Estate Planning, Revocable Trusts

Pros and Cons of a Revocable Trust

Pros and Cons of a Revocable Trust

The revocable trust can be an effective estate planning tool. However, the decision to use one is never clear-cut. You must carefully weigh the pros and cons.

A revocable trust is a trust created during the grantor’s lifetime by a transfer of ownership of assets to a trustee, with the direction to hold or distribute the assets for the benefit of the grantor. The grantor maintains total authority to revoke the trust, direct investments, change the trustee and change the dispositive terms.

Usually, the grantor will be the sole trustee, but he/she may have a co-trustee. During the grantor’s lifetime, the income and principal of the trust are payable or accumulated for grantor’s benefit or as grantor directs. Upon grantor’s death, the beneficiaries change from the grantor to the grantor’s spouse and descendants, or other beneficiaries. When the grantor dies, the trust becomes irrevocable. If the grantor becomes disabled, the successor trustee takes over and manages the assets for the grantor, the spouse and dependents.

As the assets are included in the grantor’s estate upon death, there are NO estate tax advantages resulting from the use of a revocable living trust. Of course, the revocable trust can provide other benefits–privacy and reduction of probate commissions and fees.

What is an alternative to a revocable trust? A will which contains a testamentary trust (and, thus, goes through probate). Some other options to avoid probate are to change ownership of property through tenancy by the entirety, hold property jointly with one of your children, a traditional life estate deed or an enhanced life estate deed.

ADVANTAGES OF USING A REVOCABLE TRUST

1. Avoid Probate and Reduce Costs of Personal Representative/Administration Expenses*

As the trust assets will not be a part of the probate estate, there will be a reduction of time delays, publicity and expenses incurred during probate. However, these savings are not always as much as anticipated. There are almost always assets that require probate such as tangible personal property, homestead property, or property inadvertently left out of the trust. Some choose to not even put their house (homestead) into the trust, or they change ownership on title. A transfer of the homestead into the trust may have unintended consequences such as it may not be exempt from creditors claims. Also, there are other things to consider such as documentary stamp tax on transfer of home mortgage, and other small things like that, that may add up.. As you may realize, the law on homestead is very complicated and not always crystal clear.

Personal Representative fees may be saved or reduced but this is only relevant with non-family members. Whether you have a trust (trustee commission) or a Will, someone has to do the work of administering.

2. Greater Choice of Trustee

The choice of a trustee is subject to fewer restrictions than that of a Personal Representative.

3. Continuity

As people age, they may not want to manage their property. They may name a trustee who can manage for them. Also, upon death there would be no break in the management with the use of a trust and the funds would be available immediately. The delay (albeit a short one) in having a will probated and fiduciaries appointed is avoided.

4. More Privacy

The trust is not a publicly recorded document. Unless, of course, there is some type of litigation.

5. Creditor Protection

The grantor’s assets will not be protected during his/her lifetime, but there may be marginal benefits after death. However, creditors have two years to file a claim with the estate, whereas with a Will, that time period is only three months. (That is another reason why many choose to enter probate even if they have a trust).

6. Grantor Incapacity Planning*

The trust is useful to plan for incapacity as it provides continuity and avoids need for guardian appointment. In this regard, the revocable trust is very useful. Thus, the revocable living trust makes more sense for older grantors, as opposed to younger ones.

7. Avoid Probate Contests

Not really. One would think you can bring these same challenges with a trust, and the time period to do so is actually longer (four years).

8. Avoid Multi-state Probate

If you have property in another state outside of Florida, then a trust will avoid having multiple probates.

DISADVANTAGES OF USING A REVOCABLE TRUST

1. Lack of Judicial Oversight

The probate process has the benefit of a judge overseeing the administration of the estate.

2. Drafting Pitfalls

There is a greater risk of an inconsistent estate plan, and there is an increased need to be diligent about amendments.

3. You Must Still Have a Will

A Pour-Over Will, and thus, probate, is still needed to assure the orderly transfer of all assets at death. There are still many unsettled areas of trust law in Florida as well. Thus, there may be an increased risk of litigation.

4. Borrowing Against Trust Assets

It is difficult for the grantor to use the assets in the trust as security for personal borrowings.

5. Mundane Tasks of Trustee

As grantor and trustee, you will have the mundane tasks of operating a trust.

In short, revocable trusts are primarily recommend for two reasons: 1) avoiding probate of the trust assets; and 2) avoiding the necessity of a guardian appointment. However, a careful weighing of the pros and cons is necessary.

Thank you to “Florida Will and Trust Forms Manual” which was used and referenced in the drafting of this post.  It is a very  beneficial resource for the Florida Estate Planning Attorney.  

* References very important element.

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