Should I Have a Revocable Living Trust?
A revocable living trust is an agreement that a trustee (usually yourself) shall hold all the property you transfer into the name of the revocable living trust for the benefit of the trust beneficiaries (usually yourself and your spouse). See RCW 11.120. After your death(s), the revocable living trust transfers the trust assets to those whom you designate as your ultimate beneficiaries. During the lifetime of the persons establishing the revocable living trust (the settlors), and while they are competent to do so, the trust may be revoked. Persons who have a revocable living trust also need Wills, which Wills should direct the probate assets of the settlor decedent to be “poured over” into the trust. Also, decedents need Wills to nominate personal representatives, to create non-intervention, no-bond status for their personal representative(s), and to nominate guardians for minor children.
Revocable living trusts have some advantages, which can be useful to some clients, some non-advantages (misconceptions about possible advantages of revocable living trusts), and significant disadvantages as well.
Advantages of a Revocable Living Trust.
First, a well-administered revocable living trust that contains all the assets of a decedent settlor can avoid the expense of probate. Since the revocable living trust costs money to create and maintain, this advantage is likely a non-advantage. For persons who live in states with expensive statute-mandated attorney’s fees in probate, such as California, revocable living trusts probate cost savings may be so substantial as to warrant use of revocable living trusts. Washington is not a state that mandates the fee paid to attorneys in probate.
Second, a well-administered revocable living trust can avoid the cost of ancillary probates for out of state property. If an estate holds any number of out of state or foreign properties, these costs savings and ease of administration could be substantial, as compared to traditional probate.
Third, a revocable living trust need never enter the public eye, through filing of a probate proceeding or filing of an inventory, and so the privacy of the settlers and their family may be protected.
Fourth, a revocable living trust, in possession of ongoing businesses, may provide for continuity of control and administration upon the death or incapacity of the settlor(s).
Non-Advantages of Revocable Living Trusts.
First, the probate cost savings, which are much-heralded by attorney-drafters of revocable living trusts, are overstated, and the costs of the revocable living trusts themselves much understated. Real estate property titles must be transferred, which costs money, and financial accounts must be retitled, in order to properly fund a revocable living trust. Any omissions in such transfers may necessitate having a probate proceeding as well as a trust, which misfortune maximizes the cost of one's estate plan administration.
Second, revocable living trusts offer no tax advantage. The IRS views property held in a trust managed by you for your benefit as just “your property.” All income passes through directly to your personal income tax return. No tax benefits accrue. A revocable living trust has no impact on one's estate tax obligation under Washington law, nor on one's federal estate and gift tax obligation.
Disadvantages of a Revocable Living Trust.
First, the trust instrument itself costs several thousand dollars and the ongoing costs of maintaining the trust (tax reporting, trustee fees, transfers of real property titles from settlors to the trust) are not insubstantial. In the end, revocable living trusts cost more than simple probates. So, for most clients, revocable living trusts are more expensive than the probate alternative. Probate in uncomplicated Washington estate administrations is relatively inexpensive.
Second, revocable livings trusts are more than 100 pages in length. Their complexity bewilders most settlors. I often speak with settlors who ask me to tell them what their revocable living trust says, after which the settlors tell me they do not what the outcomes created by their revocable living trusts. And, so, the revocable living trust not only costs money to create, but may also cost money to revoke.
Third, the complexity of revocable living trusts leads to settlor errors. Settlors forget to put their refinance paperwork in the name of the trust, and so end up with real property in the name of the settlors, not the trust. Settlors put financial accounts in the name of the settlors, as well as other of the myriad financial transactions of a lifetime of living. When death comes, I most often find that the settlors of a revocable living trust need not only trust administration but also a probate to move assets into the trust. Most settlors cannot hold in their minds for a lifetime after they execute a revocable living trust that they have no assets, but are simply the beneficiaries of their trust assets managed by their trustees (themselves). It is an odd idea, after all. A substantial number of my clients, after full explanation, set me the task of unwinding their revocable living trusts so they can have a Will they can understand.
Fourth, some tax procedural rules are not as liberal for trusts as they are for probates.
Fifth, failing to probate the estates of the settlors fails to take advantage of the short probate creditor claim statute of limitations. For trusts, claims for payment can crop up six years after the settlor’s death. For probates, creditor claims are cut off after four months.
Sixth, the revocable living trust of marital partners can only be revoked by agreement of the partners. Where agreement is lacking, the trust perseveres.
Except for clients who have high need for privacy, complex ongoing businesses, or substantial out of state real estate holdings, Lancaster Law Office recommends the normal Washington probate process for winding up a decedent’s affairs.