by Diedre Wachbrit, Attorney-at-Law
The Revocable Living Trust is the cornerstone of many familiesí estate plans. Hereís why it is so popular.
The Alternative Is Probate
Letís first explore what happens without an estate plan. When a person dies, the state has an interest in preventing a free-for-all and making sure that personís property is transferred to the right heirs. If there is no will, the state provides that the personís property goes to his next-of-kin in specific proportions provided by law. For example, a spouse always receives half of the personís property.
When there is a will, the state ensures that the instructions in the will are followed. With or without a will, transfers to the heirs or beneficiaries are made through a court-supervised process called probate. The probate court appoints an executor and requires that person to publish various notices and make regular reports to the court. Before the property can be completely released to its new owners, the probate court reviews all of the transactions and signs an order.
This probate process requires a great deal of paperwork and takes an average of sixteen months to complete. The executor and the attorney are both entitled to a percentage of the estate as compensation for their work. Some estimated probate costs appear in the table below. You can obtain a customized probate cost projection by entering your own information into my calculator at www.wachbrit.com. Further costs -- such as court fees, newspaper publication fees and so on -- can add up to thousands of additional dollars.
Avoiding all these costs and keeping the property transfers out of the court system are the primary reasons most people create Revocable Living Trusts.
Revocable Living Trusts are Flexible and Easy to Use
But how does this trust work during life? The creator(s) of the trust select trustees to manage the trusts assets. Usually they name themselves. Since they are the trustees, they make all the decisions about what property to buy, sell or mortgage, just as if they owned it outright. When one spouse dies, the other takes over as sole trustee. The creators are also the beneficiaries of the trust. All of the earnings of the trust (such as stock market gains) are taxed on the creatorsí individual tax return as if the trust did not exist.
The living trust is not an asset-protection trust. The property in the trust
is vulnerable to the same nursing-home costs, creditor-collection actions or
court judgments as property owned by the creators outright. When the second
spouse dies, the person they have chosen manages the trust and distributes the
property to the people they have chosen. If the beneficiaries are minors, the
assets can be kept in trust for their protection until the age the trust
creators have chosen. All of these transactions are private since no court
filings or newspaper notices are required. Thus the creators can protect
beneficiaries from predators and creditors.
Why doesnít everyone have a living trust? Some people donít need a trust to avoid probate and protect their heirs. If you have less than $100,000 in assets (do not subtract debts), or if all of your assets are the type to allow you to name a beneficiary (such as life insurance), your estate will not be subject to probate. This is only true, however, if all of your beneficiaries are adults. Minors cannot inherit property without court-supervision or a trust. Most people simply havenít thought about it. When you have no dependents, itís not as crucial how long probate takes or how much money it costs to get your assets to those you love. But when there are loved ones who are counting on you, the revocable living trust enables you to protect and provide for them even when you are not there.
*Life insurance allows the designation of beneficiaries and so is not usually subject to probate upon the death of the insured person. However, when the surviving beneficiary dies (for example, the spouse of the insured person dies leaving the money to the kids), the proceeds are includible in probate and taxable. That is the scenario assumed in the table above.
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