By Dr. James M. Dahle, WCI Founder
I recently made a list of 11 Ways to Avoid Probate which included forming a Revocable Living Trust. This post teaches what you need to know about these legal documents and how they are a key element to your overall estate plan.
What Is a Revocable Living Trust?
A revocable living trust is an estate planning tool. It does not affect your income taxes nor give you any asset protection benefit (aside from making it slightly harder to figure out what you own). Some types of revocable trusts do help you to reduce the estate tax burden if it applies. The primary reason for a revocable trust is to avoid the cost, hassle, and loss of privacy entailed by the probate process.
The 3 People Involved in a Trust
#1 Settlor/Trustor/Grantor
This is you, the person who creates and funds the trust.
#2 Trustee
This is the person who holds title to the trust property and manages its affairs. This is generally you until you die, then someone you appoint in the trust documents.
#3 Beneficiary
This is the person who will receive the principal and income from the trust. It can be you until your death, but is often a spouse, children, or a charity.
Revocable vs Irrevocable Trusts
The nice thing about being the trustee of your own revocable trust is that it is all reversible, at least until the time of your death. So if you change your mind, and want to take something out of the trust, no problema. An irrevocable trust, which doesn't allow you to do this, does provide for some additional estate tax benefits as well as a great deal of asset protection benefits. Of course, that comes with a significant loss of control over the assets.
Cedar Breaks National Monument with my beneficiaries.
Revocable Living Trusts and Avoiding Probate
If you have a will and no trust, many of your assets will have to go through the probate process. This can cost thousands of dollars, require months or even years of time, and make your assets publicly known. Under some circumstances and in some states the probate process can be abbreviated.
Setting up a revocable living trust will cost more than a will, no doubt, but, for a typical physician, it will likely cost less in the end. It can be done by yourself using online resources for as little as $100, but will probably cost $1500-$3000 for an estate planning attorney to ensure it is done correctly.
Even if you have a trust, you should still have a will (AKA a “pour-over will”). This basically says that anything not put in the trust will be put in there at the time of death. You will also need a will to nominate a guardian for your kids.
What Assets Should Be Put in a Revocable Living Trust?
There is no benefit to putting some assets into your trust. Life insurance, annuities, 401(k)s, and IRAs don't have to go through the probate process anyway since you designate a beneficiary when you set them up. Bank and brokerage accounts can also have a “payable on death” option that keeps them from having to go through probate.
Real estate generally has to go through probate, however, so many people will own their home and/or investment properties through a trust. This is particularly useful in complicated families where you don't necessarily want all of your assets to go to your spouse. You can still deduct the mortgage interest from your home even if you own it in a revocable trust.
A surprising number of people form trusts but then never fund them. You generally have to retitle property for it to be in the trust. There is generally some hassle and fees associated with retitling assets.
Most doctors should form a revocable living trust at some point in their life. It doesn't need to be done the week you walk out of residency, but as you accumulate assets without a designated beneficiary, you'll want to establish one as part of your estate plan. Other than a will (needed as soon as you have children even if you're dirt poor) and designating appropriate beneficiaries on retirement and life insurance accounts, setting up a revocable living trust is the next most important estate planning step to take.
Do you have a revocable living trust? Why or why not? What assets have you put in this kind of trust? Comment below!
another nice article. i was starting to worry you were getting a little soft with that last one.
Just mixing it up!
Couple comments:
1) I would put a priority on setting up trusts (regardless of your assets) as soon as you have children and life insurance policies. This should be done before doing investing IMO. I personally set up a revocable trust in residency as soon as I had my first child (in case my wife and I both passed away at the same time; or alternatively if my wife remarried and then died and new spouse kept the money and disinherited the children; or various other nightmare scenarios. Also, it seemed senseless to leave 2M or so to our child in insurance proceeds and not spend a tiny fraction on that to set up trusts that would make sure the millions of dollars would be managed and distributed appropriately. We paid 1700 for our full estate plan including trusts and wills, etc.
2) My understanding was that there could be an asset protection benefit if you put assets in spouse’s trust if you are in high risk occupation (obviously need to discuss this with your own attorney, as I am not one).
We set up a revocable trust over a year ago but have not funded it. I’m not sure when is the best time to start the funding process and what to place in the trust. Partly due to the hassle and expense of funding the trust and partly because once the trust is funded the assets are no longer in our own name and it is harder to deal with the assets. What have you done with the trust you set up?
We are around 40 years old and have the following assets:
1. Main home – still with 7 years left on the mortgage
2. 4 rental homes – still with 13 years left on the mortgages
3. taxable brokerage accounts
4. “designated retirement assets” – life insurance, 403b, 401K, 457b, IRAs, HSA
– the attorney recommended placing the continent beneficiary as the trust
5. 529 – for 1 son
Can you give some specific recommendations on where to get a trust or will started? $100 – $3000 seems like a lot of variance. Can you do a review of each level? e.g. What is needed? Late to the party here but trying to get ducks in a row! Thanks.
$100 is the online will option. $3000 is hiring an estate planning attorney to do it all. It’s hard to do a review without using both services.
Great article.I believe that we should prepare for our future and this would really be a big step for that.BTW, if anyone needs to fill out a “Living Trust form”,I found a blank form here:http://goo.gl/Pb6k2C
is there a particular website or software program you’d recommend to set up a basic will? we have children but not a lot of assets (neg net worth) and would like at least to have the guardianship issue addressed now
There are several but I don’t know them well enough to make a recommendation. The safe recommendation is to hire an estate planning attorney. But for $30 and a simple will, it’s probably worth a try to do an online will.
My wife and I had our will produced online using Legalzoom.com. The total cost was less than $100 and they provide intuitive steps/questions to guide you. You had the option to pay a bit more for personal help (over the phone maybe?) but we found it unnecessary. The process was pretty straight-forward for our relatively simple needs.
I am a little surprised by this one. You are usually quite careful about pointing when the best approach is state dependent. I would suggest that the benefit of a revocable trust is highly state dependent. In my state, transferring assets after a death is at least as expensive and with a full public accounting when a revocable trust is in place. Add the extra hassle to deal with the trust during life along with the extra cost to set it up and I would seriously question the incentive to have one at all, let alone to make it a priority in a state like mine. On the other hand, my understanding is if I lived in California, a revocable trust can be impart a huge benefit.
You are correct, the benefits, just like the probate process, are state dependent. What state are you in?
Before I bought my first home post-kids, I set up a quickie estate plan using LegalZoom. Before that I was dragging my feet for 5 years because of the hassle and expense of estate attorneys. It included a service for an attorney to review and do a phone consult with you for anything that needed cleaning up for your state laws (though the boilerplates they give you are state-specific). 4.5yrs later and still haven’t made it to a “real” attorney. I recommend the online options if you are procrastinating and just want something on the books (esp if you’re about the buy a house), but def make sure an attorney reviews it, esp if it’s at all complicated.
Re: funding there are discussions to be had re: retirement accounts and named beneficiaries, as well as the utility of funding other assets (like certain bank accounts, stocks, HSA accounts, etc. Also the pour-over will would include other large “untitled” assets (like vehicles) and life insurance income — the trustee of your trust can still be in charge of distributing those assets according to the parameters of the trust, even if the assets aren’t named to the trust. This starts to matter if your guardian is not necessarily a “money-person”, if you don’t want everything handed over at age 18, or if you want to be sure certain funds are used in a certain way. In this sense, there is more to your trust than just avoiding probate on your house.
Little trick I’ve employed is that if I have an asset that allows me to name trust as well as contingents, I name trust as primary bene, and my children as contingents — that way, if tax laws change at some point, and it ends up making more sense for my children to get direct distribution vs the trust, the trustee can have the trust “decline” the distribution such that it goes to the children. This is my little fail-safe, in case it’s unclear what would be the best option in the future and it’s too hard to keep up with re-funding/re-naming everything.
Curious the thoughts of others on these topics.
I like the secondary beneficiary idea.
This secondary beneficiary approach is described more fully as cascading beneficiaries in James Lange’s Retire Secure.
Ah yes, an excellent approach.
Just saw this:
https://www.whitecoatinvestor.com/langes-cascading-beneficiary-plan/
Good to know — and here I thought I invented this approach myself, lol! 🙂
I have a question: what do we put on the trust? If I u deteriorating correctly, no need to put personal home or bank accounts or retirement accounts. I own real estate but they are under a Series LLC.
House, cars, expensive toys, second homes, bank account, maybe taxable account etc. Pay on death accounts can also be used.
Not your investment real estate. Put that in an LLC. But the LLC might be owned by the trust. Again, talk to an estate planning attorney in your state.
Why is a will needed once you have children even if there is no estate to plan? I’d like to learn more because I’ve just never heard that before and you said it with such conviction
To determine who will take care of them and who will manage your money on their behalf.
We did it to clarify our wishes for who we wanted to raise our kids if we both died. Of course we talked to all the involved people so it was not a secret.
Another advantage of revocable trusts applies while you are alive: if you become incapacitated, as is common for older people but can happen at any age after accident or illness. In theory, a durable power of attorney should permit someone to take over and manage your assets. In practice, many institutions refuse to honor them. People have found that it is far more straight forward to deal with them as a trustee.
People who suggest it is difficult to transfer assets to a trust have never done it. It is trivial. For securities, open an account in the name of the trust and transfer the assets from your individual account to your trust account. Done.
People who say it is a hassle to “manage” a revocable trust have never done it. You get statements from your bankor broker, report the income on your personal return and pay just as if you owned the investments directly. Again, trivial.
That said, unless you are very early in your career and have little assets, I would not DIY this. An attorney expert in estate planning will bring up many details that have never occurred to people who don’t do this full time. The attorney will also guide you through which assets should be held how based on individual and family circumstances, nature of assets owned and your state law.
If you have kids and life insurance, simply leaving the death benefit is not much of a solution. If minors, then their guardian would have to manage the money and turn it over to them when they turn 18. You can address this with a trust created in your will being the beneficiary. Similar issue with retirement accounts. You make the trust the beneficiary, not the kids.
How difficult probate is varies by state. It is always something, so having a revocable trust can save some hassle and money. If you own real estate outside of your home state having it in trust can avoid ancillary administration, which can be time consuming and expensive.
In effect, by putting things in trust during your life you are doing now what someone else, your survivor, would have to do at your death. Better to handle this now than waiting. I look at it as cleaning up after dinner myself, or going to sleep with the kitchen a mess and leaving someone else to clean up if I die overnight.
Whether you should put your house into the trust is state dependent. If you are married and live in a state that permits tenants by the entirety ownership then there are major asset protection advantages for the TBE.
POD is a terrible estate plan. People have created problems by leaving no money in their estates to pay final bills or even to meet bequests in the will. POD also has nothing approaching the flexibility of proper estate planning. Have minor kids? POD means the money goes to them, with a guardian until they are very young adults, then they can do with it what they want.
I would echo the comments about the benefits of a Trust over a Will with a DPOA (Durable Power of Attorney). Over the past three and a half decades, I have seen firsthand what families have gone through to try and get a financial institutions to accept a DPOA which was created by a private estate attorney. They all want you to use “their” document. The problem is, now that you’re incapacitated, you can’t execute any new documents. Bringing in the Successor Trustee can literally be done the same day, in the case of a Trustee’s resignation, or in a couple of days, if you have to get the Trustee declared incompetent. In a situation where an individual passes away, you need to wait for the Certificate of Death before appointing the Successor Trustee, however even though many states have a much smoother and quicker probate process than my home state of California, the delay can still be several months and in the meantime, someone needs to pay the mortgage and fix the leaky roof and get the tuition checks off to college, which can be done very quickly and smoothly by a Successor Trustee. Often the entire “delay” after death takes no more than 10 days to two weeks. Many people focus on the fact that a Will can do almost everything that a Trust can do, if you die, but sometimes life isn’t that neat.
I met with an estate planning attorney and he recommended a revocable trust. He also recommended each my wife an I have separate trusts for anonymity purposes as well if something were to happen to one of us, and then a separate trust for all the kids etc.. Just trying to wrap my head around the purpose of the trust if I dont need to put most thing in it such as investment, retirement accounts except for maybe the house.
Separately, if I plan to begin a real estate in investing portfolio as a passive investor only or LP, and considering forming a separate LLC for this purpose how to I meld the estate plan trust and the LLC? Do I put the LLC in the trust, or make the trust the beneficiary?
Thanks in advance
Duke
Geez, if I had an estate planning attorney I was paying, I’d expect him to answer those questions.
LLCs don’t have beneficiaries, but the trust could be a partner in the LLC I suppose and there could be some utility there, but perhaps some reduced asset protection as well. Great discussion to have with the attorney.
If I own 36% of a LLC
Can I put that percentage in my own Revocable trust in CA but LLC is in Utah
Thank you for replying
Can a trust own an LLC? Yes.
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Hi,
We are think of writing a will and have testamentory trust set up for our kids. 1. Is there any benefit of testamentary trust over revocable living trust?
2. Does a testamentary trust help avoid probate?
Thank you
1. No trust costs prior to death.
2. No. That’s the big downside of a testamentary trust.
Thank you for your prompt reply. If we have proper beneficiaries assigned to our bank, investment and retirement accounts and life insurance policies, 1. they should flow to our children avoiding probate, right? 2. In that case, is there any value added in setting up a testamentary trust?
3. What additional value will a living revocable trust provide, assuming we have the right beneficiaries assigned?
4. How do kids inherit our house? Will that inevitably flow through probate?
Thank you.
1. Yes.
2. Sure, for stuff not in those accounts. The main point of a trust for accounts with beneficiaries is that you want some control over the money after you die. So you name the trust as the beneficiary. Not sure if you can do that with a testamentary trust or not. I suspect not.
3. Avoid probate for anything not in the account but owned by the trust and you can have the trust be the beneficiary.
4. Not if it is owned by a living/revocable trust.
We live in TX. have spoken to a lawyer who recommended having a testamentary trust over a living one because of
1. Cost of setting up and maintaining a living trust
2. Probate process in TX is trivial
We own a house in TX and do not have have any property outside of TX.
Do you have any thoughts on having a living trust for our situation?
Not sure I’d give you better advice than an attorney in your state. Probate is easier in some states than others and living trusts aren’t free.
We are leaning towards revocable trust inTX.
1. Do you have any recommendations for good estate attorneys in/for TX? Any estimate on how much it’ll cost to set up and ongoing maintenance costs?
2. I heard you need to fund the trust and it has tax consequences. Do you have any resources to share in this regard? Got to educate ourselves.
Thank you
1) Here’s our list: https://www.whitecoatinvestor.com/contract-negotiation-and-review/ I’d expect to spend thousands setting up the trust and a little each year to maintain.
2) A trust that you don’t put anything into doesn’t do any good. So yes, you need to retitle assets in the name of the trust. Revocable trusts are generally pass through entities, so not too much in the way of tax consequences. With an irrevocable trust you can plan on the trust paying taxes at trust rates.
Hi,
Got a few questions on revocable trust.
1. When it comes to funding the trust, is it wise to do so using business account or personal account? We are thinking about asset protection abs tax consequences.
2. We are planning on making the trust the beneficiary upon our death, where possible. In that case, we do not have to put such assets into the trust yet, right?
3. Accounts like personal accounts, retirement accounts, investment accounts, HSA accounts, and 529 plans, where we’ve already designated our kids as beneficiaries, do we still have to put them inside the trust or add trust as the beneficiary upon our death?
4. For certain assets (e.g. safe deposit box at the back) that can’t be put into a trust or we can’t assign beneficiary to, probate seems to be the natural default course. If any asset goes through probate, does that mean all our assets in our estate will also go through probate?
Thank you.
1. Personal unless it’s some really weird situation.
2. No. But you do have to name it as a beneficiary. Any assets that don’t have beneficiaries (home, trust, checking account etc) should be retitled in the name of the trust.
3. Either can be right depending on whether or not you want to put more requirements on that money (like they don’t get it until they’re 40). If so, leave it to the trust. If not, they can be listed as direct beneficiaries.
4. Why can’t the asset be owned by the trust? Certainly the safe deposit box can be rented by the trust and the trust can have a bank account. No, only assets that are not owned by a trust or covered by beneficiary designations go through probate.
We are about to write a will and create a trust- likely a revocable living trust.
We have designated beneficiaries to all bank, brokerage, 401k, 403b, HSA, and 529 accounts. Life insurance policies have beneficiaries designated as well. So these assets are already probate protected.
What remains are the following:
1. Our primary residence. Planning on deeding it to the living trust upon our death.
2. Have some precious metals in a safe deposit box at a bank that doesn’t allow to designate a trust as a beneficiary. I can only add multiple people to have access to it. But in an event when all those with access are gone, how do our kids access to the safe deposit box without going through probate? Do you have any suggestion?
3. I have a business bank account to which I cannot add beneficiaries. Can that account be brought under the trust? If so, how? Would like to avoid it being probated.
4. Will all assets via pour over will go through probate?
Thank you
1. Why wait until death?
2. Can the trust itself own a safe deposit box? Do you really NEED to own physical gold until death?
3. Can the trust own the business?
4. Yes. Which will move it into the trust.
If you want to avoid probate, move the assets into the trust before you die.
Hi,
We are on the process of setting up a revocable living trust.
1. We’d be deeding our house to the trust. We should still be able to claim interest and taxes as Deductble, right?
2. We use part of the office as home office. Will deeding the house to trust have any impact on home office deductions?
3. We’d be adding the trust as beneficiary to our bank accounts, brockerage accounts. However, is it recommended to add the trust as beneficiary to retirement accounts (401k, IRAs)? My attorney asked to not add trust to retirement accounts.
4. What are the tax consequences of setting up a living trust? Do we need to file taxes for it now?
5. Once we are gone and assets flow into the living trust, does that mean our kids will owe taxes on those assets at that point?
Thank you