If you have been searching for information regarding estate planning, you might already be aware of the advantages that an estate plan centered around a revocable living trust can offer. However, you may not be aware of its disadvantages as compared to a Will-based estate plan.
This article reviews the fundamentals of a revocable living trust, including what it is and what benefits it provides, and ultimately explores some of its disadvantages.
What is a Revocable Living Trust?
First of all, a trust is an agreement between the person who creates the trust, the settlor (also referred to as the grantor or trustor), and the trustee, the person charged with managing the trust. When forming a trust, the settlor will transfer title to his or her property to the trust, and the trustee who will manage this property for the benefit of a third party referred to as the beneficiary.
At the most basic level, a revocable living trust can be broken down into 3 main parts:
- Living; and
First, it is revocable by the settlor. Therefore, if at any time you want to terminate, amend, or restate the trust, you can.
Furthermore, the trust is a "living trusts" because it is effective during the settlor's lifetime and he or she can manage the trust while they are alive and able. A revocable living trust will typically become irrevocable on the death of the settlor.
Finally, the trust itself divides the legal and equitable interest of the property within it. The legal interest can be thought of as the name on the title. Whereas, the equitable interest can be thought of as the ability to benefit from the trust property. The division of legal and equitable title allows for the property held in the trust to avoid probate because it is not owned by the deceased person, thereby saving time and money.
Living Trust Benefits
The two most notable benefits of a revocable living trust pertain to costs and time-saving. The cost-saving is derived from avoiding the mandatory probate fees, administrative fees, and attorney's fees. These fees can be represented as a percentage of the estate's value. Conservative estimates put the cost of probate at 3% -8% of an estate's value, assuming there are no contests of the will made by the estate's beneficiaries.
For example, if your estate includes a $500,000 home, you are looking at losing $15,000 - $40,000 of your estate's value to probate costs, right off the bat. It is highly unlikely that you want that much of your estate going to probate and attorney's fees.
The administration of a revocable living trust, on the other hand, does not typically require probate court, which avoids these fees and can save your estate tens of thousands of dollars. Even when you consider the cost of setting up a trust, the trust is likely to cost much less than probating a will.
As it relates to time-saving, it must first be noted that Colorado courts, like courts in most states, are overwhelmed with litigation. Moreover, there may not be enough probate judges in the county where your estate has to be probated. Consequently, transferring your assets to your beneficiaries through probate can take anywhere from 8 months to 2 years. The ability to save your loved ones time and aggravation is a common reason why people often choose to set up a revocable living trust.
The Disadvantages of a Revocable Living Trust
Despite the well sought-after advantages that a revocable living trust can provide you and your family, there are also some disadvantages. Here are a few to consider:
- A revocable living trust is more expensive to set up than a simple Will. This is because a revocable living trust requires more work up front to ensure that the terms of the trust accurately capture your intent and that the trust is properly funded with your property.
- A revocable living trust requires more work to maintain during your lifetime than a simple Will. Refinancing your home, purchasing a new home, and adding new financial accounts and other assets require additional action by the settlor to maintain proper funding of the trust and to keep it properly functioning as a probate avoidance tool.
- A revocable living trust comes with due process concerns. This is frequently overlooked. But, when you use a trust to devise your property, there is some loss of due process. What that means is that there is no court supervising the distribution of your property like there is with a probated will. Therefore, you must trust and rely on your trustee to carry out your wishes per the terms of your trust agreement.
For a more detailed explanation of both the advantages and disadvantages of a revocable living trust and to find out if a revocable living trust can help you achieve your estate planning goals, consult with our experienced Colorado estate planning attorneys through the contact link on our website.