Revocable Living Trusts – Pros and Cons
I get many calls from prospective clients in Illinois asking for my assistance with setting up revocable trusts, also known as revocable living trusts. They've read or been told that the use of such a trust will simplify their estate and avoid probate. There is some truth to that, but there are important caveats. There are pros and cons that need to be carefully considered. Like everything in law it seems, the answer to the question of whether to establish a revocable trust is “it depends.”
Common Estate Plan Scenario Using a Revocable Trust
A revocable living trust is one that a person (the settlor) establishes during their lifetime, with the settlor acting as both the trustee and the beneficiary of the trust and naming a successor trustee to act upon the settlor's death or incapacity. The settlor then transfers their assets to the trust. Any assets held by the trust are managed by the trustee/settlor, or if the settlor becomes incapacitated, by a successor trustee (often a spouse). Upon the settlor's death, the trust becomes irrevocable, and assets are distributed according to the terms of the trust rather than a will. Because a will won't govern transfer of the trust assets, probate is avoided.
Pros and Cons of Revocable Living Trusts
Pros
Avoids Guardianship in the Event of the Settlor's Incapacity
If the settlor becomes incapacitated, a revocable trust ensures that the settlor's assets will continue to be managed for the benefit of the settlor/beneficiary by the successor trustee. Absent a revocable trust, guardianship for adults with disabilities is overseen by the court, with the attendant court costs, and requirements for an inventory of all assets and periodic accountings.
Ease of Amendment
By its nature, a revocable trust can be revoked or amended at any time during the settlor's life. Common amendments to revocable trusts include changing the trustee, successor trustee, or co-trustee. For example, if the settlor's spouse was named as the successor trustee in the original instrument but predeceases the settlor, it is a simple matter to change the name of the successor trustee, for example, to one of the couple's children, or to a professional fiduciary such as a trust company.
Revocable trusts can also be easily amended to change the disposition of assets when there are changes in the settlor's wishes or family life.
Flexibility in Disposing of Assets
Settlors have almost unlimited options in disposing of the assets in the trust. Common situations are ones where the settlor wants to provide for children of an earlier marriage, or the establishment of educational trusts for minor children.
Avoidance of Delays and Costs Associated with Probate.
Probate is time consuming and expensive. Assets passing through a will have to go through the probate process, which involves attorneys' fees (probate courts in Illinois require that you be represented by an attorney) and court costs, and can take six to twelve months, sometimes longer, to complete. There is a six-month creditor notice period during which assets can't be distributed to beneficiaries until potential creditor claims are resolved which can cause a hardship to beneficiaries in many cases.
Expedited Transfer of Assets
Assets that have been placed in a revocable trust during the settlor's lifetime do not pass through the will and therefore are not governed by probate. Transfer of assets is typically expedited by the absence of probate, although in some circumstances may still be delayed if there are creditor claims that have to be satisfied.
Privacy
Not well known is the fact that wills, which in Illinois must be filed within 30 days of death, are public record, meaning that anyone can go to the courthouse, get a copy of the will from the clerk, and know all the details of the decedent's assets, liabilities, and how their assets are to be disposed of and to whom they are being transferred to.
Revocable trusts, on the other hand, are private instruments, and the decedent's financial and personal affairs are protected from public view.
Cons
Risk of Failing to transfer assets to the Trust
Any assets that aren't transferred to the trust during the settlor's lifetime remain subject to probate, defeating a major advantage of the trust. Care must be taken throughout the settlor's lifetime to transfer existing assets to the trust and to title newly acquired assets in the trust's name.
Additional Legal Expense
Legal fees for estate plans with a revocable trust (and accompanying pour-over will) are generally greater than an estate plan consisting of just a will.
Many Assets Don't Pass through Probate
If the primary motivator is to avoid probate, it is important to note that automatic transfers of assets at death can be easily accomplished without having to put them in trust. For example, real estate can be jointly titled with rights of survivorship, beneficiary designations put on IRA or 401(k) plans or pay-on-death designations for financial accounts. Steps needed to re-title property or establish beneficiary designations are often quite simple to complete, often not requiring the help of an attorney.
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