A common question an estate planning attorney often hears from clients is "How do I figure out if I need a trust instead of a just will?" Many people assume that revocable living trusts are just for wealthy people, but the benefits that they can offer to someone with even minimal wealth are significant.
Here are some factors and situations to consider when deciding if you need a revocable living trust rather than a simple will.
Regardless of your net worth, and particularly if any of your assets are titled in your sole name, then you should consider a revocable living trust if you foresee the need to plan for potential mental disability. One of the requirements of a valid will is that the person who created it is of sound mind. A trust has measures to protect against the possibility of invalidation due to mental incapacity. However, not all revocable living trusts are created the same.
A well-drafted revocable living trust should contain provisions for determining your mental capacity outside of a court proceeding as well as how to take care of you and your finances if you do become mentally incapacitated. The provisions will save you and your family thousands of dollars by keeping you and your assets outside of a court-supervised guardianship.
Often the largest asset young parents have is either a life insurance policy or retirement account, such as an IRA or 401(k) through work. It becomes a problem if the young parents later divorce and one of the parents want to name the minor children as the primary beneficiaries, or if both parents pass away while the children are still minors. What will happen to the life insurance or retirement account?
These funds will be placed in a court-supervised guardianship for the benefit of the minor until the child reaches 18. In these situations, the parents should consider setting up a revocable living trust and naming the trust as the primary or contingent beneficiary of the life insurance or retirement account. That way the trustee will be able to accept the funds instead of a court-supervised guardian. Also, the parent can dictate in the trust when the children will receive their inheritance, such as age 25 or 30, instead of 18.
Anyone who is single and has assets titled in their sole name should consider a revocable living trust. The two main reasons are to keep you and your assets out of a court-supervised guardianship, and to allow your beneficiaries to avoid the costs and hassles of probate.
If the value of your assets is over the minimum threshold in your state, then a formal, time-consuming, and costly probate administration will be required.
The minimum net worth necessary for a single person to consider using a revocable living trust will vary from state to state. For instance, in Florida estates valued at $75,000 or less are considered small enough to be administered through a simple summary probate process. In California, that threshold is $166,250; estates that size or larger are routed through a formal probate process.
If you're married, and the estates of you and your spouse exceed the federal estate tax exemption of $12,060,000 in 2022 (up from $11,700,000 in 2021), or your state's estate tax exemption (which can be as low as $1,000,000), then you should consider establishing revocable living trusts to take advantage of both spouses' exemptions from estate taxes. This is accomplished by setting up AB Trusts or ABC Trusts and then dividing your assets roughly in equal shares between the two trusts.
The newer concept of “portability" allows a surviving spouse to utilize the unused portion of the deceased spouse’s exclusion for federal estate tax exemptions.
You will also need to do this type of planning to maximize the use of both spouses' generation-skipping transfer tax exemptions, which cannot be achieved through portability. Also note that while this type of tax planning can be done in your wills, you and your spouse will need to divide your assets into separate names, in which case the assets will need to be probated after each spouse dies. The use of revocable living trusts ensures that probate can be avoided after each spouse's death.
Couples in Second or Later Marriages
If you're in a second or later marriage and you and your spouse will have different beneficiaries such as your children or grandchildren, then you should consider establishing revocable living trusts to ensure that each spouse's estate will go where he or she wants it to go outside of the probate process.
A last will and testament that is filed with the probate court becomes a public court record that anyone can read. Contrast this with a revocable living trust, which is a private contract between you as the trustmaker and you as the trustee. Unless your beneficiaries have to go to court over something written in your revocable living trust agreement (like Michael Jackson's heirs), then the document should remain a private document that only the trustees and certain beneficiaries will be able to read after your incapacity or death.
Real Estate Located Outside of Your State
If you own real estate in more than one state, then you'll need to establish a revocable living trust and deed the out-of-state property into the trust. Otherwise, your family may be faced with two separate probate estates—one in the state where you live, and a second in the state where your real estate is located, which is referred to as "ancillary probate."
One Last Thought: Trusts Don't Work If They're Not Funded
Of course, if you find yourself in need of a revocable living trust, then be sure to fund your assets into your trust and update your beneficiary designations, otherwise, your trust won't be worth anywhere near the money you spent on it.