Revocable living trusts are increasingly popular in estate planning. These highly flexible instruments offer many benefits, both during life and at death. But there are also a number of pervasive living trust myths about the benefits of this instrument. This could lead to unnecessary confusion or improper expectations of what the Trust can and will do.
I’m going to walk through three of the most common myths about revocable living trusts that I come across in practice. I have previously written about benefits that the trust arrangement offers. You can read that article here.
But for now, let’s do some mythbusting. I will use the terms “Revocable Living Trust” and “Living Trust” interchangeably.
Living Trust Myth 1: Asset Protection
When someone creates a Trust, one of the critical steps is to fund it. This means that assets get listed in a schedule in the trust instrument itself. Certain assets, like real estate and investment accounts, need to be retitled to be held by the Trust.
The Living Trust myth that many people believe is that placing assets into the Trust creates asset protection. This would mean that creditors cannot seize their bank accounts, investments, or house when it’s held in the Trust. But that’s not true.
A Revocable Trust can be freely amended or revoked at any time—hence the term “revocable.” In the eyes of the law, placing assets into your Revocable Trust changes the form of ownership, but not the real substance.
It’s still really you as the owner, because you still have total control of everything in the Trust.
For purposes of asset protection, the Revocable Trust is ignored. This is also the case with any tax implications, as the IRS disregards the existence of the Trust. All tax consequences flow to the Settlor of the trust while he or she is still living.
Since a Revocable Trust does not offer asset protection, it is still critical to have proper insurance policies in place. This includes auto, home or renter’s, commercial liability, and other necessary insurance that covers the activities we engage in.
Talk to an insurance broker for a coverage check-up after you create your Trust.
Living Trust Myth 2: You Don’t Need a Will When You Have a Trust
A Living Trust is a non-probate estate planning vehicle. For assets it holds, there is no need for probate because the Successor Trustee will privately administer the Trust in accordance with the Trust’s terms.
But the Trust might not hold all of a deceased person’s property. As noted above, a Trust will usually have a schedule for tangible personal property, and certain types of assets need to be retitled into the name of the trust.
If the Settlor of the Trust did not list that property in the schedule or title it in the name of the Trust, it’s not held in the Trust.
This means such assets may need to be probated. But if there is no Will, there can be dramatically different results than what was intended.
This is why it’s important not to fall for the Living Trust myth that a will is unnecessary just because you have a Trust in place.
A Revocable Living Trust should always have a Pour-Over Will that goes alongside it. The Pour-Over Will acts as a backup provision so that any assets not placed into the Trust are ultimately administered according to the Trust’s terms.
The court will oversee the probate of these assets and transfer to the Trustee. After the assets are transferred, the Trustee then handles these assets privately.
A Pour-Over Will is also necessary to nominate Guardians for minor children. A Revocable Living Trust cannot perform that function, as the courts have to formally name the Guardian.
Living Trust Myth 3: Trusts Are Really Just for the Affluent
When the word “Trust” comes to mind in the estate planning context, many people perhaps think of trust funds and large inheritances left by society’s most wealthy people.
But a Revocable Living Trust is hardly just for the “One Percent.”
Some common circumstances that make a Living Trust a good choice include having minor children, being a business owner, or having real property in another state.
If there are concerns about family drama and conflict, the Living Trust provides private administration to keep the problematic people out of the equation.
Even if a person simply desires greater privacy and efficiency in passing down their legacy, the Trust can do that. A Trust can often be administered within just a few months, whereas probate can often take up to a year or more in some cases.
Setting up a Trust is more of a financial investment upfront than just doing a Will. But by frontloading some of the expense, it can save a lot of time, hassle, and cost later on for your Beneficiaries.
Final Thoughts on Common Myths About Trusts
While the Living Trust is a great estate planning vehicle, it’s important to know that it has some limitations. The Trust does not offer asset protection while the Settlor is still alive, and a Will is still required even when there is a Trust. Don’t fall for these common Living Trust myths.
But in spite of its limitations, there are still a large number of benefits it does offer. You can read more about them here. And, as discussed above, these benefits are not just for society’s most affluent.
If you’re considering a Trust as part of your estate plan, reach out to Connell Law, PLLC for a free consultation. We will help you understand your situation and options so that you can make decisions the best decisions for your legacy.
