How does one protect assets before or during a divorce? Common steps to divorce asset protection for gifts, family heirlooms, and real estate. You will need to consult with a divorce lawyer, professional appraiser, and estate planner. Definition of Equitable Distribution and fair market value of assets in divorce.
A common question considered by individuals who are preparing their estate planning is whether a will or a living trust would be a better option to serve their estate planning needs. Everyone has slightly different goals and nobody has the exact same needs. There are many benefits to choosing a Revocable Living trust instead of a will, but there are also some drawbacks. Which is better is a very personal decision. Many people use both a will and a trust to ensure that their assets are distributed according to their wishes, but they are very different. Still other people use an irrevocable trust instead of a living revocable trust. Here are the highlights of the top 5 pros and cons of the living revocable trust:
1. Revocable Living trusts do not go through probate – Pro
One of the primary reasons a person might choose a living revocable trust to distribute his or her estate is that trusts allow the heirs to avoid going through probate. Probate is the legal process of distributing assets under a will, and it requires going to court. The administrative costs associated with probate can be as high as six to ten percent of the estate’s value, which could get expensive when an estate has substantial assets. If there are challenges or issues it is likely going to be closer to ten percent than six.
Revocable Living trusts do not avoid all costs associated with probate – Con
The estate must still pay state or federal estate taxes or other taxes, which means that the administrator may have to hire an accountant or tax attorney to assist. An estate attorney may still be needed to assist with transferring assets from the revocable living trust to the beneficiaries. The successor trustee may also be entitled to a fee for the time spent administering the trust.
2. Faster distribution of assets – Pro
The law requires that probate be completed in each state where a person owns property at the time of his or her death. Thus, the more states where a person has assets, the more expensive probate will be. Probate can also be time-consuming, especially if the process must be completed in several states. Therefore, having a revocable trust instead of a will may reduce the amount of time that passes before assets are transferred to the Settlor’s heirs.
Revocable Living trusts carry upfront costs – Con
There are still some costs associated with establishing a trust. It may be necessary to pay an attorney to create the trust, write necessary documents, and transfer ownership of personal assets into the trust. The process could cost anywhere from $1,000 to $2,500. There may also be costs associated with settling the estate if the heirs or beneficiaries to the trust dispute the asset distribution or validity of the trust documents. The estate may have to pay to value assets in the trust or settle creditor claims against trust assets. Therefore, establishing a trust doesn’t avoid one hundred percent of the costs of probate, but many individuals could likely still save money.
3. Revocable Living trusts’ distribution is private – Pro
Another big advantage to avoiding probate is that probate proceedings are public. A person who wishes to keep his or her finances private and protect the heirs from public scrutiny may prefer to create a revocable trust instead. The contents of trust documents are not public record. If it becomes necessary to probate assets not included in the trust, the probate records would note the existence of a trust, but not the contents or the value of the assets. Many people choose to create a revocable trust for this reason.
4. The Settlor retains control of assets during life – Pro
A revocable trust allows the Settlor to maintain control of assets during his or her lifespan. Assets that are acquired after the trust is formed may be added, and the Settlor may also remove and sell assets, change beneficiaries, or choose to dissolve the trust entirely. Nothing is final during the Settlor’s lifetime.
The Settlor needs to retitle the assets but for asset protection she still owns them – Con
The Settlor must retitle all assets in the trust’s name. Transferred property belongs to the trust, but because any part of the trust can be revoked at any time, including dissolving the trust, that means a creditor can force you to do the same and can get access. The Settlor does not receive tax benefits from the trust during life and will be required to keep impeccable bookkeeping records to help avoid issues down the road.
5. A trustee or power of attorney may help manage assets – Pro
The Settlor is often a trustee, but it is possible appoint a successor trustee, which gives someone else the authority to make decisions if the Settlor becomes mentally or physically incapacitated. A durable power of attorney may have some of the same powers as a successor Trustee, but in neither case does the trustee or a person with power of attorney own the assets he or she manages. In addition, assets managed by a power of attorney rather than a trustee must still go through probate when the Settlor passes away.
Revocable Living trust does not receive the same tax benefits as an estate – Con
An estate is a separate legal entity like an irrevocable trust may enjoy significant tax benefits after the Settlor passes away. A revocable trust does not receive these same benefits. However, depending on the size of the estate, some people may find it more desirable to avoid probate administration costs even if it means spending more in taxes.
Revocable Living trusts does not apply to assets that are not included – Con
Most people who establish a revocable trust still need to draft a will to address the distribution of any assets that are not transferred into to the trust. If a mistake is made or the Settlor prefers to keep some assets liquid, a pour-over will tells the administrator of the estate what to do with those remaining assets. A will directs the distribution of assets acquired after the trust is funded, if the Settlor is not able to transfer the asset before death. The will controls the distribution of personal property like photographs, clothing, and household items. Absent a will, any assets not included in the trust would be distributed according to state laws on intestate succession. These laws divide property depending on a person’s relationship to the Settlor and do not consider how the deceased individual might have wanted to distribute the assets.
Every plan is different depending on the needs of the individual. Contact an expert to help you make that assessment and evaluate all of your options in order to come to a solution that makes sense for you and your family.