As an Estate Planning attorney, one of the most common questions I get from my clients is whether or not they should execute a Revocable Living Trust as part of an effective plan to protect their assets and ease the administrative burden on their families. The answer? It depends on a variety of factors and your goals for managing your estate – both during your lifetime and after you pass on. At the end of the day, about 50% of my clients end up executing a Trust as part of their Estate Planning package.
For many individuals or families, a basic Last Will and Testament, along with a Power of Attorney and Advanced Medical Directive is sufficient to meet their needs. A Will serves to ensure that assets are distributed to beneficiaries according to the makers’ wishes after they die, appoints guardians for minor children, and nominates someone to serve as Executor to administer the Estate once you have passed. In the event that you have a more complex situation, such as minor children, or relatives with special needs, you can create Testamentary Trusts within your Will, to ensure some of your assets are held in Trust for the benefit of these individuals for a specified period of time. Once you die, typically the Will is offered for probate, a court supervised administrative process which makes it part of the public record, and ensures that your Executor properly pays debts, taxes, and carries out their fiduciary duties. Wills cannot be amended without executing an entire new document.
With more complex estates, a Trust may be a better Estate Planning tool. A Revocable Living Trust is a document that establishes a shelter for the “Grantor(s)” (the person or people establishing the Trust) to place and manage their assets during their lifetime. Often times, spouses will execute a joint family trust to manage their common assets. Similar to a Will, upon the death of the last surviving grantor, the trust assets are distributed to the beneficiaries, or held in trust for their benefit for a certain period of time. For example, if the grantors have minor children, they may elect to have their assets held in the trust to be used for their care, maintenance and education until they reach the age of twenty five. For a trust to be effective, the Grantors must transfer title of their assets into the Trust – including their home, other properties, cash assets, etc. A Trust is a bit more expensive to set up, and takes some “leg work” to ensure that it is properly funded with the grantors assets. However, it is a more flexible document that can be amended easily at any time, and can save money down the road. Trust assets are not subject to probate, and pass directly to the beneficiaries by the successor Trustee once the surviving Grantor passes away.
Here are some common scenarios where having a Revocable Living Trust may be advantageous:
- Avoiding Probate: Many individuals or families are concerned that their estate will be subject to probate once they pass away. Although the probate process can be easily managed with a fairly straightforward estate, it can become tricky – and costly – if the estate is more complex. Some people want to ensure their estate plan remains confidential, or avoid lengthy court battles if there is the possibility that their estate plan will be disputed. Others may want to protect assets from creditors or troublesome family members. Avoiding probate can help offer an added layer of protection and keep the estate out of the public eye.
- Assets in Different Jurisdictions: If you own properties or other significant assets in different States, placing them in a trust will help avoid having to probate the estate in multiple jurisdiction. Think of that vacation home at the beach, or the family estate in the Cape Cod. Each state has their own rules and procedures for transferring property, and dealing with multiple jurisdiction can be costly and time consuming. Placing these assets in a Trust can ease the administrative burden of passing these assets along to beneficiaries.
- Blended Families: In our society, divorces, remarriages, and children from prior relationships are fairly common, but can cause sticky situations when determining the distribution of commonly held assets. A Trust can more easily accommodate more complex family situations, by allowing a more detailed distribution plan to be created and maintained and updated.
- Tax Advantages for the Wealthy: Wealthy individuals or families should consider a Trust as part of their tax planning strategies. While taxes on an estates cannot be completely avoided, the use of tools such as Generation Skipping Trusts, or Credit Shelter Trusts can help realize significant savings on estate and gift taxes, and ensure that the full extent of tax exemptions are preserved. Consult your tax advisor!
- Protection for your beneficiaries: Many individuals are concerned their assets will pass into the wrong hands upon their death. A common scenario is a divorced spouse who worries that his or her assets may end up being controlled by their Ex – and not used exclusively for the benefit of their minor children. Assets held in a Trust and controlled by a competent and independent Trustee can help avoid these situations.
- Uncertain Future/Indecision: One of the advantages of a Revocable Living Trusts is they are flexible. The Grantor/Trustee can make changes as frequently as they wish, and move assets into and out of their trust at any time. For people that may want to change their beneficiaries, want to establish gifts for charities, or are uncertain what their estate might look like in the future, a trust offers the flexibility to make changes throughout your lifetime.
- Business Owners: If you own an interest in a business, a trust can be a tool to provide guidance and “business succession planning” to help ensure the interest in the business is passed to the right beneficiaries, its managed by the correct designated successors, and the Estate Plan is working in harmony with Operating Agreements or other corporate guiding documents for the business.
- Special Needs: If you have a child with special needs, elderly parents, or really any individual you care about that cannot – or should not- be able to manage assets on their own, but you want to ensure they are properly cared for, you should consider a Trust. A Trust allows you to set aside assets to help provide for those individuals during their lifetime, and then pass the remainder on to them, or a subsequent beneficiary when the time is right. An added advantage of specific “special needs trust” is the trust, if properly constructed, can ensure that the funds do not jeopardize eligibility for government assistance.
The bottom line is that for Estate Planning, there is no “one-size fits all” solution. When speaking with an estate planning attorney, you should discuss the advantages and disadvantages of adding a Trust to your plan. You may find it’s not really necessary, or that it’s just the right fit for you!