Revocable Living Trusts

Disadvantages and advantages of revocable living trusts and how they can help you avoid probate and plan for disability
Revocable living trusts are an extremely popular method of avoiding probate and planning for disability. However, despite the significant benefits of living trusts, they are not appropriate for everyone. Hopefully, this information will assist you in determining whether your estate would benefit from a living trust.

REVOCABLE LIVING TRUST BASICS

Basically an estate plan utilizing a living trust involves:
  1. the drafting of the trust document which specifies how your assets will be managed while your alive and how they are to be distributed after your death, and
  2. transferring all of your assets into the living trust.

With a living trust the trustor, trustee and beneficiary are normally the same person. Therefore, while you are alive and not incapacitated you will continue to manage your assets in substantially the same manner as your did before you created the trust. However, in the event of your death or incapacity, the alternative trustee that you have specified will step in and continue to manage your financial affairs without delay and without the need for probate or a costly court appointed conservator to manage your assets.

Transferring your assets into the living trust is called "funding" the trust. The transfer is accomplished by changing the ownership documents of your assets to list the trustee as the owner. For example, John Doe has a bank account which reads "John Doe". When John Doe goes to the bank and tells them he has a living trust the bank will simply change the name on the account from "John Doe" to "John Doe, as trustee for the John Doe trust dated ____________, 200_. John Doe, as trustee, still has complete control of that bank account.

Investment accounts, stocks, real estate and other assets are transferred similarly. However, some assets require special care when transferring, such as real estate which requires the filing of a deed. In addition, assets such as an IRA should not be transferred to the trust, as the transfer would trigger significant tax consequences. An experienced estate planning attorney can assist you to make sure that only proper assets are transferred and that those assets are transferred correctly.

DISADVANTAGES

  1. Initial Cost: The initial cost of a living trust when compared to a will is often greater. A typical will for a husband and wife cost between $350 and $600 while a living trust for the same couple is normally between $1,450 and $1,850. However, the typical savings and other benefits that a living trust affords normally outweigh the initial cost difference.
  2. Greater Complexity: A living trust requires more initial documentation when compared to a will. Also, it is necessary that future purchases of titled assets such as a new home, stocks and others be purchased in the name of the trust.

ADVANTAGES

  1. Probate Avoidance: The most widely recognized benefit is the avoidance of probate. By avoiding probate the following advantages are normally achieved: a. Lower estate administration costs b. Quicker distribution to beneficiaries c. Greater estate privacy d. Reduce or eliminate court supervision e. Avoids the interruption of income for family members caused by the death or disability of the trustor.
  2. Disability Planning: Less known are the benefits that a living trust can have in the event of disability. In my experience disability can be more devastating financially than death. Without a disability plan, your loved ones may be required to endure the costs and court supervision of a conservatorship. With a living trust the alternate trustee who you have named previously will step in and manage your financial affairs without delay. This is a significant benefit regardless of whether the disability is temporary or permanent.
  3. Minimizes Challenges to Your Estate Plan by Disgruntled Beneficiaries: Basically, the standards for capacity and undue influence for execution are not the same for a trust, as the standards required for a will. Also, the use of a living trust may reduce the likelihood of a challenge by beneficiaries because of the lack of statutory notice requirements and the fact that the contestant must file an independent court action.
  4. Out-of State Real Property: Real property not located in Oregon may require an ancillary probate in the state where the real property is located. Living trusts will avoid the necessity of such a proceeding, thus reducing the time, cost, and complexity of the transfer of such property.
  5. Flexibility: The trust instrument can be amended until death or incompetency. In addition, routine changes to a trust (such as a change in beneficiary) can be accomplished with little cost. On the other hand, to make changes to a will require adherence to strict formalities and therefore your attorney will insist that you come to their office for execution to make certain that the formalities are followed.
  6. Advantages over Survivorship Property: Often people try to avoid probate by putting their assets into joint tenancy with their children or other beneficiaries. While this may avoid probate, creating a joint tenancy may cause significant unintended consequences. For one, the added person's creditors may be able to access the property to satisfy their debts. You may even find a child's spouse in a divorce claiming a portion of the property. In addition, gifts taxes may be triggered as well as the loss of significant tax benefit such as a stepped up basis upon your death. Further, by adding the person you have given up significant control of that property. If, for example, you added your child to the deed of you home, it may be impossible to transfer the property should the child withhold their consent. A living trust avoids probate and avoids the disadvantages of creating joint tenancies.

DECISION MATRIX

There is no absolute rule as to when a living trust is appropriate. The following is a list of some, but not all, of the factors that I consider when advising clients. You should understand that no single factor determines whether or not a living trust is appropriate.

 

Factors to Consider

Trust More Likely
Appropriate

Trust Less Likely
Appropriate

Age

  • Older clients, with stable asset base, nearing end of working years.
  • Younger clients, still in working years with asset base still growing.
  • Health

    • Client has concerns about health or has a present physical incapacity or progressive illness.
    • Client is healthy, youthful and less concerned about potential incapacity.

    Marital Status

    • Generally not determinative.
    • Clients in second marriages with children from prior marriages may benefit from having living trusts.
    • Client recently widowed, where deceased spouse was primary asset manager.
    • Generally not determinative.

    Nature of Assets

    • Estate consists of real property in more than one state.
    • Estate includes community property assets or assets acquired with the proceeds of the sale of community property.
    • Grantor buys and sells assets frequently-asset base not stable.
    • Estate consists primarily of assets difficult to manage or to transfer.

    Estate Value

    • Estates of over $100,000, if not professionally managed.
    • Estates of over $300,00, if seeking professional management.
    • Out of state real property regardless of value.
    • Estates of under $100,000.

    Family Dynamics

    • Client suspects that certain family members or others may launch frivolous challenges to trust dispositive plan.
    • Client wants to assure that children from prior marriage have management authority over assets ultimately to go to them, not to stepchildren.
    • Client believes that potential serious difficulties among family members may require involvement of the court to act as a "referee" through formal probate proceedings.

    Client’s Profession or Business

    • Generally not determinative.
    • Client with background in financial management, accounting, or related business field may be more comfortable with conceptual nature of living trust-able to keep it viable after initial set-up and funding.
    • Generally not determinative.
    • Client in profession with substantial risk of malpractice or liability claims (e.g., doctor or lawyer) may benefit from claims cut-off period under probate, not available under living trust.