Common Estate Planning Mistakes:
Revocable Living Trusts

Insight will periodically examine common mistakes made in estate planning. One of the most frequent mistakes made with any strategy is to assume that certain vehicles are “must-haves.” This issue provides an overview of the Revocable Living Trust, a strategy that may work for some, but isn’t useful for everyone.

WHAT IS A REVOCABLE LIVING TRUST?

An RLT is an arrangement by which you transfer ownership of your assets to another entity, a trust. As a “living trust,” the transfer of assets must occur during your lifetime. You (the settlor) can set up a trust with your own assets and retain management and control of these assets if you act as your own trustee. You can also designate someone else as your trustee; for instance, in the event you become incapacitated.

WHY DO PEOPLE SET UP AN RLT?

The RLT is an ideal arrangement for many. An RLT can be used as a substitute for a Will, in that it provides for the distribution of assets upon the settlor’s death. The trust assets are distributed directly to the beneficiaries and, unlike a Will, there is no automatic court supervision or probate. One advantage is that the allocation of assets is faster and less costly than through distribution pursuant to a Will.

A living trust may also provide for the marital deduction to avoid taxes when assets are transferred to a surviving spouse, and may minimize taxes against heirs by preserving the uniform tax credit available to the estate of the first spouse to die.

Additionally, challenges to a revocable trust are difficult and costly, which may discourage potential Will contests.

WHY MIGHT AN RLT BE A MISTAKE?

Under a living trust, there is no ongoing court supervision of the trustee; therefore there is less protection if the assets are mismanaged. A living trust costs more to draft than a Will; these expenses occur during your lifetime, as opposed to probate costs paid by heirs. Transferring ownership of all your assets to the trust can be a lengthy process. Many financial advisors recommend also drafting a Will, to ensure that any assets not captured by the RLT are transferred upon the settlor’s death. Since a living trust must be fully funded to function effectively, it may require considerable effort by the settlor to manage. Also, in many states, an RLT cannot shield your assets should you be facing the prospect of long-term care.

WHAT SHOULD I DO NEXT?

The RLT is one vehicle to consider when drafting an estate plan. But remember, your plan should outline your unique financial objectives and personal values. What works for someone else, even a family member, may not be the best plan for you.

Check out other articles at Insight on Estate Planning and the Estate Planning News index.