Throughout my years practicing as an estate planning attorney, I've run across some common misconceptions that people have about Revocable Living Trusts. Learn what these common myths are and if you've fallen for any of them.
Myth #1 - A Revocable Trust Reduces Estate Taxes
True or false: A Revocable Living Trust will reduce your estate tax bill.
FALSE - A Revocable Living Trust does absolutely nothing to reduce your estate tax bill. Its main purposes are to protect your privacy, plan for disability, and avoid probate. Period.
With that said, married couples can reduce their estate taxes by incorporating AB Trusts into their Revocable Living Trusts, but AB Trusts can also be incorporated into Last Will and Testaments. The difference is, a Revocable Trust will protect the couple's privacy and allow them to plan for disability and avoid probate. A Last Will and Testament can't and doesn't do any of these things.
Myth #2 - A Revocable Trust Always Avoids Probate
True or false: A Revocable Living Trust will always allow your loved ones to avoid probate.
FALSE, for two reasons: (1) A Revocable Living Trust can't avoid probate by itself - the trust must be fully funded to avoid probate, and (2) Sometimes quirks in state law make probate necessary.
An unfunded Revocable Living Trust won't avoid probate - the Trustmaker has to fund the trust by retitling accounts and real estate and updating beneficiaries of life insurance and retirement accounts, otherwise, any unfunded property will need to be probated.
Aside from this, even with a fully funded Revocable Living Trust the laws of the state where you live at the time of your death may require a probate proceeding to cut off creditors' rights, obtain state estate tax waivers, secure a homestead determination for a primary residence, and/or limit the time that a challenge can be made to the trust. In these situations, however, the probate process should be less time consuming and also less costly than with a full probate administration.
Myth #3 - A Revocable Trust is Fancy and Complicated
True or false: A Revocable Living Trust is part of creating a really complicated and sophisticated estate plan.
FALSE - These days a Revocable Living Trust is the basis of a solid estate plan for the majority of people. Why? Because the benefits of a Revocable Living Trust far outweigh those of a Last Will and Testament:
- A trust protects your privacy, while a will becomes a public probate record for the whole world to see.
- A disability plan can be built right into your trust, while a will only goes into effect after you die.
- In most situations a fully funded trust will avoid probate, while in most situations property that passes under the terms of a will has to be probated.
Myth #4 - A Revocable Trust Protects Your Assets Against Lawsuits
True or false: If your assets are owned by your Revocable Living Trust and a creditor gets a judgment against you, then the creditor can't take the assets owned by your trust.
Absolutely FALSE - A Revocable Living Trust does nothing to protect your assets against lawsuits for two reasons: (1) You can change the terms of the trust at any time and put assets in and take them back out, and (2) You still personally own the assets titled in the name of the trust.
Asset protection planning involves an analysis of your long term financial and estate planning goals and then positioning or re-positioning your assets to be exempt from creditors' claims. Depending on the laws of your state, this could include investing in a primary residence, life insurance, retirement accounts, annuities and/or limited liability companies; titling assets in one spouse's name or as tenants by the entirety; and/or setting up one or more irrevocable trusts. Unfortunately, a Revocable Living Trust can't shield your assets from the claims of creditors - you'll need to create a comprehensive asset protection plan in addition to your trust.
Myth #5 - A Revocable Trust Eliminates All of the Work After the Trustmaker Dies
True or false: If you've created and funded a Revocable Living Trust, then after you die your loved ones won't have to do anything but collect their inheritance checks.
FALSE - This is a common misconception about Revocable Living Trusts - it's as if people think that their trust will literally grow arms and legs and run around cleaning up their affairs after they die. Even though your loved ones won't have to go to court and open up a probate estate, your Successor Trustee will still have quite a few responsibilities and duties to fulfull before your beneficiaries can pick up their checks. The key is that your successor Trustee can settle your affairs without having to worry about a probate attorney or judge overlooking their shoulder. With a Revocable Living Trust things will be more streamlined and can be accomplished faster by the Successor Trustee. Why? Because your Successor Trustee won't have to wait for a court order to do their job.
Myth #6 - Revocable Trusts are Only for Wealthy People
True or false: Your net worth really isn't significant, so you don't need a Revocable Living Trust.
False - Your net worth is only one factor to consider when deciding if you need a Revocable Living Trust. There's a multitude of reasons why you should consider creating and funding a trust that have nothing to with your net worth:
- You have minor children and naming a trust as the beneficiary of your life insurance or retirement accounts will keep these assets outside of probate and a court-supervised guardianship.
- You own real estate in two or more states and a trust will help your loved ones avoid two or more probate administrations.
- You want to create a disability plan that will keep you and your assets outside of a court-supervised guardianship.
- You want to give your loved ones essentially immediate access to your property after you die instead of waiting weeks or even months for access through the probate court.
- You want to keep your financial matters and the identity of your beneficiaries private after you die.