One of the most common myths about estate planning today is that everyone’s estate plan, without exception, should include a revocable living trust. Celebrity personal finance commentator Suze Orman is a particularly prominent spokesperson for this point of view. Of course, Orman is not an attorney. (If she were, she would know better than to give blanket legal advice to people in all 50 states.) She is, on the other hand, the owner of a company that sells a prefabricated estate planning kit, which naturally includes a revocable living trust.
I don’t claim to know how things are in the other 49 states, but in Minnesota, a revocable living trust is not necessarily for everyone. As with every other estate planning document, it should only be used if it is the best tool to meet the specific needs of the person making the estate plan.
The major benefit cited by revocable living trust advocates is avoidance of probate, the legal process for distributing the assets of someone who has died. It is true that, in some states, probate can be unnecessarily expensive and time-consuming. In Minnesota, however, the probate code allows for small estates to be distributed by affidavit, a relatively simple procedure, and many other estates are eligible for informal probate, a faster and less expensive option than formal probate. In addition, attorney fees for probate cases are negotiable, which is not the case in some states.
Revocable trusts have two other frequently cited benefits. The first is privacy; when a person’s assets are administered through a trust rather than through probate, there is no public record of the administration. The second is incapacity planning; while powers of attorney are the most commonly used incapacity planning tools, trusts offer some additional flexibility. These are certainly legitimate benefits, but they must be weighed against the costs and potential complications of establishing and administering a trust.
It is also important to know the limits of what revocable living trusts can do. Specifically, this type of trust offers no benefit in terms of avoiding or reducing estate taxes, and it does not protect your assets from your creditors. There are trusts and other estate planning tools that can be used to address these issues, but the revocable living trust is not one of them.
Finally, it is important to avoid being lulled into a false sense of security by the statements that many promoters make about the simplicity and convenience of revocable living trusts. Once you have created one of these trusts, you must pay careful attention to how all of your assets are titled in order to gain the benefits of the trust. Also, the fact that a person had a trust does not remove the need to contact a lawyer after that person dies, as there may still be important estate administration tasks that need to be performed.
Revocable living trusts are a useful estate planning tool for many people, but they are not a one-size-fits-all solution to everyone’s estate plan. Anyone who tells you otherwise is probably trying to sell you something without going through the effort of meeting with you, learning about your goals, evaluating the costs and benefits of your different options, and drafting customized documents to meet your needs.