Understanding the benefits of a revocable living trust can be confusing due to many misconceptions. Simply put, a living trust (also known as a revocable trust or revocable living trust) can offer advantages to more Americans than typically expected. During your lifetime, a living trust acts as an extension of yourself (or you and your spouse if you choose a joint trust). It doesn’t provide any tax benefits while you’re alive, nor does it have negative tax implications. However, after death, a living trust can offer two significant benefits compared to assets not held in a trust.
Firstly, it’s crucial to understand what happens to different types of assets after someone dies. Here’s a brief overview:
This article gives a high-level look at various estate planning techniques and the role of revocable living trusts from a wealth advisor’s perspective. Each of the 50 states in the US has its own tax laws and estate planning rules, so it’s essential to work with an estate planning lawyer in your state. For instance, community property laws differ from separate property states, and not all states recognize the same forms of ownership for jointly owned, non-trust assets.
While there are many benefits to using a revocable trust, these are the two most common advantages:
1. **Avoiding Probate:** Going through probate court can have varying degrees of complications. In some worst-case scenarios, if one spouse owns most liquid assets or a closely-held business and dies first, the surviving spouse might be left without funds to pay regular bills while the probate estate is settled. A living trust helps avoid probate for assets held in the trust.
2. **Reducing Costs and Privacy Concerns:** Probate can incur avoidable expenses and attorney fees and may take months or years to resolve, depending on the state and family situation. Assets going through probate become public record, potentially causing other issues. A large probate estate can be an emotional and logistical burden on the surviving spouse and family, who often act as the estate’s executor.
A trust isn’t the only way to avoid probate. Transfer on Death (TOD)/Payable on Death (POD) accounts can avoid probate for bank and brokerage accounts, and joint ownership can apply to other types of assets.
When assets go through probate, the court decides who gets what, which might align with your wishes but might not. Holding assets in a living trust allows you to avoid probate (or reduce the probate estate) and control the timing and distribution of assets. Trust documents are private, so this can be done discreetly.
Here’s a simple example of how to place assets in a living trust:
If you have a taxable brokerage account owned individually, you can set up a living trust with an attorney and retitle the account in the name of your trust. Upon your death, the successor trustee you appoint will distribute the assets in the living trust according to your specified terms.
Typically, spouses arrange for different levels of access during the surviving partner’s lifetime, with the remainder going to children or relatives. Limiting access can offer estate tax planning benefits for some. Individuals might also choose to leave assets or money to other family members, such as aging parents, children from a different relationship, relatives, friends, charity, etc.
A trust can protect assets for minor children, support individuals with special needs, include terms if the survivor remarries, and appoint a successor trustee in case of your disability, among other protections. If assets go directly to a spouse or heirs, these protections are lost.
Your entire estate plan should be updated to reflect your current circumstances and goals. A trust is just one part of an estate plan. People often wonder if they need a trust or a will; frequently, both are necessary because a trust cannot replace a will. Depending on your financial situation, legacy goals, and specific planning needs, a trust might be just one tool in your estate planning toolbox. Consulting an attorney can help you understand which structure is most beneficial for your objectives.
Important disclosure: The material in this article is for general information and should not be misconstrued as personal legal or tax advice. Consult an attorney to discuss your personal situation and estate planning needs. Darrow Wealth Management does not offer legal or tax advice.