Wealth Planning News
Vol. V, No. 7
Revocable Living Trusts
A Trust is a very old arrangement, originally often used in England to avoid then applicable laws of primogeniture. It is now favored by most people reaching retirement age who discuss planning issues with their friends and with many of their financial advisors.
Think of the trust as a box you build that has governing rules on it. The first line says, "This is my box, and I can put things into it, take them out of it, and even destroy it if I desire, and I can also change the instructions on it." Next, "If I become disabled, then ______, my trusted successor, shall take this box and use its contents to pay my bills and take care of my needs, thereby avoiding any need for court involvement." "When I die, my trusted successor shall hold and distribute the contents of this entire box for the following persons, in the manner specified below, thereby avoiding delays, court involvement and attendant expenses, while preserving the entire privacy of my affairs from public record."
Advantages of Trust Centered Planning
By using a trust for your plan you retain the full dignity of control, even when you become disabled (a well designed trust will name someone to manage your financial affairs with instructions that far eclipse the blank check with no instructions inherent in a normal durable power of attorney).
There are three basic ways assets pass at death:
By operation of law, such as joint tenancy;
By contract, such as insurance and retirement benefits; and
By probate administration.
Use of a properly funded revocable living trust is a better way chosen by many people. Think of the trust as a box you create and control for your own benefit. Into that box you put title to your real estate, tangible personal property, bank accounts, investment accounts, and you make that box the beneficiary of your life insurance, annuities, and in many cases even your retirement accounts such as IRAs.
Use of the trust is most advantageous for anyone who may become disabled, because on the instructions on your box you designate who will manage it and its contents in event of your disability, with instructions to use what the box contains for your living needs and expenses. This approach to disability planning is in our experience far superior to powers of attorney that merely give your agent powers to act for you, but have no instructions, and thereby function largely as a blank check. If you use the trust approach you also avoid any need for probate court involvement to designate and oversee your conservator or financial guardian, thereby preserving your privacy and saving expenses that go along with court proceedings. So for disability planning a trust is ideal with no drawbacks, and as a side benefit it preserves your dignity of control by reflecting choices you made prior to any disability.
Unless you’ve made a living trust, and funded it with assets owned, all other assets other than those passing by operation of law or by beneficiary designation pass through the probate process. This is true whether you have a will, or whether you’ve never made a will.
Probate will occur if you own assets at death that exceed the "Small Estates" limit. This limit in Colorado is now slightly above $60,000, but all real estate interests must go through probate to provide clear title to your beneficiaries.
If you die without a will, the law provides for who will receive these assets you own. Because you may not like the disposition set forth by law, you may want to consider specifying your own instructions for disposition. You can do this with a will. Or you can avoid the probate process entirely by use of a fully funded revocable living trust.
Problems of Probate
Probate procedures serve a useful purpose in rare cases. But death probate has some problems that many people choose to minimize or avoid by planning.
Probate Means Court Proceedings
Probate proceedings are court proceedings. As such, they cause extra legal work with resulting legal fees that might otherwise have been saved for loved ones. Probate fees in some Uniform Probate Code states aren’t as excessive as in other states, but can nevertheless become a burden. While the Uniform Probate Code allows only a "reasonable fee" for probate, any fee for work that could have been easily avoided should be considered as "unreasonable."
In most cases, inventories and reports are filed with the probate court as part of the proceeding and violate your privacy by becoming public records.
Probate requires proceedings in every state where a decedent owned real property. In our society, many people own real estate, or interests in real estate (deeded time shares, or mineral interests), in more than one state.
Probate Can Result in Delays
Because of the nature of the probate process, which is intended to give time for notice to creditors, and time for creditors to respond, there can be delays of anywhere from at least six months to several years in settlement of an estate. Meanwhile, assets are under the control of a personal representative (an executor), and not under the control of those who will ultimately receive the assets.
Probate Is A Public Process
Probate proceedings are public. This means that in most cases there will be full disclosure of assets and debts of the estate, and disclosure of liquidity needs of the estate. Further, there's public notice of who receives the estate, in what proportions, and over what period of time. Many people who engage in estate planning want to keep this type of information private, for both financial reasons and personal reasons. Making this financial information public is like playing cards with your hand exposed to the other players.
For all of these reasons, and many others in some cases, use of a revocable living trust for lifetime asset management and estate disposition at death is always the best choice. The question is not how much wealth you have, but rather how likely it is that you may suffer disability or death. Hence the sensible choice of living trusts planning by people of retirement age.