Revocable living trusts, in Tennessee and elsewhere in the United States, have gained notoriety and popularity in recent years. Many families are using revocable living trusts, as opposed to last will and testaments, as the primary means of transferring their assets and wealth to the next generation. However, there are many, many different types of trusts that all can accomplish different goals depending upon the specific concerts of each family.
Listed below are five of the most common reasons to establish a revocable living trust:
- Avoid Probate
By far, the biggest reason that families establish a revocable living trust is for probate avoidance and to keep the estate settlement process simple. In Tennessee, probate can last anywhere from six months to two years or longer before the probate estate is finally settled and the surviving family members receive their inheritance. During this period of time, many families find that bank accounts are frozen, real estate cannot be sold for a period of time, and experience a host of other delays. In addition, the family’s entire private financial matters end up on the probate court’s public court docket system, and then it’s on the internet for everyone to see. For these reasons, probate avoidance is by far the number one reason that families set up revocable living trusts.
- Reduce Legal Fees and Costs from the Estate Settlement
The cost of settling an estate in the probate court can be very significant for the surviving family. In many other states, the legal fees that attorneys can charge to settle a probate estate is set by the court. For instance, the attorney gets a percentage, the executor receives a percentage, the court receives a percentage, and approximately 15 to 20% is taken right off the top of the estate assets for attorney fees, court costs, and miscellaneous other costs. However, in Tennessee, we have this vague reasonableness standard. Therefore, the legal fees are determined based upon what would be reasonable given the unique circumstances, issues, and assets involved in the probate estate. As such, attorney fees and costs for the settlement of a probate estate could range anywhere from $10,000 to $20,000, or even higher.
- Contingent Beneficiaries for Retirement Accounts
Many families, here in Tennessee and elsewhere across the United States, have retirement accounts such as a 401(k) through their employer, or an IRA or their 401(k) was rolled over into an IRA following their retirement from their employer. For many individuals and families, their retirement accounts are the largest assets that they own, with possibly the exception being their home. The most common scenario when an IRA or other retirement account is that a beneficiary form is completed leaving the retirement account to their surviving spouse. In addition, many people name their children in equal portions as the contingent beneficiary of their retirement accounts. All too often the children take their share of the retirement account all at once and incur significant tax consequences as a result. The surviving children could have maintained the IRA in a revocable living trust or an IRA trust. This would allow the surviving children to see the inheritance grow over the course of their lifetime, instead of taking all the cash out and paying significant income taxes. In addition, the children could have the IRA Trust treated as an Accumulation Trust allowing the Required Minimum Distributions (RMD) to flow into the trust and result in considerable higher value and accumulation over the beneficiaries lifetime. For these reasons, many families will name the contingent beneficiary of their IRA and retirement accounts to be a revocable living trust or an IRA trust.
- Asset Protection for Your Children and Heirs
Another important reason to have a revocable living trust is for asset protection for your children and heirs. If an adult child receives an inheritance from you and that inheritance is distributed directly into their name, then the adult child’s inheritance is potentially subject to loss from creditor claims and even divorce claims. As the inheritance has now been distributed directly to the adult child, the assets are just like any of their other assets and subject to loss. However, if the adult child’s inheritance were to remain in trust for a predetermined period of time, could only be accessed upon the occurrence of certain events or the passage of certain periods of time, or remains in trust and the adult child has discretion on when and in what proportion to withdraw (referred to as a children’s inheritance trust), then the inheritance is protected from creditors and divorce claims as long as the assets remain in the revocable living trust. In addition, referring to number 3 above, maintaining retirement accounts inherited in trust would also provide creditor protection and divorce protection for the adult children and heirs.
- Protection from Remarriage
One final important reason to establish a revocable living trust is to protect from remarriage. What I mean by this statement is protection following the death of the first spouse. For example, let’s say John and Jane were married and had 3 children together, Ashley, Joe, and Bill. John and Jane wrote their wills which said that they are leaving everything to each other in the event of their deaths. Jane is the first to pass away, and everything she owned at her death was transferred to John. A few years later, John got remarried to Jill. However, Jill had 2 children, Elizabeth and Brad. During their marriage, John rewrites his will leaving everything to Jill and Jill rewrites her will leaving everything to John. After 7 years of marriage, John passes away and all of his property and assets pass to Jill. Thereafter, Jill passes away, and all of her property and assets (including the assets that Jill inherited from John) passes to her two children Elizabeth and Brad. Essentially, John and Jane’s three children have been written out of their parent’s estate and receive nothing. To protect from this, many Tennessee families will establish a revocable living trust that states, upon the death of the first spouse to die, one half of the assets in trust becomes irrevocable. This way, and following the example above, John and Jane’s three children would not be written out of their estate. John and Jane would always have the assurance that no matter what happened in the future following the death of the first spouse that their three children would receive their inheritance and their wishes would be followed.
If you have questions or concerns regarding the proper comprehensive estate plan to put in place for your family to ensure a smooth transition of your wealth to the next generation, then please contact our office for a complimentary visit and conversation so that we can discuss your estate planning needs in further detail.
We look forward to hearing from you!