REVOCABLE LIVING TRUSTS
A Living Revocable Trust is Better than a Will
Revocable trusts, as described in the introduction won't provide you with tax shelter. However, revocable living trusts can shelter you from the probate threat to your wealth and control over it.
Literally, probate is the process of "proving" your will and transferring assets to your heirs. A lot of people spend a lot of time and effort trying to bypass probate, for these reasons:
Expense Depending on your state and the size of your estate, the total cost of probate might be 3%-25% of your assets. If there is a dispute, half of the value or perhaps all could be lost. Say you die with a total estate of $300,000, certainly not a huge amount in today's world. Typically $12,000 to $75,000 might go to holding fees, maintenance, security, lawyers, executors and court fees... just for reviewing and defining papers. For a married couple, two probates may be needed, costing twice as much, before all of their assets can go to their children. What's more, the probate fees get paid first, before your family gets whatever might be left.
Delays Not only will probate cost your heirs, it can cause critical holdups. Although some states probate an uncomplicated estate in a matter of a few weeks, an "expedited" probate might take six months in others and a few states tie up assets for years.
While assets are in probate, the court is in control. That means your executor or an administrator appointed by the court will manage them until the estate is settled. Will he or she buy and sell to take advantage of market or tax-planning opportunities? Perhaps... and perhaps not.
Publicity Adding insult to injury, probate proceedings are on the public record. Anyone can see a list of your assets and the debts you've incurred. Illegitimate claims may be brought against your estate and various scam artists may try to prey upon your heirs. If you own a closely held company and it goes through probate, its records will be exposed to competitors and creditors and management during probate will be awkward.
Multiple probate Suppose you own a vacation home or investment property outside your state of primary residence. Your estate will have to go through probate in that state, too, adding still more expense and aggravation.
It's clear, then, that probate is best avoided, if possible.
That's where revocable living trusts come in. In effect, once you transfer assets into the trust, at death, they are owned by the trust instead of you. At your death, the assets could stay in the trust, or be distributed by the trustee rather than by a probate court.
This arrangement makes it very difficult for a disgruntled heir (or greedy heir applicant) to challenge your disposition of assets... a big benefit. Another benefit is privacy. Your assets and their disposition are not exposed to the general public, as they are when assets go through probate.
Revocable trusts are used moat frequently precisely because they're revocable. You can change the terms whenever you want even cancel the trust altogether. You can set up a revocable living trust naming yourself as trustee as well as beneficiary. If anything comes up that makes you unhappy, you can back out, change the beneficiaries, or reallocate the trust assets.
You will, of course, name a successor trustee and successor beneficiaries to manage and receive the trust assets after your
death. In the meantime, you have full control of the assets, just as you did before creating the trust. If you transfer stocks into the trust, for example, you can buy or sell them at will. You will receive the income from any trust assets, and you'll owe the resulting income taxes. A revocable trust is not a tax shelter and does not affect income taxes.
A revocable living trust can be used as an estate planning vehicle, too. In addition to naming individual beneficiaries for assets, you can, for example, set out instructions for other trusts to be established at your death.
The bottom line: With a revocable living trust, you design future control over your assets while living. You can name who gets what at your death, and you can change your mind if you want to.
RIGHT FOR YOU?
Should you use a revocable living trust? That depends on your assets and your state's laws and probate practices. Living trusts are used more in some states (for example, California) than others (for example, New York), because some states have long, expensive probate proceedings, which encourage the use of living trusts.
Other states may discourage living trusts, for example, by prohibiting trust creators from acting as trustees as well as beneficiaries. Therefore, you should investigate your state's trust laws and probate procedures before acting, to determine whether living trusts make sense in your state. If they do, you still have to decide if such a trust makes sense for you. That is, you need to see if you have the types of assets that should be included in a trust.
NOTE! Some assets bypass probate even if they aren't held in a trust.
These "non-testamentary assets" include:
* Life insurance proceeds with a named beneficiary (as long as you don't name your estate as beneficiary).
* Retirement plan assets with a named beneficiary (again, so long as the beneficiary isn't your estate).
* Jointly owned property, including real estate and brokerage accounts, that you hold in "joint tenancy with right of survivorship" or in "tenancy by the entirety." At death, the property automatically goes to the co-owner. (In contrast, property owned as "tenants in common" is subject to probate.)
* POD bank accounts. In some states (including New York, Texas and Florida), bank accounts can be designated "payable on death," or POD. Just like an insurance policy or retirement plan holdings, the proceeds go directly to a named beneficiary at death, avoiding probate.
Exception: If your heirs are minors, you'll need a trust or custodianship to hold even these assets, because minors cannot inherit property directly. Name a minor as beneficiary for an insurance policy, a retirement plan a POD bank account, and you'll get the probate court involved.
As you can see, the shape of your portfolio determines whether or not you're a good candidate for a living trust. If most of your assets consist of a jointly owned home, a joint bank account and a retirement plan with a named beneficiary, probate won't be much of a factor, and you probably don't need a revocable trust. On the other hand, if you have diverse holdings... shares in a family business, stocks and bonds, investment real estate properties and a valuable art collection, that aren't jointly held, setting up a revocable trust may be very worthwhile.
You can start slow. Make a "self-declaration of trust," naming yourself the initial trustee and initial trust beneficiary. Thus, you'll manage the trust the assets, and the income the trust generates.
If you are timid, you can transfer only a few assets into the trust at first, to hold down the cost and the paperwork. When you get older and comfortable with the trust concept, you can create more trusts, or change them. The assets MUST be transferred to be included in the trust. Assets that are NOT transferred are then covered in your Will. If there is no Will; then the state will determine the heirs and pay someone of the court selection to be in control, and act at the court approval over periods of time.
Tax note: Because revocable living trusts aren't permanent, they're tax-neutral. No gift tax is incurred on transfers, but the property remains in your taxable estate and you are taxed on the trust's income.