If I could think of one of the most common estate planning questions we are asked, this would be it. So, what's the answer? The short answer is - it depends. In this blog, we'll dive into the top four myths we hear about revocable living trusts. By discussing and debunking these myths with clients, our clients often find that a properly drafted Will accomplishes their specific goals far more than a revocable living trust (and saves them money too).
Before I jump into these myths, let me first explain what a revocable living trust is. A revocable living trust is a living document that is set up now, while you are alive, to allow you (the Grantor) to continue to control your assets during your lifetime and direct where your assets should go after you pass away. The term "revocable" means that the trust can be revoked. (Conversely, clients are sometimes familiar with the term "irrevocable". This means that the trust cannot be revoked or changed and any assets that you move into the trust become the property of the trust.)
Myth #1: I want to avoid probate. This is by far the most common myth we hear from clients. First, the cost of probate in Montgomery County and Bucks County is typically very low compared to the cost of drafting, funding, and maintaining a trust, and the probate process in Pennsylvania is not very cumbersome. This is not true in all states so in some states avoiding probate is a pressing concern. Secondly, a revocable living trust does not avoid probate unless you move all of your assets into the trust, a crucial step that is commonly started, but not completed. It's important to note that avoiding probate can also be accomplished by naming beneficiaries on your assets (when appropriate) to direct your assets to pass directly to your beneficiaries at the time of your death.
Myth #2: I want to avoid estate and inheritance taxes. Setting up a revocable living trust does not avoid estate and inheritance taxes. Period. This is one of the most common claims scammers use to pressure you into making a trust and it is entirely untrue. As far as the IRS and Department of Revenue are concerned, your assets in your trust still belonged to you, and therefore are subject to these taxes. This is because even after moving all of your assets into your revocable living trust, you still had the ability to change or revoke the trust during your lifetime. Simply put, if you can touch it, so can they.
Myth #3: I don't want the State to get all of my money if I need to go into a nursing home and Myth #4: I don't want creditors to be able to take any of my money. I'm addressing these next myths together because the explanation is the same for both. Your revocable living trust does not protect your assets from the State (typically for Medicaid planning) if you go into a nursing home, nor from creditors. As I explained in Myth #2, your assets in your trust still belong to you after you move them into the trust. Therefore, for the purpose of calculating your assets if you need to go into a nursing home or evaluating your ability to pay creditors, your assets are still yours. Once again, if you can touch it, so can they. I(Conversely, if the assets are moved into an irrevocable trust, they can be protected from these claims because you relinquish ownership and control of those assets when you move them into the irrevocable trust. This is a tool that is only used in very specific circumstances).
I will note quickly that even though having a revocable living trust won't protect you or your estate under these circumstances, proper titling of your assets and other planning tools may.
After reading this blog, you may be thinking that a trust isn't right for you after all. The truth is, estate planning is complicated. It should be tailored specifically to you, your needs, and the needs of your beneficiaries. So, going back to your question "My [friend, neighbor, sister, etc.] told me I need a revocable living trust. Is that true?", the answer is still - it depends. There is no one-size-fits-all solution despite the many DIY websites and programs out there. You should be aware of scams that claim trusts are the solution to all of your estate planning concerns.
Before making any decisions about whether or not a trust or Will is right for you, and before spending thousands (yes, thousands) of dollars on a document that you may not even need, you should consult with one of our attorneys. There are certainly circumstances where these trusts are the best estate planning tool and should be utilized. We can work together to understand what your needs and wishes are, and determine which vehicle is appropriate for you. We look forward to working with you.