DO I NEED A REVOCABLE TRUST?
Not everyone may need a revocable trust, also known as an inter vivos trust. Who may not need one:
- People with very small estates may not benefit from a revocable trust;
- Young, childless married couples who plan to leave everything to each other may not benefit from a trust;
- People who want to have court supervision over the distribution of the estate may not get what they want from a revocable trust
WHAT TYPES OF TRUSTS ARE THERE?
There are three general types of trusts:
- Revocable Trust [also known as inter vivos trusts], that are fully revocable during the life of the “settlor”, which would be the maker of the Trust.
- Irrevocable Trust, which is, obviously, NOT revocable once it is set up. This is usually because there are tax benefits involved. These might be insurance trusts, charitable trusts or the like.
- Testamentary Trusts are trusts set up because a will directs it to be done. Usually, this is because an heir under a will is a minor or under some incapacity. These do NOT allow you to manage your assets during life because they do not come into play until your death.
WHAT IS THE BENEFIT OF A REVOCABLE TRUST?
A revocable trust can help you manage your assets in exactly the way you want them managed in the event of your death or incapacity. It provides you with comprehensive management of the assets you included in the trust. There is no separate tax return to be filed for the Trust during your life as any income reports under your social security number and is treated as being owned by you.
Additionally, your plan will be in place should you be no longer able to manage your assets. You will have already chosen a person you trust and have already designated how you want things to go. Whether you are healthy and can manage your own trust or whether you have become unable to do, a trust lets you know that you have in place THE PLAN you want. A trust is managed fairly closely to the way you manage your assets already. You name a “Trustee”, who is a person that manages the assets for you. At the start, this is usually you. On your death or disability, you have pre-selected your successor and they will manage your assets. On your death, the Successor Trustee then gathers your assets, pays your debts, claims and taxes and then, usually, distributes the assets as you set out. Sometimes, there is an on-going trust that is managed by this person due to the age or disability of the beneficiary. The trust, though, is NOT COURT SUPERVISED so it remains private.
The reality is the cost of a Trust is substantially less than of a probate. A Trust may cost more up front but a probate can cost so much more. Consider a $750K estate which is made of up non-trust assets, and in California, depending on where you live, it could be just the family home. The probate fees would be $36,000. A Trust may run $3,500, or 10% of the cost of a probate. If the assets were $1,000,000, the cost would be $46,000 and the Trust would be about 8% of the cost of probate. People tend to think it costs so much more than a Will but you have to factor in the cause and effect of doing a Will over a Trust, and you can see a Trust makes much more economical sense.
The chart below is helpful:
|PROBATE ESTATE VALUES||TOTAL ATTORNEY & EXECUTOR FEES|
WHAT ARE DISADVANTAGES OF A REVOCABLE TRUST?
The fact that it is not generally a court supervised process can be a good or bad thing. There is no one looking over the shoulder of the Trustee so if there is misconduct, it may go undetected. The Trustee may start acting in his or her own interest instead of yours. So while it is private, there is a risk of the Trustee acting differently than you want.
The cost of a Trust is up-front and usually more than a will because it is more involved, complex and requires funding. The will may seem a better route because they are much less expensive and in some cases can be done yourself, but the probate costs can way surpass the initial investment in the Trust, as seen in the section right above. If your estate is significant and detailed, the Trust will provide you the flexibility you want.
WHAT DOES A REVOCABLE TRUST DO AT MY DEATH?
Because the assets in your trust are managed by you during your life, the structure is in place so that when you die, your Trustee can step into your shoes seamlessly. He or she can act as soon as there is a Death Certificate whereas a probate requires LETTERS OF ADMINISTRATION issued by the court. The minute delay involved in a Trust means your heirs can be taken care of as soon as possible. There is no court supervision so the matter is private between you and your heirs. There are no court costs, investigators’ fees, executor’s fees, referee’s fees and so on. There will be a trustee fee, usually paid by an amount set out in the trust instrument, but often, if the Trustee is a beneficiary, that may be waived. The Successor Trustee should see an attorney right away to make sure that everything is in the Trust that should be and procedures are in place to support the Successor Trustee. It may be an attorney is needed in some cases but is often not required.
WHAT DOES A REVOCABLE TRUST DO IF I AM INCAPACITATED?
Here is one we all need to plan for, the possibility of our incapacity. If you are the Trustee, as is typical, when you are incapacitated, your hand selected Successor Trustee will step in and act for you according to the terms of your trust. A well-managed revocable trust will have a process in place for your first choice to step in and manage your assets for you. This may be until you regain your capacity to act [like perhaps in the case of a serious injury] or until your death [like perhaps in the case of progressive dementia]. Without a trust, someone would have to be appointed to take care of your assets and who that is and how they did that may depend on whether the property is separate or community property.
If you are married or in a registered domestic partnership, assets acquired by either your or your spouse/domestic partner are community property. I am not talking about income tax purposes because that is different for domestic partners than spouses. Property you owned prior to marriage or got from an inheritance or gift, is called separate property. In California, community property may be managed by your spouse or registered domestic partner if they are competent. Separate property assets might be managed under a power of attorney and could be subject to a conservatorship proceeding in probate court.
During the conservatorship process, a judge decides whether you can manage your finances or are able to resist undue influence or fraud. If it decides you cannot, a conservator is appointed in a public record. The person appointed may not be the person you would want; it may be a family member who is the last person you would want to have access to your assets!
WHO DO I PICK AS TRUSTEE OF MY REVOCABLE TRUST?
Initially, and typically, you are your own Trustee of your trust. If you are married or registered domestic partners, you are Co-Trustees. On your death or incapacity, if you do not have a Co-Trustee, the person you select becomes Trustee and manages your assets. It is a big job, so the person you name needs to be willing to do it. This is a critical choice and must be someone whom you totally trust because they usually have the authority to do all the things with your assets you could do, with some exceptions. All of this is able to be done with NO court supervision. The choice could be of anyone you trust and does not have to be a family member or oldest child. Indeed, you may feel that your family members lack the time, skill, ability or willingness to manage your life and theirs. You may have to consider the family dynamic of choosing one child over others and what that might entail.
You might think multiple co-trustees is a good idea but it usually is not. You may choose a friend and later have a falling out or lose trust in that person. This is a very important choice and, should facts change, you may need to amend your Trust to change this person. Whomever you choose, consider this very carefully first and you may also want to discuss it with your chosen potential trustee. They may have opinions you should know prior to selecting them!
IS IT EITHER A REVOCABLE TRUST OR A WILL?
No, you will need both. All assets titled in the name of the Trust are guided by the Trust. Any asset that lists a beneficiary or right of survivorship, for example, are NOT part of the trust and pass according to the contractual designation. Any asset not titled in the name of the Trust OR listing a beneficiary, will fall through the cracks and so we use what is called a “pour-over will” which takes anything you missed for whatever reason, and “pours” it over to the Trust to pass under those terms. Additionally, in a Will you can name a guardian for your minor children and make individual bequests of personal property.
CAN I DRAFT THIS MYSELF?
Chances are, no, you cannot draft this yourself. This is a very complicated area of law. You may see ads all around offering a trust for some unbelievably low price. Be wary of this; usually these are ‘mills’ staffed by non-attorneys that use the cookie cutter approach to your estate plan. You are not a “cookie”! They may also be ‘fly by night’ outfits that take in a lot of cases and disappear with the morning sun. One size fits all does not apply in your estate plan. Many of these businesses will meet with you and want you to transfer all your assets into whatever type of item they sell. Annuities, for example, may be recommended as “The Answer” for your estate planning needs. Consider who you are talking to and what they are selling before taking any major steps. You are sometimes being urged to see their contact, an attorney, or buy their product because they get a commission or fee on it. It is not because it is in your best interests.
This is a very important document that will provide for the people you care for most and great care should be given to whom you have help you with this process. Give the entire planning process a lot of thought before you act. Do not let yourself be pressured by others to do what they want you to do.
Take steps to protect your estate now. When you have given this considerable thought and you are ready, please give me a call. I am here to help.