Advantage # 1: Ability To Select Your Beneficiaries: This is seldom mentioned as a reason for creating and executing an estate plan which includes a Trust, but it’s an important reason. Minor children are not allowed to own real property in the State of Utah and require an adult Guardian to oversee the property until the child reaches majority age. Even then, many parents do not want a newly minted 18-year-old adult to over see property for himself or herself or for others. Parents do not want to give an 18-year-old an incentive to quit college or purchase a brand-new Corvette.
But, minor children aren’t the only ones who might squander an inheritance. Most experts agree that no one under the age of 25 should be given a large inheritance outright, because they generally are not mature enough to handle large sums of money. A Trust allows you to give your hard-earned money and property to those you care about while protecting those funds for them at the same time.
Let’s take a look at a typical example and see how it works. Let’s say that you have a 18-year-old son who just graduated from high school. If you and your wife both die, you'd probably want your only son to get all of your property, including the equity in your home, your life insurance, retirement plans, etc. If you reduce all of your property to cash, it could easily amount to a good sum of money. For illustration purposes, let's assume it's $350,000. Having the executor of your estate write a check to your 18-year-old son for $350,000 is probably not a good idea. Instead, it would be far better to create a Trust for the benefit of your son with someone you trust -- say a friend, family relative, or an attorney serving as Trustee. The Trustee would then hold the money and invest it for your son’s benefit until he reached a more mature age, say age 25 or even 30. In the meantime, the Trustee would use the money to pay for your son’s college or training, his general living expenses, and any other expenses you specify in the Trust instrument -- including a down payment on a home. Then, when your son reaches the age specified in your Trust, the Trust would end, and all property held by the Trustee would be turned over to your son. Because your son will probably be finished with college or job training at that time and already embarking on a career of his own, he'll probably be mature enough to make good decisions regarding his inheritance.
Advantage #2: Selecting the Trustee: Many people serve as Trustees of their own Revocable Living Trusts until they become incompetent or die. Others decide they need assistance simply because they are too busy or too inexperienced or do not want to manage their day-to-day financial affairs.
Choosing the right Trustee to act on your behalf is very important. Your Trustee will have considerable authority and responsibility and will not be under direct Court supervision.
You might choose a spouse, adult child, domestic partner, other relative, family friend, business associate, or professional fiduciary to be your Trustee. The professional fiduciary could be a licensed, registered individual, or a bank or trust company licensed by the State of Utah. You may also name co-Trustees.
Discuss your choice with an estate planning lawyer. There are many issues to consider. For example, would the appointment of one of your grown children cause a problem with his or her siblings? What conflicts of interest would be created if you name a spouse, child, business associate, or partner as your Trustee? And will the person named as your Successor Trustee have the time, organizational ability and experience to do the job effectively?
Advantage #3: Reducing or Eliminating Estate Taxes: Many people say that a Revocable Living Trust doesn’t save estate taxes. Technically, they’re right. There are no provisions in the federal tax laws that exempt Revocable Living Trusts from estate taxes. However, Revocable Living Trusts are often used by individuals and families to take advantage of certain deductions and credits that are allowed under the tax laws.
That sounds like double-talk, so let me explain. For individuals dying in 2014, up to $5,250,000 was exempt from federal estate taxes. That exempt amount was made possible by virtue of a so-called “unified credit.” In addition to the unified credit, all property that passed to a surviving spouse was exempt from federal estate taxes by virtue of a so-called "marital deduction." The marital deduction was unlimited, so you could transfer any amount of money or property to your spouse without paying any estate taxes on it.
Because these estate issues are in a constant state of flux in Washington, D.C., if you have an estate larger than $1,000,000, you should update your estate plan every few years to make sure you understand the latest Washington D.C. craziness.
Because of the complexity of this issue, estate valuations, death taxes and death tax deductions are discussed further below.
Advantage #4: Managing Property Upon Incapacity: Most people name themselves as the Trustee in charge of managing their Trust's assets. This way, even though your assets have been put into the Trust, you can remain in control of your assets during your lifetime. You can also name a Successor Trustee who will manage the Trust's assets if you ever become unable or unwilling to do so yourself.
Here are some of the instructions your Revocable Living Trust could provide:
- Give the Trustee the legal right to manage and control the assets held in your Trust.
- Instruct the Trustee to manage the Trust's assets for your benefit during your lifetime.
- Name the beneficiaries who are to receive your Trust's assets when you die.
- Give guidance, certain powers and authority to the Trustee to manage and distribute your Trust's assets. The Trustee is a fiduciary, which means he or she holds a position of trust and confidence and is subject to strict responsibilities and very high standards. For example, the Trustee cannot use your Trust's assets for his or her own personal use or benefit without your explicit permission. Instead, the Trustee must hold and use Trust assets solely for the benefit of the Trust's beneficiaries.
If your assets were not in a Revocable Living Trust, however, someone else would have to manage them. How this would be accomplished might depend on whether your assets were separate or marital property. This will require the Court to appoint a “Conservator” to manage your assets while you are incapacitated. Your Conservator might be someone whom you previously nominated. Alternatively, if no one had been nominated, it might be your spouse, registered domestic partner or another family member. If none of those persons are available, then it might be the Public Guardian. Any time the Court is required to get involved, the proceedings are public in nature and can be costly depending on the level of Court intervention required.
Advantage # 5: Managing Property Upon Death: At your death, the Trustee -- similar to the executor of a Will -- would then gather your assets, pay any debts, claims, or taxes, and distribute your Trust assets according to your instructions. Unlike a Will, however, this can all be done without Court supervision or approval, and your assets will not become a public record.
Rather than simply distributing your assets, the assets held in your Revocable Living Trust could be managed by the Trustee, and the proceeds of that management could be distributed according to your directions without Court supervision and involvement. This can save your heirs time and money. Your heirs and beneficiaries would still have to be notified about the Revocable Living Trust by the Trustee and advised, among other things, of their right to obtain a copy of the Trust.
If your assets (those in your name alone) are not in a Revocable Living Trust when you die, they would be subject to probate. Probate is a court-supervised process for transferring assets to the beneficiaries listed in one's Will. After your death, a petition would be filed with the Court. After notice is given, a hearing would be held. Then your Will would be admitted to probate and an executor would be appointed. An inventory of your assets would be filed with the Court and notice would be given to your creditors so they could file claims. The process would end once the court approved a final distribution of assets.
Probate can take more time to complete than the distribution of property held in a Revocable Living Trust. In addition, assets tied up in probate may not be as readily accessible to the beneficiaries as those held in a Revocable Living Trust. And the cost of a probate is often greater than the cost of managing and distributing comparable assets held in a Revocable Living Trust.
Advantage #6: Avoiding Probate: It is true that property in your Revocable Living Trust will not go through probate when you die. That’s because the Trust instrument spells out who gets the property. It’s a lot like life insurance, annuities, 401(k) plans, IRAs, and company retirement plans -- those properties do not go through probate because they each have a designated beneficiary. Jointly owned property, with rights of survivorship, does not go through probate process either. It passes automatically to the surviving joint owner.
That does not mean, however, that your Successor Trustee is free to distribute the Trust property immediately. It’s not as simple as that. Just because your property is in Trust doesn’t mean that your outstanding debts don’t have to be paid. Likewise, the federal government still wants to collect its estate taxes; your state government still wants to collect its inheritance taxes; and the probate Court still wants some fees even though most of your property may avoid probate. There probably will be Trustee’s fees and attorney’s fees as well. In light of all these expenses, the Successor Trustee may be able to make some advanced distributions from the Trust, but enough money has to be retained in the Trust to pay all the debts and expenses.
Still, a reasonably efficient Successor Trustee will be able to determine, fairly quickly, just how much the potential debts and expenses will be, and he or she will then be able to make advanced distributions accordingly. In the final analysis, most Revocable Living Trusts are able to distribute property more quickly and with much less cost than is possible through probate.
Advantage #7: Avoiding a Will Contest: It is true that a Will is far more likely to be contested than a Revocable Living Trust. That’s because a Will goes into effect only when a person dies, whereas a Revocable Living Trust goes into effect as soon as the Trust instrument is signed and generally lasts for some time after the owner’s death. If you’re going to contest a Will, all you have to do is prove that the testator was either incompetent or under undue influence at the precise moment the Will was signed. To contest a Revocable Living Trust, you have to prove that the grantor was incompetent or under undue influence not only when the Trust instrument was signed, but also when each property was transferred to the Trust, when each investment decision was made, and when each and every distribution was made to the owner or anyone else. That is virtually impossible to do.
Moreover, it costs nothing to contest a Will. All a disgruntled family member has to do is object when the Will is presented for probate, then hire an attorney on a contingency fee basis, and wait for the final outcome. A disgruntled family member has nothing to lose. On the other hand, contesting a Revocable Living Trust generally involves a substantial commitment of time and money. Whereas a Will contest is heard under the probate calendar procedures, a Revocable Living Trust contest is heard on the general civil calendar, where there are filing fees and formal procedures that have to be followed.
Still, some people argue that Will contests are seldom successful, so why bother with a Revocable Living Trust? The answer is threefold: First, a Will contest puts a screeching halt to the settlement of an estate. Most Will contests take a minimum of two or more years to complete and, during that period, no distributions will be made to anyone. Second, defending a Will contest involves lots of attorney time that results in large attorneys’ fees. Even unsuccessful Will contests can end up costing $50,000 or more in attorney’s fees. And, those fees come out of the estate, which means that much less for the beneficiaries. Third, many Will contests are settled before they ever get to Court. In that case, the estate will be further diminished by the amount of the settlement that is eventually reached. In the final analysis, Will contests are time consuming and expensive. The best way to avoid them is through a Revocable Living Trust.
Advantage #8: Privacy: Most of us naturally dislike the concept of probate because it is a public process. Theoretically, anyone can go into probate Court when a person dies and look at the estate file. You can read the Will, find out who the relatives and beneficiaries are, look at the claims of creditors and the list of assets, and you can find the phone numbers and addresses of the beneficiaries. Unscrupulous sales people often go through estate files to locate grieving heirs to prey on. Disgruntled heirs, even friends and neighbors, often like to poke their noses into an estate file to see what’s there. And, with the advent of the internet, they don't even have to get themselves down to the probate Court to take a look. All they have to do is fire up their computer in the comfort of their own homes.
Revocable Living Trusts can prevent all of that. Revocable Living Trusts are private; they don’t get filed with the probate Court, and no one gets to look at them unless the grantor or the Trustee allows it. Some people put a high value on privacy -- some people don’t. In my experience, most individuals know whether they will have a problem with a family member or some other person regarding their estate. In those cases, privacy becomes a very important concern and one that should properly be addressed with a Revocable Living Trust. It's no accident that most the famous people utilized a Revocable Living Trust to keep their affairs private.