For many years, there has been a controversy as to whether a will or a revocable living trust is the best estate planning tool. Everyone needs a will. Even if you have a revocable living trust you should implement what is known as a pour over will. From an estate tax perspective, wills and living trusts are essentially identical. Both documents allow you to optimize the use of the federal estate tax credit and marital deduction in the same way. Assets contained in a living trust or in your own name will be subject to state inheritance and estate taxes as well as the federal estate tax. Income derived from assets in either a revocable living trust or in your own name will be subject to both state and federal income tax liability.
So why should you consider implementing a revocable living trust? Assets held in your individual name at the time of your death will be subject to a process which is known as probate. In most states the probate process will last for a period of at least six months to a year. The cost of probating an estate is generally substantially higher than those estates where probate can be avoided. A revocable living trust passes the assets contained in the trust directly to the named beneficiaries without the need to probate the deceased party's estate. This can amount to a substantial savings to the surviving family members if they can avoid the costly and time consuming probate process.
I've always believed that the main reason to use a revocable living trust is because it is a terrific management tool. The person who establishes the trust can oversee and maintain the assets contained in the trust. When that individual becomes disabled a designated family member can immediately step in seamlessly as a successor trustee and continue to manage the grantors day to day affairs. As a collateral benefit, when the grantor ultimately dies the assets contained in the trust can pass directly to the named beneficiaries thereby avoiding the probate process.
One of the negative aspects of establishing the living trust is that it must be funded. The grantor of the trust must retitle all of his or her assets in the name of the trust. Assets such as life insurance, annuities and in certain cases retirement plan accounts may also need to be directed to the trust by a beneficiary designation. The deeds to your real estate will need to be rewritten so that the revocable living trust can become the owner of the property. This actually will be a tremendous benefit for an estate where a person owns property in multiple jurisdictions. If a person dies owning properties in multiple states, the family will be compelled to open probate estates in two or more different jurisdictions. This can greatly increase the cost of handling one's estate.
In certain cases, the probate process may actually be desirable. If the family does not get along, it forces the personal representative to communicate with all family members who are beneficiaries of the deceased's estate. The court of jurisdiction will oversee the process of assembling the assets of the estate and the distribution thereof to the beneficiaries named in the will. Many individuals have few if any close family members. It may be in their best interest to compel their estate to be distributed with state supervision. One estate planning strategy does not fit all! For those individuals with estates over $1 million of probatable assets, a revocable living trust may be your best option. A top flight estate and elder law attorney can help guide you through the decision making process.