Do you need a living trust in your estate plan?

I recommend the use of a living trust, also known as a revocable trust, if the nature or amount of your assets will require that your estate go through the probate process.  Probate is the legal process through which a deceased person’s estate is distributed to heirs and designated beneficiaries and any debts owed to creditors are paid.  In probate, property is distributed according to your will (if you have one) or according to your state’s laws of intestate succession (if you don’t have a will).  Probate requires that the administrator of your estate (commonly known as the executor), file your will with the court, where the will must be proven to be valid.  Then, all the deceased’s property is inventoried, properties are appraised, and debts and taxes are paid.  At that point, the remaining assets are distributed to the beneficiaries.  This process can take, on average, six to nine months or, in some cases, if there are disputes as to the validity of the will, many years.  Often the executor will hire an attorney to help them through the probate process.  In Illinois, attorney fees for a relatively simple estate (no disputes and an active executor) are likely to be in the range of $6,000 (up to $7,500 may be paid from the estate).  Even a somewhat complex estate is likely to cost much more. In Iowa, an attorney is allowed to charge up to 2% of the value of the estate over $5,000.  

Many states have recognized that probate can be a burdensome, time consuming and expensive process.  In Illinois, if an estate is worth less than $100,000 with no real estate, the executor may file a simplified Small Estate Affidavit in lieu of the probate process.  In Iowa, you can file a Small Estate Affidavit if the estate is worth less than $25,000 and has no real estate.  A summary probate process is also available in Iowa if the estate is worth less than $100,000. If one of these processes can be used, probate is avoided (or greatly simplified) and the time and expenses are reduced. 

A revocable trust does add a layer of complexity and expense to the estate planning process.  So, the first thing I do with clients when determining whether to recommend a revocable trust is evaluate whether their assets will pass through their wills or whether they will pass via other probate-avoidance devices.  For example, insurance policies pass directly to the beneficiary of the policy.  Bank accounts may be owned jointly or have transfer-on-death features.  Similarly, many investment accounts and retirement plans have beneficiary features and, therefore, pass outside the will.  Many people’s assets fall into one of these categories, so that the assets required to pass through the will are relatively few and small in value.  For example, a young, heathy couple may have assets consisting of joint bank accounts, insurance policies and retirement accounts and a home owned jointly.  In such a case, the only assets passing through the will are the deceased’s personal property (clothes, home furnishings, jewelry, automobiles, etc.).  Unless, both spouses die at the same time, the family home will pass to the living spouse. In cases such as these, unless the clients want to do a trust at this time (anticipating a change in circumstances or growth in value of probate assets), I would not necessarily recommend a revocable trust.  

Many people wonder why a revocable trust will help them avoid probate.  A trust is a particular type of intangible legal entity (you can’t see or touch it, but it exists).  A trust requires a grantor (the person who creates the trust and transfers property), a trustee (the person who manages the trust) and a beneficiary (the person who is entitled to benefit from the trust property).  With a revocable trust, during a clients’ lifetime, the client is the grantor, the trustee and the beneficiary.  This is why, during your lifetime, as the grantor, you have the power to transfer property in and out of the trust, including buying or selling property.  As the beneficiary, you benefit from all the trust’s assets and, as the trustee, you have complete control over the trust. You can determine to revoke the trust if you want, which is why it is called a revocable trust.  There are other types of trusts that are irrevocable, and they are used for different purposes.  However, with the revocable trust, there is no concern that, during your lifetime, you will lose any control over your assets.  Any property granted to the trust simply becomes titled in your name, as the trustee of the revocable trust.  

The trust allows you to avoid probate by permitting you to name a successor trustee and successor beneficiaries.  When you pass, the person named as your successor trustee (for couples, this is most commonly your spouse, if living) becomes the new trustee and the persons named as your successor beneficiaries, receive your trust property.  A trust gives you the flexibility to keep your property in trust for your successor beneficiaries (like your spouse or minor children) or to pass your property free from the trust (like to your grown children or other people or organizations).  All of this is accomplished immediately upon your death by virtue of the trust documentation and without having to go through probate.  In order to retitle your assets, if necessary, the trustee will just have to provide your death certificate and the trust documentation.  It is still a fair amount of paperwork, but the trustee can often handle this alone or with just a small amount of assistance from a lawyer and in just a few weeks.  

Despite the additional complexity and initial expense, I do recommend a revocable trust in the following situations: 1) where the value of the probate estate is greater than $100,000; 2) where the client owns real estate (except for a home owned jointly), such as investment property or a farm; 3) where the client owns a small business; 4) when any of the proceeding are likely to be true in the near future (due to an inheritance or change in assets); and 5) in borderline cases (such as when probate assets are right around $100,000) where the client is in poor health.  Use of the revocable trust in these situations will allow you to use one of the simplified probate procedures.  You will still have to have a will because there are certain assets you do not generally want to transfer to a revocable trust, like the family automobile, but the time and expense will be greatly reduced.  There are some exceptions to this, though, like if your business has some debt problems or if you are in the middle of a divorce, so you should always talk to an attorney.