An increased interest in estate planning has contributed to a rise in popularity of revocable living trusts. Perhaps you’ve heard of them but you’re fuzzy on the details. Here are the basics. You create a revocable living trust while you’re alive and you can cancel it at any time. Generally, you are both the trustee and the beneficiary, so you keep control of the trust’s assets.
With a revocable living trust, you distribute assets to yourself while you’re alive. At your death, a “successor trustee” distributes the assets in the trust according to your instructions.
There are pros and cons to revocable living trusts. At PWB, we help you weigh the tax advantages and disadvantages of each type of trust, so you can work with your estate planning attorney to determine which is best for you.
Some of the Pros of a Revocable Trust
It lets your estate avoid probate. Upon death, assets held in the revocable trust bypass probate. What that means is they pass to your heirs without having to put your assets through the probate process with the courts, which can be time-consuming and expensive. A successor trustee, who you named earlier, takes over without court oversight.
It lets you avoid “ancillary” probate in another state. If you move your property into a revocable trust (register the deed to the trust), your heirs will be spared the additional probate hassles that owning property in another state can bring.
It protects you in the event you become incapacitated. If you ever reach the point where you’re unable to manage your own affairs, a successor trustee named by you will step in. That trustee has a fiduciary responsibility to manage trust assets for your benefit.
Some of the Cons of a Revocable Trust
It offers no tax benefits. Don’t be lulled into a false sense of security. Shifting assets into a revocable trust won’t save income or estate taxes. You still need to implement appropriate tax-reduction strategies.
It lacks asset protection. Although assets held in an irrevocable trust are generally beyond the reach of creditors, that’s not true with a revocable trust. Assets are treated as if they belong to you.
It requires some administrative work. After creating a revocable trust, you must take the time to re-title assets from individual ownership to the trust. Just having one doesn’t do you any good unless you formally move assets into it by transferring legal title.
Assets not formally held in the trust still have to go through probate and won’t be under the management of a successor trustee in case of incapacity.
It isn’t necessary for certain types of assets. Holdings such as retirement plans, insurance policies, annuities and jointly held property don’t go through probate. If most of your wealth is in assets like these, you may not need a revocable trust.
It may be preferable to getting a guardianship for an aging or disabled relative, which is a public and time-consuming process. With a revocable trust, family members don’t need to go to court to request a guardianship because the backup trustee simply takes over.
Consider your options.
Work with your estate planning attorney to weigh the advantages and disadvantages before deciding whether a revocable trust is right for you. Keep in mind that laws are constantly changing and may differ from state to state. At PWB, we’re here to help you understand the tax implications of each type of trust, so you can make the right decision for you.
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