It is a common misconception that trusts are only for wealthy individuals. There are a myriad of reasons why people of all income brackets should utilize a trust as a tool in their estate planning arsenal and, in particular, a Revocable Living Trust (RLT), where the creator can also be a trustee or a co-trustee.
A key reason to use an RLT is that it avoids probate. If, upon your death, you own assets in your name alone, those assets will pass according to the terms of your Last Will and Testament (LWT), if there is one (in which case the LWT must be probated) or through an estate administration proceeding, if there is not. Either way, your loved ones must go through the Surrogate’s Court in order to receive the assets in your estate, and it is a process that can be riddled with complications, delays, unforeseen expenses, and hostile family dynamics.
An RLT, on the other hand, is a “Will Substitute.” It avoids the headache and expense of probate or estate administration but allows for contingencies the same way that a LWT does, as well as a vehicle to streamline the distribution of your assets. For example, if you retitle your home and all your liquid non-retirement assets (e.g., all bank and brokerage accounts) to an RLT, then upon your death, your successor trustee can distribute those assets to your named beneficiaries, pursuant to the trust’s terms, without court intervention.
If you are the creator and the trustee of your RLT, you maintain control over the trust’s assets during your lifetime as well as the ability to amend, modify, or revoke the trust as you see fit. Additionally, if in the future you become mentally incapacitated and can no longer pay your bills, your agent under your Power of Attorney (POA) may encounter issues and delays when the POA is presented to the bank for their review. Yet, if your assets are titled to an RLT, that same individual (if named as a co-trustee) can step in to manage the trust assets.
Any estate tax planning that can be accomplished in a LWT can also be done through an RLT. For instance, an RLT may contain a credit shelter trust or a disclaimer trust, allowing for the utilization of the estate tax exemption of the first spouse to die. Similarly, real property titled to an RLT will get a step up in cost basis to the fair market value as of your date of death, thereby reducing or eliminating capital gains consequences for your beneficiaries.
An RLT may sound intimidating, but in actuality, it is a highly effective and cost-efficient instrument that allows you to strategically plan for your future, whatever the cards may hold, without the delays, legal fees, and court filing fees associated with probate or an estate administration proceeding.
Read more articles by Stella King: