Why You Must Consider a Revocable Living Trust with Two Warnings
With the recent passage of the One Big Beautiful Bill Act (OBBBA), the federal estate and gift tax exemption has increased to $15 million per person ($30 million per couple). This has led to questions regarding the strategy of revocable living trusts as an estate planning tool.
While a will, durable power of attorney, and health care directive are all important and necessary pieces of an effective estate plan, a revocable living trust provides three levels of control that the others do not.
Control Over Timing
A properly structured living trust allows you to specify when you want who to get what in a way that a will does not. It gives you the power to delay passing on your assets to one or more of your beneficiaries while paying out immediately to others. You can stagger the delivery of funds over time, or stipulate conditions on their distribution on a person-by-person basis such as having funds available upon graduation from college.
Control Over Circumstances
Setting up a living trust gives you the freedom to decide, in advance and with great specificity, what you want to have happen in four scenarios: you are alive and healthy, you are alive and incapacitated, when you pass away and your spouse survives you, and when you pass away and your spouse does not survive you. A living trust allows you to spell out exactly what happens, who’s in charge, who gets to make what decisions, and where your assets go.
Control Over Probate
Probate involves validating a person’s last will and testament in a court of law. The will must be presented by an attorney to the court in the jurisdiction where you live. Once a judge declares it valid, notice is given to any potential debtors, and all of your assets are listed in public records. Although it’s time-consuming, expensive and invasive, every will must be validated before it becomes a legal document on which your executor can act.
If you’ve ever had the unfortunate job of settling an estate for a family member or friend who didn’t have a proper plan in place, then you know just how awful the probate process can be.
A properly funded revocable living trust allows your family to potentially avoid the probate process entirely, something a will can’t do.
Warning #1: Your estate planning attorney may suggest that you don’t need a living trust because your estate will owe no federal estate taxes upon your death based on current laws.
In many cases today that is true because estate tax exclusions have rapidly increased in the past few years (see the passage of the OBBBA above).
Depending on the state you live in, you may still be subject to state estate or inheritance taxes. In Massachusetts, where we live, the estate tax exemption is still only $2 million per person.
With all of that said, the real problem as I described above is the cost and delay of the probate process, and a properly funded living trust can help you potentially avoid it altogether.
Warning #2: “Creating” a revocable living trust alone does not help you avoid probate.
You must take step two which is “funding” your trust while you’re still living. Funding simply means re-titling your assets to your trust prior to our death.
The first step is to determine which assets will go into whose trust (i.e. your trust and/or your spouse’s trust). If your estate planning attorney is doing his/her job, they will spell this all out for you.
The next step is to change the title of ownership on each of your non-IRA assets, a bank account or your residence for example, to your trust so that your statement and ownership title now reads “John Jones, Trustee, for the John Jones Revocable Trust” instead of just “John Jones”.
Make sure you do this with all of your non-IRA assets so nothing gets left out.
Another option to help your heirs avoid the probate process is to add a designated beneficiary to non-IRA bank and investment accounts so the account title reads “John Jones TOD” (transfer on death).
While you’re completing the paperwork to re-title your assets to your respective trusts, or adding designated beneficiaries, take care of all your beneficiary designations on your life insurance, IRAs, and annuities at the same time.
Your estate planning attorney should provide instructions in this area as well to remain consistent with your estate planning goals and strategy.
** A key point here is, if you are going to name your trust as your beneficiary, your trust MUST qualify for “pass-through” status so your trust beneficiaries have the opportunity to take advantage of the potential tax savings of Inherited IRA rules.
Your family will really appreciate that you took the time to plan ahead so everything passes to them as seamlessly as possible.
Jack Phelps
Managing Partner / Financial Advisor