People are typically interested in RLTs because they have been told they can “avoid probate,” and probate is expensive and takes a lot of time; they can avoid paying taxes; they can avoid paying their creditors; and that trusts are private. A lot of these claims are myths, or at least not entirely accurate.
Myth Number 1. You can “avoid probate” with a trust, and you will want to because probate is expensive and takes a lot of time.
First, RLTs routinely do not avoid probate. The only way to avoid probate is for all of the decedent’s estate assets to be titled in the trust at the time of death. Often, what happens is a trust is created, funded, and then the grantor gets additional assets during his/her lifetime that are not subsequently added. Sometimes, trust documents are created by someone and no assets are put in the RLT at all! I see this happen quite a bit--especially if you have purchased the document from an internet “legal document” company and have not done any other work. People assume that with the document, your estate is magically handled when you die! Not true at all. An attorney will draft a will along with the trust to ensure that there’s a will in place in case there are assets not in the trust when the grantor dies.
If there are assets not in the trust when you die, the existence of a RLT will actually double costs at death because the estate will go through probate and then go through the administration of a trust (resulting in additional attorney’s fees, CPA fees, and trustee fees). Property will also have to be retitled twice (title from decedent to trust, and then to beneficiary, instead of just to the beneficiary at death).
Secondly, even if probate is necessary, it is normally not as expensive or time consuming as the myth would have you believe. A lot of those “horror stories” you hear are from people who passed away without a will or who live in other states. In North Carolina, the court fees for a formal probate administration is $120.00 + $.40 for every $100.00 in receipts and disbursements through the probate estate. For example, for an estate with $100,000 of receipts and disbursements, the total court costs would be $520. Attorney’s fees will add several thousand dollars to this figure; however, sometimes, attorneys are not needed to probate an estate. Attorneys are always needed to assist in the administration of a trust. The trustee will still be paid for his/her time, just like an executor in a probate estate. Other professionals like CPAs will still need to be hired.
Even if you had $500,000 or more going through the estate, the time value of money means that paying $2,000 for trusts and wills now is a worse financial decision than paying $6,000 to close an estate in 30 years. Transferring title to property is time consuming and can sometimes cost money. One of the reasons why attorneys charge so much for the trust is because the grantor is not just paying for the document – doing it correctly involves assistance with retitling property. Stockbrokers or other companies also might charge a fee for retitling. There are recording fees. The grantor will need to update the insurance on trust property to a new insured.
In any event, it is likely that the size of your probate estate will be smaller than you think because most property that someone owns passes outside of probate anyway. The largest assets that a person owns is life insurance, retirement, and real estate. Life insurance and retirement passes outside of the probate estate if beneficiaries are designated. If a husband and wife own real estate, the house will pass to the surviving spouse automatically after the first spouse’s death. These assets will not be countable by the court when determining court costs (the $.04/$100 equation). Other property not included in the estate is property passed to the surviving spouse by operation of law. Thus, I will sometimes recommend a RLT to a single person who has a lot of estate property to keep the property out of probate, but it is normally not a necessity for husband and wife clients or for those whose assets will pass outside of probate anyway.
Finally, there’s still going to be a delay with beneficiaries receiving property after the grantor dies, even if everything is correctly titled in a trust and no probate is required. When the grantor dies, loved ones still have to gather assets, pay taxes and debts and final expenses, and retitle assets. Therefore, a RLT is not saving your loved ones any work.
Myth Number 2. RLTs will help you pay less estate and income tax.
RLTs do not save you from paying estate tax. Property titled in the name of an RLT is considered part of your estate by the IRS for estate tax purposes. Additionally, when determining the amount of income taxes owed for income producing property in the trust, the tax bracket of the grantor is used, so the grantor is not saving any money there.
Myth Number 3. Assets in RLTs are safe from creditors.
Again, property titled in the name of an RLT is considered part of your probate estate when you pass and will be available to satisfy creditor claims if you pass away owing money to creditors.
Myth Number 4. Trusts are completely private, unlike wills which are public.
This myth is a half-myth. Most trust agreements have language in the trust prohibiting the trustee from making the contents of the trust public, so if you wanted to keep beneficiaries’ identities secret, you could probably achieve that. However, property owned by the trust is not secret. DMV records and deed records are public records. Someone looking at property records will see that the “Trustee of Jane Doe Trust” owns real estate at Lake Norman. These records are mostly online. As of today, probate court records are NOT online. If someone wanted to pull a copy of a decedent’s will or probate court file, they would have to physically go to the courthouse and make a copy.
Further, this privacy comes at a cost. Probate is a court supervised process, whereby the court ensures that debts and expenses are paid, the executor follows the decedent’s instructions as outlined in the will, and beneficiaries receive their inheritance. With the administration of the RLT being private, the court has no supervision over the trustee.
Despite the information in this article, there are several circumstances when having a RLT is a good idea (just not for the reasons stated above). A RLT can be a valuable planning tool for owners of closely held businesses, people with grown children and multiple marriages, and owners of real estate located in multiple states, to name a few. I will review why in the next article and discuss some of the risks involved in setting up a RLT without consulting estate planning professionals.