There is a widespread misconception out there that “a trust” will be your estate planning salvation! People seem to think “a trust” is going to help them:
- eliminate taxes,
- avoid probate,
- protect assets from creditors,
- qualify them for public assistance, and
- look fifteen pounds lighter
I am unaware of any trusts that will make you look thinner. There are specific types of trusts that can help you reduce tax liability, benefit folks on public assistance, and protect assets from creditors. But, the commonly used revocable living trust (hereinafter “RLT”) isn’t one of them. And, if the only reason for having a RLT in Colorado is to “avoid probate,” it may be more trouble than it is worth.
Some people are fuzzy on what a trust is, but are sure they need one. So, let’s quickly go over some trust basics. A trust is a separate legal entity that is created by a writing or trust agreement. The trust agreement lays out the instructions for the trust. Once created and funded, a trust holds title to property including things like investments, homes, rental property, bank accounts, vehicles, mineral rights, tangible personal property. There are three important roles within a trust:
- The Settlor. Sometimes called the “grantor,” this is the person (or people) who set up the trust, establish the instructions for the trustee, decide who will benefit from the trust.
- The Trustee. This is a person (or a bank or trust company) that manages the trust, complies with statutory requirements regarding accounting, reporting and other tasks and distributes income and principal in accordance with the trust agreement.
- The Beneficiary. This is the person or people who benefit from the trust– “trust funders” to use the pejorative parlance for trust beneficiaries.
Importantly, the same person can wear all three hats. That is often the case with RLT’s.
Common Features of a Revocable Living Trust
Now, to be clear there are countless types of trusts. The specific type of trust discussed in this article is a RLT. This is a commonly used estate planning strategy where the client sets up a trust and endeavors to transfer all of her assets into the trust during her lifetime. While she is alive, she retains the ability to revoke or amend the trust and may even serve as the trustee and the primary beneficiary. Then when she passes away, that trust becomes her primary estate planning vehicle and dictates how her assets will be distributed.
Common Misconceptions Regarding Revocable Living Trusts
Before we talk about what a RLT can do, let’s go over a few things these types of trusts will NOT do:
- It will not save you from taxes. There is a pervasive misconception that a “trust,” any trust, will put assets beyond the reach of the IRS. This is not true for revocable trusts. Because the settlor retains the ability to amend or revoke the trust (in other words, maintains considerable control over the assets) the IRS basically views these types of trusts as a nullity for tax purposes. They are essentially treated as an extension of the settlor. During the settlor’s lifetime, the trust assets are included on the settor’s tax return and when the settlor dies, they are considered part of the settlor’s taxable estate. But, for the vast majority of us, that isn’t a bad thing. Consider that the federal estate tax exemption is currently 11.2 million dollars for individuals (and 22.4 million for married couples). Colorado effectively has no estate tax, so unless you are worth in excess of eleven million dollars, you can relax. Once you have amassed a fortune, there are trusts that will help you minimize your estate tax liability, but a RLT will not be one of them.
- It will not protect the settlor’s assets from creditors. If you find yourself in financial trouble, endure a contentious divorce, or are sued by someone, a RLT will not shield your assets from liability. Here again, this is because the settlor retains considerable control over the trust assets. Courts will look past the trust and treat all the trust assets as if they are owned by the settlor.
- It will not help you qualify for public benefits or assistance. Due to the skyrocketing cost of nursing and residential care for seniors, more and more people may need to qualify for Medicaid. Medicare will pay for senior’s doctor and hospital visits. But, if seniors need long-term residential care, they need to meet the very strict means tests under Medicaid. This means that seniors can only have assets totaling a certain value to qualify. But, putting assets in a RLT may do more harm than good. The agency will still count those assets assets. And, depending on the circumstances, transferring assets into a trust may trigger penalties associated with gifts made within 60 months of application. It can also disqualify the settlor for the exemptions allowed for a primary residence.
So, Why Have a Revocable Living Trust?
There are a few good reasons to have a RLT as opposed to a will. Those include the following:
- To plan for impending incapacity. Due to advanced age or an unfortunate diagnosis, some individuals may need to plan for their inevitable, future incapacity. They may want to consider using a RLT. Trusts may enable a client to move more seamlessly from management by the settlor as trustee, to management by the successor trustee in cases of advanced age, dementia or a family history of Alzheimer’s.
- To hold title to out-of-state property. When people own real estate or mineral rights in another state, a trust can be a useful tool to avoid ancillary probate. Most estates will need to go through the probate process in the state where the decedent lived. In Colorado, the probate process is not terribly complicated or onerous, but that varies state-by-state. So, if there is real estate in another state, it may be necessary to open some type of probate proceeding in the state where the property is located. But, this can be avoided by using a trust or other entity to hold title to the out-of-state property.
- Increased privacy. Historically trusts have been used where there is a secret the decedent would like to keep. A probated will becomes a public court record. However, unless a dispute or lawsuit requiring court intervention arises, a trust will not be public record. So, people with illegitimate children or folks with lovers on the side would look to trusts to keep from airing their dirty laundry.
But, Don’t I Need To Avoid Probate Altogether?!?!
Along with estate taxes, probate causes so much unnecessary worry for people. I once heard someone say “I’m not sure what probate is, but I know I need to avoid it.” This sentiment is pervasive. If you visit some of the estate planning self-help blogs and forums online, you would think “probate” is a judicial Chupacabra that will sneak into your house at night take all your stuff and snatch your children. But, in Colorado, those worries are misplaced.
Probate is simply the court supervised process of distributing a person’s property to their heirs or devisees after they pass away. In some states, probate can be a tricky and time consuming process. But, Colorado probate is generally a pretty simple administrative process. Assuming your kids aren’t fighting over your estate like disappointed vultures, your estate can take advantage of the process for uncontested probates or hire a lawyer to do it for a few thousand dollars. In a lot of cases the difference between the fees for setting up and funding a RLT, and the fees for an uncontested Colorado probate may end up being negligible.
Successfully avoiding probate using a RLT can be a hassle. You will need to ensure that substantially all of your assets are placed in that trust. This is because if there are assets totaling more than about $60,000 held outside the trust, your estate will need to go through probate anyway. So, you must re-title your real estate, vehicles, investment and bank accounts (or pay an attorney to do it). This is no small task. Thereafter, you will need to diligently title everything you acquire in the name of your trust. If you inherit property from a relative, if you open a new account, if you buy a car you will need to ensure it is placed in your trust. You will also have to be mindful of any due on sale clauses in your mortgage, check to make sure you do not need to amend your insurance coverage, and you may have a more difficult time refinancing if you have transferred assets into a trust.
As a practical matter, using a RLT creates many more opportunities for mistakes. People often don’t get things titled quite right. Years later, when something needs to be sorted out, trust agreements, and amendments, thereto may have been lost. There may be ambiguities in the trust document that end up having to be resolved by a court anyway. Deeds that were intended to retitle assets may have been drafted and signed, but never recorded. Oftentimes, people appoint family members who may not understand their responsibilities to serve as trustee. This can lead to disagreements and court involvement. Trusts certainly can work smoothly, but the settlor and trustee have to do a lot of things right.
Additionally, the legal fees associated with setting up a RLT are oftentimes higher than those for a standard estate plan. So, in an effort to avoid legal fees and hassle associated with having an estate go through probate, you may end up with comparable fees and hassle by setting up a RLT.
Don’t Get Upsold on a Revocable Living Trust
The best way to determine if a RLT is right for you is to discuss your situation in detail with an estate planning attorney. Call The Law Office of Keenan Copple PC and I will walk you through all the pros and cons and help you determine what is best for you. I will go over what you will need to do going forward to fund and administer any trusts that are set-up. I will also go through a number of circumstances that would necessitate revisions of your plan before your leave my office with your newly minted estate plan.
If you already have an estate plan that includes an RLT, there is good news: it is probably not hurting anything. But, if you have questions or concerns, please call The Law Office of Keenan Copple PC today and I would be delighted to work through things with you. If you are tired of dealing with your RLT or otherwise need to update or revise your estate plan, there is more good news: you aren’t stuck with your unnecessary RLT. I can help you decide if it is better to update your plan within the framework of your existing trust or if it would be better to terminate the trust and move forward without one.
I will leave you with a word of caution: if you don’t identify with any of the “good reasons” for a RLT, you may simply not need one. If the only reason your estate planning attorney is offering for using a RLT is probate avoidance, it may be overkill, and you could be getting upsold. And just like an order of loaded nachos before your chile relleno plate, you probably really don’t need it–and it sure won’t make you look fifteen pounds lighter.