One of the first legal documents people recognize in estate planning is the will – and you have one, so you should be good, right? Or maybe you’ve heard about revocable living trusts, but you aren’t quite sure what these things are or how important these will be in aiding your family should something happen to you. Below are some commonly asked questions about wills and trusts that Rowen N. Young advises in his law practice and on his radio show:
What is a Revocable Trust? Why is it better to have one than just having a will?
A Revocable trust, also called “living trust”, “inter vivos trust,” or “revocable living trust,” is a document used to solve a variety of problems that wills do not. A revocable trust is a document you create during your life that gives directions on what happens to your property. Similarly to a will, a trust also essentially answers the questions, “who gets what” and “who is in charge” of your property after you pass away. A revocable trust helps plan for mental disability or incapacity, protects the privacy of your property and beneficiaries after you die, and most advantageously helps avoid probate.
What is Probate and why do I want to avoid it?
Probate is officially proving the validity of a will, so its terms can be carried out. To do this, a will must go through the courts in a probate process, which generally may take several months to several years, expose your assets to the public, and costs thousands of dollars.
As with any legal proceeding, opening a probate matter generally includes the following: notifying creditors and publishing legal notices, the court overseeing how the executors of the will distribute assets and how to take creditor’s rights into account, petitioning to appoint a personal representative or issuing letters of administration for handling assets, addressing other claims or lawsuits against the estate, selling property if necessary to effect the correct distribution or pay debts, factoring in estate or gift or inheritance taxes if the estate exceeds certain thresholds, paying ordinary taxes such as income tax on interest and property taxation out of the assets, and addressing other types of transfer that may be applicable like transfer on death or death designations.
How can I avoid Probate?
Property put into a trust allows you to maintain control over your property while avoiding Probate. However, you need to make sure everything you own is held in trust form. Any part not in trust will still be subject to Probate – including new houses, cars, and bank accounts opened. You will need to remember to put new property in trust or arrange your new assets to avoid Probate.
What is the difference between a revocable trust and an irrevocable trust?
Both types of trusts will control the property and assets in the trust according to its terms.
Generally, revocable trusts can be changed. In other words, you can take things back and regain control over the property you put into a revocable trust. The option to revoke your trust is nice, but it comes with some tradeoffs. Property put in a revocable trust is still considered owned by you, which mean a few things: 1) your creditors can still reach your trust assets after you die, 2) they will be subject to death taxes and estate taxes since they are still your property, and 3) your assets will be yours for Medicaid purposes.
However, irrevocable trusts generally cannot be changed – you cannot change your mind and cannot take your property once placed in an irrevocable trust. In essence, you have given your assets away and cannot get them back. This means a reduction in your estate taxes, asset protection for the trustmaker and the trustmaker’s beneficiaries from creditors.
Generally, revocable trusts turn in to irrevocable trusts after you pass away. This makes sense – once the person who can revoke the trust has passed away, he or she is no longer alive to make any changes (so you can’t take it back).