The Revocable Living Trust
The use of a revocable living trust in an estate plan is often encouraged by attorneys as a way for clients to avoid probate, plan for incapacity, and provide for children. While a revocable living trust can be created in a way that it accomplishes some or even all of those goals, that does not necessarily mean that it is always a good idea for the client. Often, the costs (in time AND money) of creating and maintaining the revocable living trust are greater than the benefits that the trust can provide.
The revocable living trust is, in my opinion at least, used unnecessarily more often than any other types of trusts. (It is also commonly referred to as a revocable living trust, revocable trust, or inter-vivos trust.) The revocable living trust is generally applicable and, if not explained in detail to clients, can seem like an excellent choice for everybody regardless of their financial or family situation.
What is a trust?
A trust is an agreement between three parties—the grantor, the trustee, and the beneficiary—that the grantor will give title or ownership of property and assets to the trustee, and that the trustee will hold that property for the benefit of the beneficiary. Trusts come in all shapes and sizes, and can be tailor to fit a variety of needs. Trusts can be inter-vivos (created during the lifetime of the grantor), or testamentary (created after the death of the grantor, usually per the instruction of a will). They can also be revocable (the grantor can change the terms of the trust, or terminate it all together) and irrevocable (the grantor cannot change the terms of the trust after it is created). For clients with a lot of assets (a LOT of assets, like over $5 mil worth), for example, an irrevocable trust can be a great way to avoid having to pay estate taxes, because the irrevocable nature of the trust essentially removes the assets from the grantor’s estate. A revocable living trust, therefore, is one that is created during the lifetime of the grantor, and can be changed or terminated by the grantor while he/she is alive and has the mental capacity to do so.
A Revocable Living Trust Avoids Probate
The primary reason that most people use a revocable living trust, and the reason most often touted by attorneys as to why you need a revocable living trust, is to avoid probate. Probate is the court-supervised process by which an estate is distributed to the heirs of a decedent (the person who died). Probate involves filing documents and records with the court, which can get costly, and many people will benefit from the assistance of an attorney, such as myself, to help sort out the probate process (which can also get costly). If family members of the decedent challenge the distribution, either because they think they are entitled to inherit something other than what they are getting, or they think that the decedent’s will was invalid, probate has the potential to become very very expensive, and can last a very long time. This means that the estate could be tied up for months or even years before any of the assets or distributed to the heirs, and even then, there is a possibility that most or all of the assets will have to be used to pay the attorneys.
It is that stress-inducing hypothetical situation that makes most people go “aah!” when they hear the word “probate.” And the way some attorneys convince their clients that they need a living trust, since property that is held in a trust can pass to the beneficiaries without having to go through probate. But the reality is that, in many situations, probate can be either avoided all together without at trust, or is more likely to be an annoying, but not really that big of a deal, situation.
In many states, Colorado included, if you have a small enough estate and no real property (i.e. real estate), your estate may not have to be probated at all. Similarly, for spouses who own all of their property as joint tenants with rights of survivorship (bank accounts are owned jointly, both names are on titles for cars, house is owned as joint tenants), if one spouse dies, property owned as joint tenants will automatically pass to the surviving spouse, and will never have to see the light of a court room. Heftier estates can sometimes go through “informal probate” under certain circumstances, and the informal probate process is usually completed in a few months with minimal costs aside from court filing fees. If you have a small family, or believe that there is a very very small chance that anybody in your family would try to challenge your will or estate distribution, the costs of an uncontested formal probate will usually still be less than the costs of creating a revocable living trust.
Here’s the other part that some attorneys “forget” to mention to their clients: even with a revocable living trust, your estate may still have to go through probate. If you have a revocable living trust, you will still need a pour-over will. This pour-over will provides that anything that you may have left out of your trust or forgotten to transfer to your trust by the time you die will go into your trust and be distributed according to the trust agreement. It is sort of a “catch-all” to make sure all of your property is distrusted through the trust. So even though the property that is already held in the revocable living trust gets to avoid probate, the pour-over will may still need to be probated! Here’s more: let’s say you are creating a revocable living trust because you are worried that your pain-in-the-ass family would try to challenge your will because you left one (or all) of them out of it. Well, while the trust does avoid getting tied going through probate, all of the property in the trust could potentially get tied up because your family can still challenge the trust! It is not easy or cheap to challenge a trust, but a disinherited and determined child could still do it, thus negating the whole reason you created the trust in the first place.
The purpose of this article is not to totally discourage the use of a revocable living trust. A revocable living trust CAN be a great part of a comprehensive estate plan, and can prove to be totally worth it. Rather, the purpose of this article is to encourage you to ask questions of your attorney and to become completely informed about why you should do the things he or she is recommending you do. Ask your attorney in what situations probate may or may not be worth avoiding, and make sure you understand all of the costs, risks, and benefits of choosing or not choosing to use a revocable living trust. Don’t take “because it avoids probate” as an answer; if that is all you get out of your attorney, find another one—fast. If your attorney is not trust-worthy, how can you be sure that you are “trust worthy?”
Denver, Colorado estate planning attorney Aiden H. Kramer can help you decide if a revocable living trust is right for you. Contact Aiden Kramer at (720) 379-3425 or [email protected]