While you may think that living trusts are only for the elderly or the wealthy, they are a powerful estate planning tool for many different people. While every aspect of estate planning comes with pros and cons, it is important to understand the possible disadvantages of revocable living trusts. Then, you will be more informed to make a decision on whether a revocable living trust is right for you and your needs.
What is a Revocable Living Trust?
A revocable living trust is a document that determines how an individual’s assets will be distributed after they pass away. These assets might include real estate, valuables, bank accounts, and investments. Over the course of an individual’s lifetime, they will place assets within their living trust. With a revocable living trust, an individual will be able to change or cancel aspects of the living trust at any point throughout their lifetime.
The individual that creates the trust is referred to as the creator or trustor. The person who has created the trust may also be the trustee; the person who oversees the trust. However, the trustor can also name someone else to be the trustee.
Revocable vs Irrevocable Living Trusts
Revocable and irrevocable living trusts are two different types of trusts. Depending on your wants and needs, you may choose to go with one or the other.
Revocable. You will be able to alter or terminate the trust whenever you want throughout your lifetime. You can also remove and add beneficiaries freely. The assets that are in a revocable trust are still considered to be yours and you will need to pay taxes on them accordingly.
Irrevocable. You will not be able to modify or cancel the trust without the approval of everyone that has been named in the trust. This can be challenging to do, as each beneficiary will need to agree and sign. The assets that are placed within irrevocable trusts are no longer considered to be the trust-maker’s, so the taxes will be applicable to the actual trust.
Major Disadvantages of a Revocable Living Trust
As with any estate planning tool, revocable living trusts do come with some disadvantages. Depending on your own individual needs, you can determine if a revocable living trust is right for you.
No Asset Protection. Creditors will still be able to reach into your assets that have been placed in a revocable living trust.
Administrative Work Required. All of your assets will need to be re-titled when the living trust goes into effect. This can take time and effort, as you may have to go through quite a bit of paperwork. This may also include the opening of new bank accounts.
No Tax Benefits. Placing assets in a revocable living trust does not shield them from taxes.
Upfront and Ongoing Costs. In order to establish a trust, the trust creator will have to go through complicated documents. If an individual does not have many assets, a revocable living trust may not be the most cost-effective option for them.
Advantages of Revocable Living Trusts
While revocable living trusts do come with some pitfalls, there are also some potential advantages as well.
You Remain in Control of Your Assets. The main advantage of revocable living trusts are that they are flexible for the trust creator. A trust requires that there are three parties: a grantor, a beneficiary, and a trustee. The client can serve as all three of these parties. That means that assets can be moved in and out of a revocable living trust freely.
Your Trust Avoids Probate. If your assets are in a living trust when you pass away, then your assets will avoid probate. Probate can be a very lengthy process and can cause strain on family members. Loved ones may have to wait quite a long time before they have access to your assets if they go through probate. Keep in mind that all assets will need to be in the living trust at the time of your passing or your assets could still go through probate.
You Can Maintain Your Privacy. Since your trust will not go through the probate process, then the contents of your trust will not be disclosed. This may be a great advantage for those that value their privacy.
Is a revocable living trust different from a living will?
While the terminology sounds similar to each other, a revocable living trust and a living will are quite different. A living will is a legal document that will determine what medical treatments you would prefer in the case that you are incapacitated and cannot communicate your requests at that time. For example, a living will may be utilized if you are in a coma or on life support. A living will is different from a last will and testament, as a last will and testament does not typically include information about medical decisions.
Is a revocable living trust right for me?
In order to determine if a revocable living trust is right for you, you will need to assess your own needs. Understanding the complexities surrounding a revocable living trust can be challenging. Speaking with a dedicated legal professional can help get you started on the right path in your estate planning journey.
Speak with a Professional Estate Planning Attorney
No matter what stage in life you are at, estate planning documents are some of the most important documents that you will create within your lifetime. So, it is important that you are aware of some of the disadvantages that coincide with certain estate planning options. This will help you make an informed decision regarding not only your final wishes, but also how your assets will be handled while you are living. At Galanti & Copenhaver, our team is dedicated to providing an individualized experience because we know that the life of each client is unique. We can walk you through the estate planning process and assess your overall needs. Schedule a consultation to speak with one of our team members today!