REVOCABLE LIVING TRUSTS – FACTS VS. FICTION

A Revocable Living Trust (“RLT”), if often a device used for avoiding probate. In its basic form, the RLT involves an individual naming himself as trustee of his own trust and continuing to manage his own assets. The trust document provides for a successor trustee in the event of his incompetence or death, and further provides for the distribution of his property to his wife, children, or other beneficiaries, upon his death. The individual transfers ownership of all the assets he owns into the trust. The individual must still have a Will which provides that any assets which were not transferred to the trust by oversight are, on the death of the individual, transferred to the trust.

An individual must be certain to transfer all assets to the trust. This includes all bank accounts, certificates of deposit, brokerage accounts, stocks, bonds, real estate, and personal property. The proper titling of assets is ongoing throughout the person’s lifetime. Failure to transfer to the trust will most generally result in the need for those assets to be subject to probate. When an estate is large enough, failure to properly transfer assets out of a joint tenancy status to a separate trust for each spouse could have disastrous death tax results. The many problems with transfer of assets to a trust have resulted in most attorneys recommending that the client execute a general durable power of attorney along with the trust and pour-over will.

If the client becomes incompetent, he can no longer transfer assets titled in his own name to the trust nor can the Successor Trustee transfer title to the trust because the Successor Trustee controls only those assets that have been transferred to the trust. However, with a durable power of attorney the “Attorney In Fact” may transfer assets to the trust even though the original trustee has been declared incompetent. It becomes important upon the incompetence of the trustee for the successor trustee and attorney in fact to immediately inventory the assets of the individual to be certain that all assets of the incompetent are titled in the name of the trust. Failure to do so would again result in probate, which is normally the compelling reason for establishing the trust in the first place.

Concern about probate expenses in Indiana have been exaggerated by many, in their efforts to market RLTs. With the unsupervised estate administration in Indiana, the administrative costs of probate are often insignificant. This may not be the case in some of our larger states, such as New York, Florida, California, and Texas, to name a few.

In a few instances, individuals have been led to believe that RLTs somehow eliminate taxes which would otherwise be due upon their death. Unfortunately, this is untrue.

In many instances, the costs of establishing and transferring all assets into an RLT may equal or exceed the costs associated with probate. Once a person is deceased, whether you have a trust or Will, a trustee or personal representative must seek professional advice relating to federal and state death and income taxes, administrative procedures, accountings, transfer of assets and distribution of estate or trust assets to the ultimate beneficiaries. Many of the costs often considered as part of “probate” will exist with or without a living trust.

Although the RLT is a useful estate planning tool, it is not a remedy for all clients’ estate planning needs. In instances where a married couple has a small estate with assets held jointly, a durable power of attorney and a simple will may make more sense and create less expense than going to the expense of creating a trust and transferring all assets into that trust. As always, your estate plan should be developed only after careful consideration of your individual circumstances.