Revocable Living Trust: Right for You?

A revocable living trust is useful for several reasons. Is extra cost worth it to you?

Have questions about what's right for you?

Helping you determine if a will or a trust would be more useful to you is a crucial part of estate planning these days. 

In general, but not always, using a Living Trust can be a better estate planning approach. When we talk, we'll discuss your wealth situation. With honestly and knowledge, I can recommend a trust or a will I believe fits you well. And delivers benefits.

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REASON #1. Avoid probate

Through the media, people know that trusts 'avoid probate.' For many, it's the only fact they know about it.

Yet that fact is only one of several benefits over a will. To understand more, start with this:

After you die, someone makes a list of the things you owned at death. Maybe a spouse does the list. Or a child. Or a friend.

Then, if you owned any asset in your SOLE name, your Will will need to pass through the court system. We call that process 'probate'.

Why do it? Because financial institutions (holding the money) will insist that a probate be done before they hand over the funds. The financial institution wants to make sure it's delivering the money to the right person.

If you've signed a will, the person you've named in the will (personal representative or executor) will file the will in the probate court. Along with lots of other paperwork. They are filing to 'probate your will.'

After the will and other papers are filed, a clerk and probate court judge will decide if all the paperwork is adequate. Until the documents are stamped, you don't have a will. Instead, you have stapled pages. So, it's a 'will' after the judge says so. By the way, it's been this way for a long time

In Massachusetts, the court will give the person filing the will a 'letter of authority.' This is what a financial institution wants to see before it hands over the money.

For example:

There's a bank account in the sole name of 'Joel Bernstein'. Even my spouse cannot get those proceeds until probate of my will is done.
Yet probate only affects assets in my sole name, including real estate in my sole name.

Difference of a living trust

Or you can arrange to create a different type of estate plan. You can create a living trust. It looks like a will but is different.

After you sign a living trust, you can change the name on the account to your living trust. Try 'Joel Bernstein, Trustee of the Joel Bernstein Living Trust'. If married, likely both you and your spouse will be co-trustees of your trust.

The trust will own the asset while you are still living. (Actually the trustee becomes the legal owner, but let's keep it simple.)
The trust directs to whom to give your assets. The trustee has the authority to do that.

Unlike a will that needs probate to be in force, the living trust is in force when you sign it.

The trust will own many but not all of your assets.

More about how a Living Trust works

In the living trust, you appoint the 'Successor Trustee'. And instructions what to do with the assets after your passing.

Without court involvement, the trustee follows the instructions. These can be simple or detailed, depending on your situation.

Your living trust can instruct the trustee give the asset directly to someone after death. This is 'outright.'

Alternatively, for one or more beneficiaries, you can tell the trustee to hold the money for a time period after your death. And to use if for the beneficiary. This is a continuing trust arrangement. We call it a 'subtrust.'

Division of assets after you die

Many times you will instruct the trustee to split the assets into several shares after you die. The shares can be equal, or unequal.

There may be estate tax benefits of keeping the trust in place for the lifetime of a surviving spouse.

Or a beneficiary may have an issue, unresolved at your death. Out of control drugs, alcohol, spending, lack of ability to manage it.

If held in a subtrust after your death, the beneficiary does not then get the asset outright.

Instead, the trustee continues to hold the asset for the benefit of the beneficiary. The trustee can decide what is good or bad for the beneficiary.

A trust provision can, if you wish, add the element of TIME to your estate plan

Abit simplified, you control the asset even after your death to some degree.

It's very flexible. You can even appoint the same person as the trustee as one beneficiary. It's common for a spouse or child to be both the successor trustee and its current beneficiary.

It's about more than avoiding probate

Going through probate is not the end of the world. In real life, it's usually a delay. A bit costly and confusing. But hardly a root canal. So, 'avoiding probate' should not be your sole estate planning goal. As clear as I can say it: Not the only reason to get estate planning.

There are other things to consider before deciding that a trust is right for you in Massachusetts.

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"A revocable living trust allows your heirs to avoid probate entirely and keeps you in complete control of your finances while you're alive. You can always make changes to what's in the trust and to how you'd ultimately like it managed or disbursed."

- Suze Orman

REASON #2. Reduce estate taxes

We face estate taxes in MA, unlike many other states. For estates over $1 million at death, this tax may cause you to pay money to the state.

BUT, if you are:

married
live in MA and
own more than $1 million in wealth

you could almost always save estate taxes by using MA Living Trusts.

How it works

In a Living Trust, you can tell the Successor Trustee (whom can be a spouse) to:

On your first death, put $1 million in assets (real estate, accounts) into a separate account. We'll call it a 'Family Trust'.

Tell your Successor Trustee to:
- annually give the income to your spouse and
- annually give principal needed to your spouse and children.

Tell the person who will be the trustee AFTER your spouse dies not to pay estate tax on the $1 million after your spouse later dies. And this is legal.

By using this approach, you can reduce the taxable estate of the survivor by $1 million. And so the estate tax will be lower.

And, if your estate is than $2 million, you can add more tools after you get a living trust in place, as level 1 planning.

A Living Trust can lead to reduced estate taxes, for some people. Knowing who will benefit and explaining all this is part of estate planning.

REASON #3. Protect a beneficiary from overspending

You may want to leave money or assets to a person who can't control their behavior. Or can't manage money. Or has special circumstances.

Here are some reasons why it might not be wise for a person to receive money or assets directly:

Too young
Uncontrollable spending
A pending divorce
Government benefits
Drug/alcohol problems

How it works

We have historical names for the persons involved. We call the person who controls the money the 'trustee.' The person you want to benefit is the 'beneficiary.' Let's call this arrangement a 'subtrust.' It goes into force after you die. If married, after both deaths.

The subtrust will last for a period of time you consider and choose. You can change the length while you are living. May be until the beneficiary reaches 30. This is the most common type of subtrust provision.

Estate planning also reviews if any beneficiary is receiving government benefits. If the type of benefit depends on the beneficiary having a low level of income or assets, the govt. check may end if you give them a large amount. But some govt. benefits ignore the recipient's income and assets.

You can instruct the trustee to supplement—but not replace—those government benefits. It is a called a supplemental needs trust, or a special needs trust.

Drugs. Alcohol. You may have a child or grandchild or spouse with a severe drug problem. He or she may spend all the money poorly if left directly to them. In little time, before better used.

On your death - instead of giving it to the beneficiary directly (outright) - you tell the next trustee (after yo) to

Continue to hold that beneficiary's share.
Use it for the beneficiary's benefit. Safe, roof, food. More purposes.
Act as brake against abuse of funds.
If the problem ends, the trustee can loosen or distribute the purse.

A Living Trust can protect the beneficiary's interests.

Wills & Trusts—in plain English

Face, don't avoid, death, disability, and taxes. It’s easier than you think.

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REASON #4. You can change the trust's terms

Like a will, you can change the terms of a revocable Living Trust. On the other hand, it is more difficult to change an irrevocable trust.

But remember, even an irrevocable trust can be flexible. Sometimes a second reading of it shows ways to achieve your goals within the trust terms.

REASON #5. Protect future beneficiaries from their creditors

In the U.S. a trust can give a beneficiary protection against a creditor. So, if they get sued, the creditor will be generally unable to get to the assets.

But Massachusetts law does not give this same protection to you if you created the trust. The law calls this a
'self-settled trust'.

So, if you can use either the income or principal, the law doesn't provide creditor protection. Until after your death and the trust benefits others.

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REASON #6. Reduce income tax with an irrevocable trust

For several years I gave lectures on the topic of income taxation of trusts and estates. I spoke to CPAs throughout the country, I can tell you it is complex.

How it works

For irrevocable trusts in Massachusetts, for U.S. taxes:

When a trust distributes income to a beneficiary, the beneficiary pays income tax on it. And the trust does not.***

On its Federal 1041 income tax return, the irrevocable trust gets a tax deduction for that amount. So it does not pay income tax on it.
Income tax savings can occur if the beneficiary pays income tax at a lower tax bracket than you.

*** This is the most general statement one can make. So make sure you talk with a knowledgeable professional about your situation.

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