The above question is among the most common that estate planners get. The answer, unfortunately, is not a simple “yes” or “no.” In typical lawyer fashion, the answer is really, “it depends.”
When a Revocable Living Trust is Appropriate:
Privacy Concerns – For a multitude of reasons, a client might find themselves in a situation where they do not want the general public aware of the assets they own whenever they die. Probate records are public and can be searched, viewed and printed by the general public. These probate records typically include a filing known as an “Inventory, Appraisement and List of Claims,” which is effectively a snapshot of the decedent’s estate at the time of their death.
Assets held in a Revocable Living Trust, however, that do not revert back to the estate of the trust maker (often referred to as the settlor or grantor), are not included on the Inventory, Appraisement and List of Claims. This is because assets in the revocable living trust are owned by the trust and not by the decedent or the decedent’s estate. The assets held in the revocable living trust will not pass pursuant to the terms of the settlor’s will. Instead, the assets will pass pursuant to the terms of the Revocable Living Trust.
Probate Avoidance – As mentioned above, assets held in a Revocable Living Trust are not part of the settlor’s estate for estate administration purposes. This means that the assets held in the trust pass per the terms of the trust (i.e. not pursuant to the terms of the settlors will).
It is conceivable that a person could transfer all of their assets to the trust (i.e. their house, their cars, bank accounts, other personal property, etc.) and thereby avoid the need to go through the probate process.
Incapacity Planning – For certain clients, Revocable Living Trusts can be a useful way to ensure that their assets continue to be managed and used for their benefit in the event they become incapacitated. This is especially useful where one spouse is suffering from an illness (e.g. dementia) and relies on the other spouse for care and support.
By setting up and funding a Revocable Living Trust, the settlors can put a trustee succession in place so that in the event one or both of them becomes incapacitated, the trustee (or successor trustee as the case may be) can continue to make the assets of the trust available for their care and benefit (i.e. paying bills, paying caregivers, etc.).
When a Revocable Living Trust May Not Be Appropriate:
Probate Avoidance – Yes, it is true that Revocable Living Trusts can be a useful tool for avoiding probate, but if this is your only concern and/or reason for creating such a trust, then this may not be an appropriate estate planning tool for your situation.
Probate in Texas, as compared to many other states, is relatively inexpensive. So much so, in fact, that the cost of creating and then properly operating the trust (it is not as simple as simply signing the trust agreement and bringing the trust into existence) can be more expensive than simply going through the probate process itself.
Creditor Protection – Perhaps the single biggest misconception about Revocable Living Trusts is that they will protect you and your assets from the claims of creditors. Unfortunately, this is not the case.
Because Revocable Living Trusts are, as their name implies, “revocable,” the law treats the assets for creditor protection purposes as if you still owned them outright. This means that creditors can still make claims against the assets of the trust. If creditor protection is a concern of yours, then you would be better suited using an irrevocable trust or an entity (limited partnership, LLC, etc.), as opposed to a Revocable Living Trust.
Avoiding Estate Taxes – Another common misconception about Revocable Living Trusts is that they will help you avoid estate taxes. The problem with this is that the value of the assets of a Revocable Living Trust are still included in your estate for federal estate tax purposes. Of course, certain terms and provisions can be included to maximize your tax savings (perhaps even eliminating taxes all together), but this can also be accomplished through your will for virtually the same cost and without the additional expenses for maintenance and upkeep moving forward.
Additionally, it is important to understand that the current exemption for federal estate and gift tax purposes is $5.49 million (and this amount is indexed for inflation each year). Moreover, married couples can combine their estate and gift tax exemption giving them almost $11 million they can pass free of estate and gift tax. These thresholds being as high as they are means that most people do not have to worry about having taxable estates and/or making gifts in excess of the estate and gift tax. Thus, a heavily tax planned Revocable Living Trust might be an inappropriate estate planning tool for their circumstances.
For some, Revocable Living Trusts can be a useful and powerful estate planning tool. Before considering the use of such a trust, however, it is important to first discuss your circumstances with your estate planning attorney. In the end, you may find other more cost effective tools to better suit your needs.