There are many reasons why having a revocable living trust in place is important, but I’m going to share with you the top 10 reasons why having your revocable trust plan in place is critical:
1. Probate avoidance. Even when a married couple holds title in joint tenancy or community property with right of survivorship, upon the death of the surviving spouse, if the house has not been put into a trust, it will go through the probate process before reaching the eventual heirs (which could be to someone other than who you intended or in a % other than you intended).
2. Asset protection for children. It is possible to set up asset protection trusts for children in your revocable trust. You can even make them “beneficiary-controlled” at a stated age. This can give your children the gift protecting the assets you leave them from a future divorcing spouse, a creditor, predator, or lawsuit.
3. Better control over downstream or contingent beneficiaries. Although some assets such as bank accounts can have pay-on-death designees, it doesn’t control very well if your beneficiary predeceases you or if your beneficiary doesn’t do their own estate planning.
4. The ability to list your revocable trust as a contingent beneficiary on your retirement accounts. This is particularly important if you have minor children. No custodian will make a distribution from an IRA or 401(k) directly to a minor beneficiary. The court will need to be involved. This can be averted by having a properly structured trust with conduit retirement plan provisions so that you can list your trust as the contingent beneficiary behind your spouse.
5. Asset protection for the surviving spouse. By setting up the right language to create a “Bypass” trust and/or a “QTIP” trust at the death of the first spouse, the surviving spouse can gain asset protection for themselves over the assets that are in the “Bypass” trust and/or “QTIP” trust.
6. Divorce/remarriage protection for the first spouse to pass away. A “Bypass” Trust and/or QTIP Trust (both marital trusts) created from the trust at the death of the first spouse can also act as a protection vehicle for the first to die’s separate property and their half of any community property assets. This is because the surviving spouse cannot change the terms of the “Bypass” or “QTIP” trust. A “Bypass” trust and “QTIP” trust each become irrevocable at the death of the first spouse (absent any limited powers of appointment granted to the surviving spouse), so the surviving spouse can’t leave the assets to a new spouse.
7. Remote Contingent Beneficiary planning. In a trust, you have the opportunity to choose a remote contingent beneficiary or beneficiaries. Some wish to designate a charity or others in their family to be the remainder beneficiary in the event all those listed predecease or are all in a common disaster or accident.
8. The ability to nominate a Trustee to privately take care of your financial affairs in the event of your incapacity. Your trust can dictate how your capacity is later determined. The successor who takes over management of your assets in the trust can do so privately without court interference.
9. The ability to funnel your life insurance into a protected continuing trust for your children or other beneficiaries. If your life insurance beneficiary form designates your trust as the primary beneficiary, at your death or upon the death of the surviving spouse, your life insurance proceeds can be asset protected for your children from creditors, predators and future divorcing spouses in a continuing trust that can spring from your revocable trust.
10. Estate tax savings for both spouses through special marital formula trust provisions is an important tool in the estate planning toolbox. They can also provide flexibility not only for planning for possible estate taxes but income taxes such as basis step-up as well. If your total estate with your spouse is over $7,000,000 (life insurance owned by you personally should also be including in this calculation), you may want to consider structuring your trust with your spouse to account for future estate and income taxes.
For more information on trust and estate planning, request my book or contact us to schedule your consultation.