Revocable Trust Pros & Cons & Trust Tax Implications
The myths about trusts.
Mistake: believing that trusts are simple and easy, that they save money, and they avoid probate.
For years – even decades – people have incorporated a revocable trust as part of their estate plan. Revocable trusts – or living trusts – can be an important component, to safeguard and manage your property and money both during your life and after you’re gone. They can assist you if you’re incapacitated and unable to handle your business affairs, and they can handle managing the inheritances which you leave to your loved ones.
But, revocable trusts are not, by themselves, the “be all, end all” of estate planning.
They’re good. They’re important. But, they don’t necessarily avoid probate.
While it’s true that a revocable trust is a “will substitute,” that, alone, doesn’t mean you’ll avoid a probate proceeding in the local probate court when you die.
Yes, assets which are already in your revocable trust are “outside” of probate and automatically, by operation of law, descend to – or are held for – the trust beneficiaries, according to the trust document.
But….there are a couple of things which your probate lawyer probably hasn’t told you.
First, the assets in your revocable trust will be used to pay your debts, legal obligations, and expenses of administration. If you don’t have sufficient money in your probate estate, or assets which were in your individual name when you die, then your debts and obligations are paid for by the trustee of your revocable trust.
Ask yourself: who’s going to pay your last electric bill, your final federal income taxes, your mortgage, your condo fees, real estate taxes, and your credit card statements? Your estate will. And, if there’s not enough money in your estate, then the trustee of your revocable trust is going to pay those bills. You cannot simply place assets into a revocable trust and avoid your debts and legal obligations. The bottom line: Revocable trusts don’t necessarily avoid probate.