You want to build and protect your wealth, and you want to use every tool at your fingertips to make that happen. But when someone mentions a revocable living trust, you tune them out because you don’t think you’re wealthy enough to need it. And that’s a bad mistake.
Whether you’re just beginning to build wealth, or you’re already sitting on a hefty nest egg, you need a revocable living trust. It protects your wishes and your assets. We’ll explain how.
What Is a Revocable Living Trust?
Before we explain why you need a revocable living trust (RLT), let’s make sure we’re on the same page by outlining what an RLT is. In basic terms, an RLT offers you the opportunity to define how your assets are administered while you are alive and well, if you become incapacitated, and after you pass away. [PG1] As the name implies, it is:
- Revocable. This means you can change it or even eliminate it anytime you’d like while you are still alive and not incapacitated. You maintain control of your assets.
- Finite. The “living” part means the trust is in effect for a defined period of time, such as during your lifetime or even the lifetime of your children or other beneficiaries. Although some RLTs are designed to remain in effect for multiple generations, they will dissolve at some point.
- Structured. The “trust” component means the assets you place in your RLT are owned by the trust instead of by you. However, in most cases, you are the primary trustee, and you maintain full control over its operation. You can set up the trust to change trustees when and if you become unable to make your own financial decisions.
Why Do I Need a Revocable Living Trust?
I know what you’re thinking: What’s the point of placing my own assets in a trust I control? Why not just hold onto them directly or with my spouse and pass them onto my heirs in a will? That’s a great question. Here’s the quick answer: estate taxes. [PG2]
The state you live in has laws about estate taxes. If you live in a state with estate taxes, you have an estate planning challenge if your wealth exceeds the state’s thresh hold. For example, Illinois has set the limit at $4 million per person, even though the federal exemption for estate taxes is $11.58 million (in 2020). If you live in Illinois and pass away with more than $4 million, your estate (and your loved ones) will get slapped with taxes—unless it has been placed in a trust.
Other Benefits of a Revocable Living Trust
We believe that one of the biggest misperceptions about whether to engage in estate planning to begin with is that it’s only for those seeking to avoid “the death tax.” In reality, whether or not estate taxes are an issue, there are still a number of reasons that estate planning in general and an RLT in particular may make sense for you and your family.
- Efficiency. Compared to executing an RLT, traditional probate can be considerably more time-consuming and potentially far more costly. You don’t want your loved ones to be caught up in that mess. And, while it is possible to avoid probate without establishing an RLT, the arrangements may not cover key decisions that need to be made should you become incapacitated.
- Costs. We know $2,000–$4,000 set-up costs for a typical RLT is not chump change, but that expense pales in comparison to what it can cost to settle your estate after the fact. It’s not uncommon for those costs to run as high as 5 percent of your assets. If your intended beneficiaries must resort to litigation to get the job done, the sky can become the limit. And that’s not even considering the time and emotional toll involved.
- Privacy. Unlike probate, which is a very public proceeding with public records maintained, your RLT decisions are kept private, keeping others out of your business—and your family’s business as well. Everyone deserves their privacy.
- Effectiveness. An RLT helps ensure that your assets are distributed based on your documented intents, instead of by a judge assigned to rule on your probate proceedings. You can specify exactly how you want every part of your estate handled[PG3] .
- Flexibility. Because an RLT is revocable, you can do the following: change its terms; add newly acquired assets; add, change, or remove special provisions for particular assets; and cover scenarios where you may become temporarily or permanently incapable of handling your own affairs. You can designate secondary trustees, asset management preferences, and competency ruling procedures. This protects a loved one from being left to anguish over what you would have preferred, or worse yet, from getting left out of the decision-making entirely.[PG4]
Before You Create Your Revocable Living Trust
While a well-crafted RLT can be a powerful estate-planning tool, there are a few caveats to bear in mind. Here are some things to think about:
- Death and taxes. An RLT is not necessarily a tax-management tool. The IRS disregards your RLT for tax purposes, which means that you continue to file your annual personal income taxes in the same manner as before. While establishing an RLT shouldn’t be a tax burden for you, neither is it designed to help you avoid taxes. An RLT can potentially reduce your beneficiaries’ income taxes. As with any tax planning, however, it’s best to consult with a tax professional before determining a prudent course for you and your heirs.
- Your trust and your assets. Establishing a trust without transferring assets into it defeats the whole purpose of an RLT. It’s important to fund your RLT on initial set-up by moving all relevant assets into it: checking, savings and investment accounts; insurance policies; your home; business ownerships or interests in LLCs or other corporations; patents, trademarks, and other significant personal assets. Anything not in the trust is not protected.
- Maintenance costs and activities. You expect to incur upfront costs as you set up a trust, but you also need to take into account the ongoing expenses to ensure that the trust remains relevant to your evolving circumstances. A brief, annual review is warranted to ensure that new accounts and properties are added over time, and closed accounts and disposed assets are removed from the paperwork. It’s also a good idea to review powers of attorney annually, to help ensure they remain enforceable when needed.
Benefiting from Your Estate Planning Team
There are additional details to bear in mind, such as whether to designate retirement accounts into your RLT or name a trust as your beneficiary of those accounts. Work with a professional estate planning attorney to make sure your intentions are translated into proper, legal structure. They should also help ensure that all upfront and ongoing documents are prepared and signed, with assets transferred into your trust in a timely manner.
You have worked hard to capture your stellar earnings. You have built durable wealth. Shouldn’t your legacy be carried out in a manner that is easy and effective, based on your intent? [PG5] Trusts of any kind can be complicated. The IRS or state departments of revenue might way in. Your estate planning attorney will guide you in considering your unique situation and discuss the risks or challenges you may face. Trusts can be written so that you minimize the risks and mitigate the challenges.
If you do not have an estate planning attorney or know of one anywhere in the U.S., reach out to us for a referral. Better yet, if you have an ongoing relationship with a wealth manager (like Cogent), they can help bridge gaps in your overall financial plan. We can work with your CPA, lawyer, and other professionals to protect your hard-earned money and your family, too. Give us a call today.