The Benefits of a Revocable Living Trust
Death and taxes.
The only two guarantees in life, as Ben Franklin famously stated. Also two subjects nobody enjoys thinking about. But with a “baby boomer” generation approaching its golden years with considerable assets, they are topics that go hand in hand, especially if you have valuable Florida real estate and other holdings.
Fewer than 20 percent of U.S. residents have a written will stating who shall inherit their assets. If a person dies without a will, he or she is said to die “intestate,” in which their state’s law determines who receives the assets. Usually a surviving spouse, children, or other close relatives will be designated.
However, especially in second marriages, intestate succession often results in wholly unintended consequences. With the exception of small estates, probate proceedings are usually required when a person dies without a will, thus delaying distribution for 6-18 months, if not longer. Another reason to avoid probate court at all cost is that state law determines attorney / administrator fees, ranging from 6-22 percent of estate assets.
A far better and faster approach (not to mention one that will save you money) is to have a revocable living trust to hold title to major assets such as your home, real estate investments, bank accounts, and other funds. Life insurance policies, tax-deferred annuities, IRA and 401k should remain outside your living trust because they pass automatically to the designated beneficiary.
THE FIRST ADVANTAGE OF A REVOCABLE LIVING TRUST
Most real estate owners are not aware of the two key living-trust benefits, the most important of which is to avoid probate costs and delays after the trustor or principal dies. Until then, the individual is the trustee of his or her living trust, with assets able to be bought, sold, and managed as desired. Tax benefits are not affected because a living trust is merely a method of holding title.
When a living-trust creator dies, the successor trustee beings management of living-trust assets. Often this is a surviving spouse, or trusted adult child, relative, or even a friend. The successor trustee can distribute trust assets according to the living-trust terms immediately, but it is usually wise to wait 30-60 days so debts of the deceased can be paid.
When a person dies owning major assets such as real estate in more than one state, holding title to those assets in the living trust avoids probate costs and delays. For example, if a person dies who owned real estate in Florida, Minnesota and North Dakota, and did not have a living trust, the costly probate court proceedings will be held in all three states, thus delaying asset distribution by a considerable length of time.
THE SECOND, LESSER KNOWN ADVANTAGE
Few people ever plan for it, but if the person becomes incapacitated, such as with Alzheimer’s disease or a coma, a court-appointed conservator or guardian manage will be appointed to manage their assets if there is no living trust in place. If you have your assets in your living trust, your successor trustee can then manage them without court interference.
For this continued management reason, holding title to your property, real estate, bank accounts and other assets in your living trust is usually far better than joint tenancy with right of survivorship. A successor trustee can take over if a physician determines the trust owner is incapacitated.
ADDITIONAL BENEFITS
Privacy is a major living-trust benefit, as compared to a will that becomes public knowledge after a person dies. Just like a will, a revocable living trust can be changed or even revoked at any time, but another benefit is a living trust has no effect on the heirs’ tax benefits, such as the $250,000 and $500,000 principal residence sale tax break, homestead rights, real estate sales proceeds that are tax-deferred, even stepped-up cost.
DISADVANTAGES
Although there are excellent do-it-yourself living-trust books available, most people prefer to consult a real estate attorney who specializes in living trusts. Costs vary depending on the complexity and the extent of asset transfers into the living trust. Attorneys charge various rates, but most will be far less expensive than costs for probating a will.
A perceived disadvantage can occur if you want to refinance your home. Most Florida home loan providers require taking the title out of the trust so the mortgage or deed of trust can be signed and recorded by the borrower rather than the trustee. But then the title can be transferred back into the living trust one moment later.
