on the next $800,000.00 
  1% on the next $9,000,000.00
  1/2%  on the next $15,000,000.00
  Reasonable compensation on the excess over $25,000,000.00.

 

Any estate equal to or greater than $100,000.00 in assets subject to probate must go through the probate process.  Even if those assets have no equity because of loans they secure, probate looks only to the gross value of assets.

 

An estate with less than $100,000 of assets subject to probate must go through at least a summary probate proceeding.

 

Property held in joint tenancy, trust, or bank accounts held in trust for another on death (Totten Trusts) are not assets subject to probate.

 

2. Greater protection than Joint Tenancy or Totten Trust/POD Bank Accounts:

 

The trust covers all contingencies of another predeceasing you.  Title in Joint Tenancies and Totten Trust/POD Bank Accounts revert back to the granting individual if the other Joint Tenant or the beneficiary of the bank account dies before you. This defeats their probate avoidance purpose.

 

Joint tenancies may be attached if other joint tenants have creditor problems or go through a divorce. A living trust avoids these problems.

 

3. Privacy:
 
Trusts avoid public disclosure of your financial affairs after your death and while you are alive.  Probate is a public record. Avoiding it keeps your affairs private.  During life if you ever become incapacitated, a trust sets provisions for an alternate trustee to take over handling your financial affairs without requiring a humiliating and public conservatorship proceeding. After death only those beneficiaries named in the trust and your heirs who would otherwise inherit if you had no trust have a right to see your trust.

 

4. Legally saves on taxes in future:

 

Starting in year 2011 the estate tax kicks back in at $5,000,000 per person.  Accordingly Married couples with a living trust can protect up to $10,000,000 from IRS estate taxes instead of just $5,000,000 without a trust.

 

5. Takes care of Special Needs and Spendthrift heirs:

 

A. Special Needs Heir:  If a child or other heir is incapable of handling their financial affairs due to physical or mental disability, a trust protects them by allowing the grantor to designate funds as desired for the Special Needs Beneficiary with a structure to make sure these funds pay for those heir's needs. 
 
B. Spendthrifts: If an heir is a spendthrift, a trust may be used to insure only enough money is granted each month/week to the heir for his/her necessities.

 

 

 

Are there downsides to Revocable Living Trusts? 

 

There are a few potentially negative aspects of living trusts:

 

1. Revocable Living Trusts initially cost more to set up than a will.

 

2. Revocable living trusts create the need for extra paperwork after their creation:

 

The trust must be funded by property. Title on assets must be changed into the trust’s name.

 

3. Creditors claims are not barred as quickly:

 

Creditors may have a full year after the trustor’s death to make a claim for payment unlike the four month period for probated estates. 

 

4. Separate Trust Administration after First Spouse’s Death:

 

Once one spouse dies the surviving spouse may have to divide up the assets into  separate trusts and administer them separately. Each separate trust will require its own taxpayer ID number and potentially an income tax return.  Other technical tax issues may arise for more involved trusts.

 

 

 

Are Revocable Living Trusts Worthwhile?

It depends on each individual’s or married couple’s circumstances. Usually the benefits outweigh the burdens except for those with very limited assets.

 

 

 

When are Revocable Living Trusts necessary?

 

1. When there are two spouses with greater than $5,000,000 in net worth or a  reasonable likelihood that they will 
    exceed that threshold in their lifetime.

2. When the estate subject to probate is over $100,000 and heirs have potential creditor problems and it is desired 
    to protect the inheritance from creditors.

3. When an heir is incapable of handling his/her own financial affairs.

 

 

 

When are Revocable Living Trusts recommended?

 

Any time the estate is worth greater than $100,000.