Advantages and Disadvantages of Using a Revocable Living Trust as Part of Your Estate Plan

A Revocable Living Trust is an agreement that a Trustee (usually yourself) shall hold all the property you transfer into the name of the Trust for the benefit of the trust beneficiaries (usually yourself and your spouse). After your death, the Trust transfers the trust assets to those you designate as your ultimate beneficiaries. During the lifetime of the person establishing the Trust (the Trustor), and while they are competent to do so, the Trust may be revoked. People who have a Revocable Living Trust also need Wills, which Wills should direct the probate assets of the Trustor decedent to be “poured over” into the trust. Also, decedents need Wills to nominate Personal Representatives, to create non-intervention, no-bond status for their Personal Representative and to nominate guardians for minor children.

Revocable Living Trusts have some advantages, which can be useful to some clients, some misconceptions about possible advantages, and significant disadvantages as well.

ADVANTAGES OF A REVOCABLE LIVING TRUST. First, a well-administered Revocable Living Trust that contains all the assets of a decedent Trustor can avoid the expense of probate. Since the Trust costs money to create and maintain, this advantage is likely a non-advantage. For people who live in states with expensive statute-mandated attorney’s fees in probate, such as California, probate cost savings may be so substantial as to warrant use of Revocable Living Trusts. Washington and Idaho are not states that mandates the fee paid to attorneys in probate.

Second, a well-administered Trust can avoid the cost of ancillary probates for out-of-state property. If an estate holds any number of out-of-state or foreign properties, these costs savings and ease of administration could be substantial, as compared to traditional probate.

Third, a Revocable Living Trust need never enter the public eye, through filing of a probate proceeding or filing of an inventory, and so the privacy of the Trustor and their family may be protected.

Fourth, a Revocable Living Trust, in possession of ongoing businesses, may provide for continuity of control and administration upon the death or incapacity of the Trustor.

MISCONCEPTIONS ABOUT TRUSTS. First, the probate cost savings, which are much-heralded by drafters of Revocable Living Trusts, are overstated, and the costs of the Trusts themselves much understated. Real estate property titles must be transferred, which costs money, and financial accounts must be retitled, in order to properly fund a Trust. Any omissions in such transfers may necessitate having a probate proceeding as well as a Trust, which misfortune maximizes the cost of one's estate plan administration.

Second, Revocable living trusts offer no tax advantage. The IRS views property held in a trust managed by you for your benefit as just “your property.” All income passes through directly to your personal income tax return. No tax benefits accrue. A Revocable Living Trust has no impact on one's estate tax obligation under state law, nor on one's federal estate and gift tax obligation.

DISADVANTAGES OF A REVOCABLE LIVING TRUST. First, the trust instrument itself costs a few thousand dollars and the ongoing costs of maintaining the trust (tax reporting, trustee fees, transfers of real property titles from Trustor to the Trust) are substantial. In the end, Revocable Living Trusts can cost more than simple probates. So, for most clients, Revocable Living Trusts are more expensive than the probate alternative. Probate in uncomplicated Washington and Idaho estate administrations is relatively inexpensive.

Second, Revocable Livings Trust Agreements are complex legal documents. Their complexity bewilders most Trustors. And, so, the Revocable Living Trust not only costs money to create, but may also cost money to revoke.

Third, the complexity of Revocable Living Trusts leads to Trustor errors. Trustors forget to put their refinance paperwork in the name of the Trust, and so end up with real estate in the name of the Trustors, not the Trust. Trustors put financial accounts in the name of the Trustors, as well as other of the myriad financial transactions of a lifetime of living. When death comes, we most often find that the Trustors of a Revocable Living Trust need not only trust administration but also a probate to move assets into the Trust. Most Trustors cannot hold in their minds for a lifetime after they execute a Trust Agreement that they have no assets, but are simply the beneficiaries of their trust assets managed by their Trustees (themselves). It is an odd idea, after all.

Fourth, some tax procedural rules are not as liberal for trusts as they are for probates.

Fifth, failing to probate the estates of the Trustor fails to take advantage of the short probate creditor claim statute of limitations. For Trusts, claims for payment can crop up six years after the Trustor’s death. For probates, creditor claims are cut off after four months.

There are obviously pros and cons to using a Revocable Living Trust as part of your estate plan. If you have questions about Revocable Living Trust or estate planning in generally, give us a call at 253.858.5434 to set up an appointment today.