Benefits of a Revocable Trust and The Perils of Probate
We all have had a loved one that transitioned from life to death. The remaining family members must sort through the complex and often frustrating laws governing wills and estates. What is a Revocable Trust? Probate? What do all these things mean? How do I protect my estate? These are all questions that we will answer.
What is Probate?
The word “probate” comes from the Latin word “probare,” meaning “to prove”. Probate – a court-guided process to conclude a deceased individual’s financial affairs.
In the U.S. in 1784 we developed a process to handle or manage the wills and estates of the deceased in Massachusetts. A process patterned after early English religious courts. These courts had jurisdiction over the probate of wills and the administration of estates. In the state of Florida, the Court determines who the proper beneficiaries will be.
The idea that probate is guided by the courts should immediately alert you that it will be an expensive endeavor in both personal time and money.
There are numerous stories of families arguing over the personal property of a deceased individual. Many times these arguments cause irreparable harm to those relationships. Relationship dynamics are often destroyed when you combine distribution of property and money.
Last Will and Testaments are somewhat helpful. However, they there are those who feel they were somehow slighted in the loved one’s Will. This leads to a challenge of the will.
A Last Will and Testament is an instrument designed for the purpose of determining the specifics of distributing the deceased’s property and money. However, the Will is always used in probate.
Lawrence spent his last years lonely and afraid. Arthritis kept him from leaving his Boston apartment. As he became unable to care for himself, Lawrence, in his late 70s, feared he would wind up in a nursing home. He had no close relatives to turn to. Then his friends stopped visiting him, and he didn’t understand why. There was only his live-in caregiver.
In December 1991, a year after his caregiver moved in with Lawrence, the old man signed a will. In this will he left his principal asset—a six-unit apartment building worth well over $1 million—to his new companion.
Lawrence died in 1993, at age 82. His caregiver submitted the will for probate. But then two close friends of Lawrence’s who had cared for him before the caregiver moved in, asked the court to throw out the 1991 will. They asked that the court probate instead a will executed by Lawrence in 1989 that left the building to them.
The legal battle raged for 14 years, going from probate court to appellate court back to probate court and then up again on appeal. The legal fees for one of the parties alone ran into the mid-six figures.
What Could Possibly Go Wrong?
When Liz’s fiancé died suddenly, she had the headache of sorting out his will, alongside his former wife. For almost two estate attorneys visited his home weekly. Billing out at full firm billing rates, the estate ran out of cash to pay the lawyers.
Only when the check book went dry was the probate firm ready to release his real and personal property to the rightful heirs. In fact, the estate was completely drained of its cash holdings (well over $100,000). It was in the hole another $10,000 for attorney billings when the keys to his home were finally turned over.
Those keys cost Liz $10,000 out of their own pocket until such time she could sell some of the inherited assets. In short, the estate was raided of all its cash for “administration fees”. Then it was forced into debt before the probate attorneys decided it was time to let go and declare it “settled”.
The case then became tied up for another several months in probate due to mishandling of the original estate. In the end, Liz owed much more than the total worth of the estate.
Avoiding the Perils of Probate
The Probate Court oversees numerous types of trusts. These include:
- Testamentary trusts: Trusts established by a decedent’s will.
- Inter Vivos trusts: Trusts established by an individual during his or her lifetime.
- Wrongful Death Trusts: Established by the Probate Court. They are for the protection of minors who receive funds from the wrongful death of a relative.
- Supplemental Needs Trusts to provide a higher quality of life for the disabled.
In order to avoid the inherent perils of probate, you can create an irrevocable trust or revocable trust.
The simplest difference between the two is where the assets reside. Assets remain in the grantor’s estate in a revocable trust but move out of the estate in an irrevocable trust. The primary reasoning behind the irrevocable trust is that there are many good reasons for clients to want to move assets out of their estate.
Irrevocable Trust vs. Revocable Trust
In a revocable trust, the grantor maintains ownership of the assets. An irrevocable trust moves those assets out of the trust maker’s hands, and the grantor no longer owns them.
An independent trustee makes all the decisions regarding investments on behalf of all the trustees, which may or may not include the grantor.
However, keep in mind that transferring assets through an irrevocable trust can result in gift taxes owed to the government.
Additionally, the assets in a revocable trust remain in the deceased’s estate. What benefits does a revocable trust have, aside from the obvious one that the grantor can revoke it?
Benefits of a Revocable Trust
Many grantors create a revocable trust to avoid probate, which it certainly does. If the grantor of a revocable trust becomes incapacitated in managing their affairs, the designated trustee steps in. They then handle the assets.
Creating a revocable trust is probably the best way to ensure that your property remains available. It ensures that it will be used for your benefit, should you become physically or mentally incapable of managing your own affairs.
Continuity of management is also possible with a durable power of attorney. However, third parties such as banks, brokers and transfer agents often have more difficulty in dealing with a power of attorney than with a trust agreement.
Also, if you become somehow incapacitated and you have neither a revocable trust nor a power of attorney, you will be headed to court. An expensive, lengthy, and potentially embarrassing court proceeding is generally required to appoint a conservator or guardian. This is required before your property can be used to benefit either you or your family.
Even after a guardian is named, you will still have continued court supervision over the management of investments and disbursements. This can include:
- Annual bond fees
- Annual accounts
- Additional legal fees
- Accounting fees
Allowing a court to have a say in the matter defeats one of the main reasons for a revocable trust: to avoid probate.
The Primary Benefit of a Revocable Trust
The primary benefit of creating a revocable trust is this:
It provides a prearranged way that will ensure the continued management and preservation of your estate and assets, should you become incapacitated.
Another benefit is the ability to provide uninterrupted investment management. Should the grantor become disabled, and after the grantor’s death, you will have that ability.
By transferring assets into the trust’s name, you have no need to re-register securities after death.
In addition, depending on the cash needs and investment objectives of the grantor’s estate, there may be no need to develop a new investment strategy.
It can also set forth all of the dispositive provisions of your estate plan. Due to changes in tax laws, most revocable trusts can be treated as part of the deceased’s estate for federal income tax purposes.
Consequently, a revocable trust is also now afforded certain post-mortem tax advantages. They include reporting income on a fiscal year basis rather than a calendar year.
While there are a few disadvantages that may apply to using a revocable trust instead of a will. However, they are not substantial enough to weigh heavily against the use of such a trust. These arise from the different treatment of trusts and wills under certain property laws.
Is a Revocable Trust Right For You?
Revocable trusts are not necessarily for everyone. Whether a revocable trust is appropriate for you and your beneficiaries depends greatly on your specific needs and circumstances. The advantages of creating a revocable trust usually outweigh the disadvantages. Yet, the decision is not without complications. It requires a thorough legal analysis that considers all the above factors as they affect each individual and family.
Jacksonville Estate Planning Attorney S. Blake Harris is knowledgeable in creating plans that protect his clients’ wealth both during and after their lifetimes.