1. You are the owner of a closely-held business. Business interests are oftentimes considered estate assets. Therefore, an owner’s interest in a business may be “tied up” in probate after they pass. There might not be an agreement in place for who will operate the business and how it will be operated. A business owner might transfer his/her interest to a RLT making it easier for a trustee to immediately start running the business at the owner’s death.
2. You have a fair amount of assets, and you want to control what your surviving spouse does with his/her inheritance and/or control what happens with the inheritance after your surviving spouse dies.
You can place property in a RLT with contingencies on it, like your surviving spouse only getting a certain amount of money per year. Your RLT can provide that at the death of your surviving spouse, your children will inherit whatever is left in the RLT. This is a preferred method for people on their second marriage. If you leave property outright to your surviving spouse, the surviving spouse’s estate plan will dictate who gets the property he/she inherited at the surviving spouse’s death, which may leave children from a first marriage without anything.
I say “fair” amount of assets because, as previously mentioned, most of a decedent’s property passes outside of probate anyway. Children can be designated as beneficiaries if a second marriage is involved. If there are not a lot of probate assets, it is not going to be much of a concern what the surviving spouse is inheriting. Also, a surviving spouse is entitled to $20,000 - $30,000 spousal allowance anyway, which can come out of RLT assets. A RLT is not necessary to plan for minor children because wills can include a testamentary trust, stating that children are not to inherit until age 21 or 24, for example.
3. You own property in multiple states. If you own property in multiple states, when you pass away, your executor will have to probate your estate in every single one of those states. Those costs can really add up. Titling the real estate in the name of the trustee will prevent that from happening.
4. You have a lot of property that will pass through probate. As previously discussed, most of what someone has when they die passes outside of property (jointly owned property, retirement, life insurance). If you have a lot of property passing through probate, the court costs could be higher than normal, and a RLT may avoid some of those fees.
5. It is likely that you will become incapacitated in the future. The trustee of a RLT starts acting for the grantor upon the death or incapacity of the grantor. Thus, a trustee can step in and handle an incapacitated person’s finances even while they are still alive.
There are cheaper alternatives to drafting a RLT, though. A durable power of attorney allows an agent to handle an incapacitated person’s financial affairs. Guardianship is another alterative, whereby a loved one is appointed by the court as an incapacitated person’s guardian over the person and/or over the estate (meaning finances).
There are pros and cons for all three options. The benefit to using a RLT for anticipated incapacity is that the trustee can be given much more powers in a RLT than a guardian or agent under a power of attorney. The benefit to using a durable power of attorney is obviously its price, and unlike a trustee, an agent under a power of attorney is normally not compensated. A guardian can be compensated, but only with court approval. I consider the court supervision required with guardianship to be a “pro,” but others might consider it a “con.” The trustee would likely have to hire an attorney and a CPA to assist him/her with the administration of the trust during the grantor’s incapacity, which results in more cost to the grantor’s estate because those costs are considered trust expenses to be paid out of trust assets.
One final point – the trustee of a RLT only has power over an incapacitated person’s trust assets. A loved one might still have to go seek a court appointment to be guardian over the incapacitated’s person (meaning physical custody).
While there are some benefits to having an RLT in certain circumstances, there are risks that need to be considered. Hiring a professional to draft the trust, assist you with funding the trust, and consistently advise you as to the trust is why RLTs are expensive. You should never purchase a form trust and blindly start putting assets into the RLT without consulting professionals. Here are some of the risks:
a. You may lose creditor protections. Example: Your husband is in an auto accident that results in an injury to the other party. The car is titled to the trust. The injured party gets a $100,000 judgment for his injuries. All of your property is in the trust, meaning that all of your assets are subject to the collection of the $100,000 judgment.
b. You may lose liability protection. Example: Your husband is in an auto accident that results in an injury to the other party. The car is titled to the trust. Because you are joint owner of the trust with your husband, you are jointly liable for the accident as owner of the car.
c. Retitling retirement assets to trust may result in early distribution fees. Also, if you put a non-probate asset into a RLT (like retirement assets), you may lose creditor protection.
There are certain circumstances where a revocable living trust is beneficial to the owner. However, for many, it is just not necessary, and it may create a lot more risks and costs than are worth it. Like any estate planning, a consultation with a professional is worthwhile.