Distinguishing the revocable living trust from the will-based estate plan
You’ve likely heard finance experts say it. In fact, Suze Orman wrote about it in the July 2015 issue of the Costco Connection. It is this piece of estate planning wisdom: “A revocable living trust is a document all families should have.” Is this true? Do you need a revocable living trust here in Washington state?
The two primary methods to pass property to your heirs are the Will and the Revocable Living Trust. Most of us are familiar with the Will. But, the RLT sounds so interesting, exotic and esoteric. Do you need one?
First, let’s understand the RLT. It is a separate entity. In a sense, it is like setting up your own corporation. The attorney drafts the shell (the trust), and you transfer in all your assets into the trust. For example you deed your house from Beau Ruff to Beau Ruff, Trustee of the Beau Ruff Trust dated January 1, 2016.
Now, Beau Ruff is not the owner of the house any longer, but Beau Ruff — in his fiduciary capacity — is the owner of the house. And the RLT dictates how the trust is administered during life and death. Largely, during life, you would have unfettered access to the trust and its assets, just as you have access to your assets without the trust.
Does the RLT offer advantages over Will-based planning?
For income tax purposes, the RLT is a grantor trust, meaning it is treated as if the trust didn’t exist at all. This means there is not a single income tax advantage or tax planning opportunity to the arrangement.
The Beau Ruff Trust doesn’t die like Beau Ruff eventually will. This means that the property in the RLT is not generally subject to the dreaded “probate.” People often fear that word — probate. Most aren’t really sure what it is, but they want to avoid it at all costs. With a properly structured RLT, probate is avoided. But, in Washington, the probate process is much simpler and less expensive than other states. It is not a process to be feared.
Further, the RLT is administered through a process called “Trust Administration.”
Since about 2013, the administration of a RLT though the trust administration process is substantially similar to the probate process for a Will. For most people, the perceived advantages of avoiding probate are not realized.
The Will is generally simpler to draft, less expensive and less complicated. And, to the extent the RLT is not properly ‘funded’ (that it, all the assets must be properly titled in the name of the trust), then there is the possibility you would go through both trust administration and probate to properly administer the estate.
There is no estate tax savings when comparing an RLT and a Will, with associated testamentary irrevocable trusts.
There is no creditor protection for an RLT above and beyond that achieved with a Will-based plan (with associated testamentary irrevocable trusts).
The Will is public, so it is filed at the county courthouse upon death. The RLT is typically not filed at the courthouse. This privacy is typically of limited value. Most people do not venture to the courthouse to read wills. And, if someone does happen to read a will, it is usually pretty bland. In some cases with celebrities or politicians or sensitive bequests, like ‘I give $1000 a month to my son John Smith who is a meth addict, but only so long as he can pass a urinalysis exam to show he is clean of meth at the time of distribution,’ the privacy might be important. Most people don’t find value in the privacy proposition offered by Trusts.
So, the RLT costs more, it is more complicated to set up, the advantages so far seem small. Why would anyone set up the RLT?
In my opinion, there is really one major factor that weighs in favor of the RLT- the amount and nature of real property owned outside of Washington. If there is a lot, consider the RLT.
If there is not, you are probably just as well off with a Will-based estate plan.
Ask your trusted estate-planning attorney which he prefers. About 90 percent of the estate plans I draft are Will-based estate plans. For myself and my family I chose a Will-based plan.
You don’t want to confuse the RLT with other types of trusts, like irrevocable trusts, which can have real income tax, estate tax and creditor protection attributes that don’t exist in the revocable variety.
Also, please note that other states’ laws are different and in other states you can achieve real creditor protection through a RLT and avoid expensive probate costs.
[panel title=”About Beau Ruff” style=”info”]
Attorney Beau Ruff grew up working for his father at Ruff’s Giant Burgers. He graduated from Kamiakin High School and obtained both his bachelor’s degree and Juris Doctor degree from Gonzaga. Ruff also has a Master’s degree in Taxation. After law school, Ruff served as a Judge Advocate General’s Corps in the U.S. Army for four years, including a tour to Iraq for which he was awarded the Bronze Star. Beau later practiced as an attorney with the law firm of Leavy, Schultz & Davis, P.S., where he focused on business planning, estate planning, and taxation. In January of 2016, Ruff joined Cornerstone Wealth Strategies in Kennewick. Beau is the President of the Tri-City Estate Planning Council.
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