This is a follow up to the last article which explained Revocable Living Trusts (RLTs). In today’s article, I will describe some of the myths surrounding RLTs. In a couple of weeks, in the third and final article in this series, I will review when having a RLT is a good idea or a bad idea.
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.
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 or pass outside of probate another way (like a beneficiary designation). 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 a lot of 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.
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 or joint bank accounts, that property 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).
Finally, there is likely to be a little less of a delay with beneficiaries receiving property after the grantor dies if it goes through trust, but not much. When the grantor dies, loved ones still have to gather assets, pay taxes and debts and final expenses, and retitle assets. To ensure all debts are paid, notice to creditors is normally run in a newspaper and three months passes for beneficiaries are paid. Probate takes 6-12 months, so there may be a difference of 1-6 months with using an RLT.
Myth Number 2. 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 3. 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. Beneficiaries are entitled to copies of the trusts. 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 little 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.
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