Five Situations When a Revocable Trust Can Help
A revocable trust (also commonly referred to as a living trust) is a trust created to help a person manage or protect his assets should he no longer be able to manage them himself. A key feature of a revocable trust is the ability to amend or revoke them. They are also useful for avoiding probate.
The negatives of a revocable trust are costs and estate taxes. Assets held within a revocable trust are not exempt from the estate tax. Still, there are situations when a revocable trust makes sense. In a column written for Financial Planning, a website and publication for investment advisers, estate attorney Tracy Craig listed five such situations.
Probate Avoidance: Assets placed within the trust will be distributed according to the trust’s instructions, and will thereby avoid probate. Craig says this feature is particularly useful when real estate is owned in more than one state. The trust circumvents the chances of facing probate in several jurisdictions.
Privacy: Wills become public records when they are filed with the court. Revocable trusts remain private. Craig gave an example of preventing a ex-spouse from seeing what is in the estate. The privacy feature may also help to avoid disputes between heirs over inheritance.
Second Marriages: A revocable trust can ensure that children from a first marriage are taken care of. It can prevent the second spouse from disinheriting his or her stepchildren. Craig also notes that this type of trust can give the current spouse income from retirement accounts, while ensuring any balance remaining at death is passed along to the stepchildren.
Incapacity: Revocable trusts smooth the transition of control when a person is no longer able to manage his or her finances. This can be particularly useful in cases of accident, a severe illness or cognitive challenges related to aging. Other documents, including account titling and a durable power of attorney are also helpful for dealing with incapacity, but Craig believes a revocable trust works best.
Special Care Needs: A revocable trust can provide a stream of income for a family member with special care needs. Craig says this type of trust is particularly useful when an outright inheritance would cause the person to be denied government benefits.
Source: “Does Your Client Need a Revocable Trust?,” Tracy Craig, Financial Planning, July 14, 2014.