The Nitty Gritty of Revocable Living Trusts
A revocable living trust is a trust that holds assets. It is what’s called a “grantor trust” in the San Diego estate planning business. That means that the beneficiary of the trust is the same person who created the trust. Revocable living trusts are also unique in a few other ways:
- The grantor (the trust creator) is the trustee, in addition to being the beneficiary.
- The trust itself does not exist as a separate legal entity, so it doesn’t need to pay taxes on profits generated by assets owned by the trust.
- The internal trust document is private in that it doesn’t need to be filed with any court or custodian of public records.
- Assets in the trust are not protected from lawsuits against the grantor.
- The primary purpose of the trust is to allow the grantor’s estate to avoid probate.
What Does it All Mean?
The bottom line is that revocable living trusts do nothing to protect your assets from creditor claims, lawsuits, or other traditional risks to your wealth. Rather, the purpose of a revocable living trust is simply to reduce the size of your probate estate. San Diego Probate Court is a process that your loved ones would have to go through if you die without a fully funded living trust, or if you have no plan, or if all you have is a will and you have assets over $100,000 and real estate over $20,000. That’s important because if you reduce the size of your probate estate sufficiently, your estate will be able to avoid costly probate court proceedings and taxes altogether.
Use yourself as an example for this thought experiment. If you have an estate worth $200,000 and you die, a probate court will intervene to determine who receives what. Even if you left a last will and testament, probate procedures are necessary for the court to ensure that your wishes are carried out in your estate distribution. Probate is very expensive, so if there are any disputes or minor children involved, the proceeding itself will cut into your estate and could be significant. We estimate a probate can cost 5% of the gross San Diego Probate estate.
If, on the other hand, your $200,000 worth of assets are held in a revocable living trust, your probate estate is zero and there is no need to involve the San Diego Probate Court after your death, as the trust is totally controlling under the law. Because you are the trustee of your revocable living trust, during your life you maintain sole, total control of the assets. The tax consequences of profits generated by assets in the trust are also your personal responsibility, but because the trust is revocable, assets in it are not protected against creditor claims. In essence, a revocable living trust is a pass-through entity. In most jurisdictions you can even keep a homestead exemption for property owned by the trust.
The Upfront Cost is Well Worth the Peace of Mind, Not to Mention the Savings Later
Take a minute to think about whether you really want a probate judge—a total stranger—prying into your personal affairs and making determinations that you yourself can and should make now. The reality is that revocable living trusts are extremely complex. To make one the “right way” requires that you and your attorney take the time to determine what you have and how it can most effectively be allocated after your passing. The analysis requires that you dig deep, and then it’s up to your attorney to get the technicalities right.
That’s where we come in as your San Diego Estate Planning firm where Kristina helps clients manage these issues everyday and set up a plan to avoid San Diego Probate Court. We understand that you want to dictate the terms of your estate and at a cost that you feel is reasonable, rather than leaving that burden to your loved ones.
Kristina Hess Haymes — San Diego Trust and Estate Attorney