A few years back, I attended an estate planning seminar at a nearby hotel. The firm putting on the show is well known in the area. Many of my clients had documents prepared by this group, so I felt an obligation to see exactly what they were offering. The seminar was good. There were no crazy claims that you see at many of these “free” events. They seemed to know what they were doing.
However, at the end of the day, every single person who engaged the firm got the same basic set of estate planning documents. To me, that’s a red flag. Why would someone who is single in their 30s need the same plan as someone who is widowed, 65 and has a bad relationship with one of their kids? That was the inspiration for this column. While most of our clients do use a revocable trust, it made me think about the folks who really don’t need one. Below, you will find four scenarios where a basic will package will do the trick. (For reasons to have a revocable trust, read my article Four Reasons Retirees Need a (Revocable) Trust.)
1. Probate avoidance is the only goal.
While this is an admirable goal, a trust may not be the only way to avoid probate. Depending on where you live, you can attach beneficiaries to the majority of your assets. The house is typically the toughest. However, in certain jurisdictions, you can add a transfer-on-death (TOD) deed to your home. If I own my home jointly and die before my wife, the home will become hers without probate. In the unlikely case that we die at the same time, the home will pass to the beneficiaries on the TOD deed.
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TOD designations apply to your investment accounts, too. You can attach them to any taxable account, and the assets will “transfer” according to your wishes, outside of the court system. For bank accounts, a similar concept exists, in the form of payable-on-death (POD) designations. Retirement accounts, life insurance and annuity contracts all have beneficiaries attached. That should wipe out most of your probate estate.
2. You have straightforward wishes.
As highlighted above, if you just want to get your assets to your beneficiaries in a direct manner, a trust is likely unnecessary. However, if you want any sort of control over how the assets are distributed beyond your death, you will need a trust. Conversely, let’s say you have two kids who are 50/50 beneficiaries. Both are good with money. You can just name them as direct beneficiaries on your accounts.
This comes with a word of caution: Goals and wishes change. People don’t often think to change beneficiaries with those goals and wishes. You should review beneficiaries once a year to ensure your now ex-spouse won’t inherit your assets.
3. You’re motivated by tax savings or Medicaid eligibility.
This is where it’s important to differentiate revocable, or living trusts, from irrevocable trusts. The former is primarily used for control and efficiency while distributing your assets. The latter is typically used to reduce your taxable estate. This article addresses only revocable trusts, which can be used in conjunction with other tools to reduce taxes. However, a stand-alone revocable trust will do nothing to reduce your taxes, as it is tied to your Social Security number.
4. You’re not great at follow-through.
This may seem like a silly one, but a trust is about as good as a blank piece of paper until it is “funded.” I cannot tell you the number of people I come across who have gone through the hassle and cost of putting together a trust but never followed through on transferring their assets into the trust. That is the only way it will work.
If you plan to use a trust as part of your estate plan, you will have to transfer ownership of the assets into the trust for it to have any effect. For example, there has to be a deed transfer for your home and a change of title for your investment accounts. Step one of creating the trust is an expensive waste of time without step two: funding the trust.
related content
- Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer
- Estate Planning? Four Strategies for Leaving Assets to Your Heirs
- What Assets Should You Put (or Not Put) in Your Trust?
- Best States for Trusts: How to Choose One That’s ‘Trust-Worthy’
- Estate Planning Tips: How to Pick POAs, Health Surrogates and Trustees
Disclaimer
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
FAQs
The Disadvantage of a Revocable Living Trust
Complexity: Managing a trust requires ongoing paperwork and record-keeping, which can be burdensome and time-consuming. No Tax Benefits: Unlike some other estate planning tools, a revocable living trust does not offer direct tax advantages or reductions.
What are the major disadvantages of revocable living trusts? ›
The Disadvantage of a Revocable Living Trust
Complexity: Managing a trust requires ongoing paperwork and record-keeping, which can be burdensome and time-consuming. No Tax Benefits: Unlike some other estate planning tools, a revocable living trust does not offer direct tax advantages or reductions.
What are the only 3 reasons you should have an irrevocable trust? ›
The only time you might want to consider creating an irrevocable trust is when you want to (1) minimize estate taxes, (2) become eligible for government programs, and (3) protect your assets from your creditors. If none of these apply, you should not have one.
What does Suze Orman say about revocable trust? ›
Suze Orman, the popular financial guru, goes so far as to say that “everyone” needs a revocable living trust. But what everyone really needs is some good advice. Living trusts can be useful in limited circ*mstances, but most of us should sit down with an independent planner to decide whether a living trust is suitable.
What is not an advantage of a revocable trust? ›
No Tax Benefits
While revocable living trusts do provide some asset protection as mentioned earlier, they don't have direct tax benefits. This is because you still retain control of the assets while you are alive, and any income on those assets passes through you.
What is a revocable trust most often used for? ›
People set up a revocable living trust in order to give someone else the power to make financial decisions on their behalf, in the event they become unable to because of injury or illness.
What assets should not be placed in a revocable trust? ›
A living trust can help you manage and pass on a variety of assets. However, there are a few asset types that generally shouldn't go in a living trust, including retirement accounts, health savings accounts, life insurance policies, UTMA or UGMA accounts and vehicles.
What is the best trust to avoid estate taxes? ›
One type of trust that helps protect assets is an intentionally defective grantor trust (IDGT). Any assets or funds put into an IDGT aren't taxable to the grantor (owner) for gift, estate, generation-skipping transfer tax, or trust purposes.
Why choose a revocable trust over an irrevocable trust? ›
Revocable trusts offer benefits such as the ability to be easily amended, saving time and money by avoiding probate court, while irrevocable trusts offer the benefit of minimizing estate taxes and protecting assets from creditors.
Can creditors go after an irrevocable trust? ›
Because a settlor of an irrevocable trust no longer has any control over the trust assets, the settlor's creditors cannot reach the assets in most situations.
These specific documents are a will, a living revocable trust, a durable power of attorney for healthcare and an advance directive. Here is an overview of what each of these documents does and why Orman feels they are essential for everyone to have.
Can the IRS take your revocable trust? ›
A revocable trust is one that allows you to change how your assets will be allocated after your death. An irrevocable trust is the exact opposite. Since a revocable trust allows you to revoke your assets from the trust, the IRS considers assets placed into this type of trust to still be owned by the taxpayer.
Do beneficiaries of a revocable trust pay taxes? ›
When trust beneficiaries receive distributions from the trust's principal balance, they don't have to pay taxes on this disbursem*nt. The Internal Revenue Service (IRS) assumes this money was taxed before being placed into the trust. Gains on the trust are taxable as income to the beneficiary or the trust.
Should bank accounts be in a trust? ›
To make sure your Beneficiaries can easily access your accounts and receive their inheritance, protect your assets by putting them in a Trust. A Trust-Based Estate Plan is the most secure way to make your last wishes known while protecting your assets and loved ones.
What assets should I put in my revocable trust? ›
For a revocable living trust to take effect, it should be funded by transferring certain assets into the trust. Often people fund a living trust with real estate, financial accounts, life insurance, annuity certificates, personal property, business interests and other assets.
Do revocable trusts avoid federal taxes? ›
Any income generated by a revocable trust is taxable to the trust's creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator's lifetime. This is because the trust's creator retains full control over the terms of the trust and the assets contained within it.
What is the greatest advantage of a revocable trust? ›
Arguably, the single greatest advantage of choosing a revocable living trust is the simple fact that it avoids probate court. With a last will and testament, the named beneficiaries must go through a lengthy court hearing before they are able to legally obtain the estate and/or assets specified in the grantor's will.
What is the downfall of a living trust? ›
One of the primary disadvantages to using a trust is the cost necessary to establish it. It's generally more expensive to prepare a living trust than a will. You must create new deeds and other documents to transfer ownership of your assets into the trust after you form it.
What are the pitfalls of a living trust? ›
Most people think the benefits outweigh the drawbacks, but before you make a living trust, you should be aware of them.
- Paperwork. Setting up a living trust isn't difficult or expensive, but it requires some paperwork. ...
- Record Keeping. ...
- Transfer Taxes. ...
- Difficulty Refinancing Trust Property. ...
- No Cutoff of Creditors' Claims.
A: Whether to make your revocable living trust the beneficiary of your life insurance policy depends on your personal situation and what your goals are. There is no one-size-fits-all answer to this question, so it is important to have your attorney educate you and assist you in making an informed decision.
