While we hope the urgency isn’t immediate, it’s always important to have one’s estate in order, lest incomplete or ineffective planning ends up pitting child against spouse, or family against corporation. In the “ounce of prevention” category, a well-designed Revocable Living Trust (RLT) can help. And yet, I often hear successful professionals and others say that they don’t feel they are “rich enough” to have one. That’s too bad, because they may be missing out on a valuable wealth management tool for themselves and their loved ones.
What Is an RLT?
An RLT offers you the opportunity to define today how your assets will be administered while you are alive and well, if you become incapacitated, and ultimately after you pass. As the name implies, it is:
- Revocable: “Revocable” means you can change it or even eliminate it anytime you’d like while you are still alive and not incapacitated.
- Finite: The “Living” part means that the trust is in effect for a defined period of time, such as during your lifetime or the lifetime of your children or other beneficiaries. Although some RLTs are designed to remain in effect for multiple generations, at some point, they dissolve.
- Structured: The “Trust” component means the assets you place in your RLT are owned by the trust instead of by you … although, typically, you are the primary trustee, with full control over its operation.
There’s another line of questioning I often hear from those who have appreciable assets, but who remain under the federal estate tax exemption ($5.43 million in 2015). It goes something like this: What’s the point of placing my own assets in a trust that I control? Why not just hold them directly or with my spouse in joint tenancy, and pass them onto my heirs from there?
We believe that one of the biggest misperceptions about whether to engage in estate planning to begin with is that it’s only for those seeking to avoid “the death tax.” In reality, whether or not estate taxes are an issue, there are still a number of reasons that estate planning in general and an RLT in particular may make sense for you and your family.
Efficiency: Compared to executing an RLT, traditional probate can be considerably more time-consuming and potentially far more costly. And, while it is possible to avoid probate without establishing an RLT, the arrangements may not cover key decisions that need to be made should you become incapacitated.
Costs: $2,000–$4,000 set-up costs for a typical RLT is not chump change, but the expense pales in comparison to what it can cost to settle your estate after the fact. It’s not uncommon for those costs to run as high as 5 percent of your assets. If your intended beneficiaries must resort to litigation to get the job done, the sky can become the limit. And that’s not even considering the time and emotional tolls involved.
Privacy: Unlike probate, which is a very public proceeding with public records maintained, your RLT decisions are kept private, keeping others out of your business.
Effectiveness: An RLT helps ensure that your assets are distributed based on your documented intents, instead of by a judge assigned to rule on your probate proceedings.
Flexibility: Because an RLT is revocable, you can change its terms; add newly acquired assets; add, change or remove special provisions for particular assets; and cover scenarios where you may become temporarily or permanently incapable of handling your own affairs. You can designate secondary trustees, asset management preferences, and competency ruling procedures – before a loved one is left to anguish over what you would have preferred; or, worse yet, is left out of the decision-making entirely.
Enacting Your RLT
While a well-crafted RLT can be a powerful estate-planning tool, there are a few caveats to bear in mind.
Death and taxes: First, it’s important to emphasize that an RLT is not necessarily a tax-management tool. The IRS disregards your RLT for tax purposes, which means that you continue to file your annual personal income taxes in the same manner as before. While establishing an RLT shouldn’t be a tax burden for you, neither is it designed to help you avoid taxes. (An RLT can provide for an effective step-up in basis upon inheritance, potentially reducing your beneficiaries’ income taxes. As with any tax planning, however, it’s best to consult with a tax professional before determining a prudent course for you and your heirs.)
Your trust and your assets: Having a trust in place without transferring assets into it defeats its purpose. Like a car that’s low on gas, an empty or poorly funded RLT won’t get you very far. It’s important to fund your RLT on initial set-up by moving all relevant assets into it, such as checking, savings and investment accounts; insurance policies; your home; business ownerships or interests in LLCs or other corporations; and other significant personal assets.
Maintenance costs and activities: As touched on above, expect to incur upfront costs as well as ongoing expenses to ensure that the trust remains relevant to your evolving circumstances. A brief, annual review is warranted, to ensure that new accounts and properties are added over time, with closed accounts and disposed assets removed from the paperwork. Another good idea is to sign updated powers of attorney approximately annually, to help ensure they remain enforceable when needed.
Benefiting From Your Estate Planning Team
There are additional details to bear in mind, such as how or if to designate retirement accounts into your RLT, where minimum distribution requirements may be lost. Suffice it to say it’s important to work with a professional estate planning attorney to ensure that your intentions are translated into proper, legal structure. He or she should also help ensure that all upfront and ongoing documents are prepared and signed, with assets transferred into your trust in a timely manner.
Better yet, if you have an ongoing relationship with a wealth manager (such as yours truly), he or she can help bridge gaps and identify opportunities for you and your attorney, with whom you may be meeting less frequently. As a team, you, your family, your estate planning attorney and your wealth manager can best devise, implement and manage a plan to address three simple words in your life, and the stress related to resolving them: Who Gets What.