Are Revocable Living Trusts for You?[Retiree Portfolios] May 8, 2000

Retiree Portfolio Are Revocable Living Trusts for You?

By David Braze (TMF Pixy)
May 8, 2000

Okay, gang, it's time for a test. The following questions may be answered as "True" or "False." Take your best shot. We'll discuss the pertinent answers after you're done.

  1. A revocable living trust is a document you have voluntarily signed in advance that directs doctors and hospitals to cease heroic, life-sustaining measures when there is no reasonable prospect of your permanent recovery from an injury or disease.

  2. A will is unnecessary when you have a living trust.

  3. A revocable living trust shelters your assets from creditors and helps make you eligible for Medicaid when you require nursing home care.

  4. A living trust is always less expensive to prepare than a will.

  5. After you have written and signed a living trust, all of your assets will pass to your beneficiaries outside of probate after your death.

  6. A revocable living trust ensures you will always reduce your income, federal estate, and state inheritance taxes.

  7. When you die, the trustee of your living trust may immediately distribute all assets in that trust.

  8. Unlike a will, a living trust cannot be contested by dissatisfied or intentionally omitted heirs (e.g., children, spouses).

  9. Everyone needs a living trust to avoid the delays and costs of probate and to reduce estate taxes on death.

  10. A living trust is the simplest and cheapest way to avoid the costs involved in obtaining a court-appointed guardian in the event of your incapacity.

Pencils down please. Now it's time for some self-grading. For every question you answered as "False," award yourself ten points. Add up your score. You pass if you scored 70 or higher. If you scored 60 or less, you need to learn a little more about revocable living trusts, a document that in this Fool's opinion is highly overrated and highly oversold to many retirees.

Don't misunderstand me. I'm not against living trusts at all. I think they can be an invaluable estate planning tool for many. If I didn't, I wouldn't have one myself. But I don't think it's an appropriate document for everyone, and you should examine the issue carefully to see whether it's appropriate for you. As in all things, this is an area where you should be an informed consumer.

A revocable living trust is not a living will. Instead, it's a will substitute that lets you direct how your property will be distributed after your death. A will often requires a lengthy, public, and time-consuming probate process. The revocable living trust does not, which is why it is popular with many. It does not, however, eliminate all estate and inheritance taxes, nor does it do anything to reduce your income taxes.

A properly constructed trust can, however, ensure estate and inheritance taxes are minimized to ensure your heirs will receive more of your hard-earned dollars. For those with assets exceeding $675,000 this year, a living trust makes sense. That's not so true for those with lesser potential estates. For the latter, the length and cost of probating those assets may be the deciding issue. Even then, the living trust's trustee must ensure all final bills and taxes have been paid before the assets may be distributed, a process that can take 90 days or more.

To be effective, your assets (i.e., home, car, personal property, investments, checking accounts, etc.) must be transferred to and titled in the name of the trust so they are owned by that trust instead of you. That's called "funding" the trust. On transfer, those assets are controlled by the trustee(s). You may be both the trustee and the beneficiary of that trust, which means you use those assets just as you did before.

Regrettably, no one except those who are absolutely fanatical about details will ever remember to transfer all assets to a revocable living trust; therefore, you must still have a "pour-over" will. That's to take care of those assets during the probate process so they are disposed of in accordance with your wishes. For most folks, then, the probate process isn't avoided totally. And for income tax purposes, nothing has changed. You still pay your taxes as before, to include any resulting from your income-producing assets now owned by the trust.

Creditors may also lay claim to those assets, and they will be counted as available to you in any Medicaid-eligibility determination. The important point to remember, though, is that an unfunded trust isn't worth the paper on which it's printed. For the trust to be effective, you must go through the time and expense of transferring the asset titles to it. In doing so, you must also expect some heavy resistance from mortgage companies and (for checking and savings accounts) your bank. They almost always want a living, breathing human (not an inanimate though legal "person") as the title holder or owner of such accounts.

A revocable living trust can be costly. Typically, they range in price from around $500 to several thousands depending on the size of your estate, your desires and (most importantly) the person or entity providing the document to you. There are many charlatans out there who prey on and sell virtually worthless living trust kits to the elderly. Thus, it is not necessarily cheaper than a will in the long run.

Additionally, there are other ways of avoiding probate (assuming that's your major desire) rather then the use of a trust. The way you hold title to your assets determines that. Assets owned jointly, as tenants by the entirety or designated as Transfer on Death to a named beneficiary also pass outside of probate, and they do so more cheaply in most cases.

Further, the guardianship provisions of a trust, though effective, can be accomplished far more cheaply by the durable power of attorney we discussed two weeks ago. It's true a trust makes it harder for someone to contest its provisions as compared to a will. But it still can be contested by a dissatisfied heir on grounds of fraud, the maker's lack of mental capacity, or the undue influence of the trust's seller or someone else. So a revocable living trust is not infallible in that regard, either.

You may or may not need a revocable living trust. I personally believe most folks do not, but that issue varies from state to state and from person to person. If you think you need or want this document, there are many "trust" mills operating across the land and on the Internet who will be happy to sell you one. They are also available in modestly priced software packages and from an estate planning attorney in your area.

All three of these sources can provide you with an effective and valid trust. But of the three, your best assurance of a legally binding and valid product in your state will come only through the use of an attorney. In this Fool's opinion, it really doesn't pay to forego the services of a qualified lawyer when dealing with a trust. The savings of a few bucks today may cost your family far more after you're gone.

And that's it for revocable living trusts. Don't forget -- I won't occupy this space on either June 5 or June 12 due to an annual family reunion. Therefore, I'm still seeking two guest columnists for those dates. Do you have a retirement issue about which you wish to be heard? Any alternatives, solutions or problems pertinent to retirees you want discussed? Here's your chance for fame and glory.

Send me your proposed article of 1,250 words or less no later than noon ET on Monday, May 29, 2000. I'll select two of the entries I receive for publication. Winners will receive a genuine Motley Fool tee shirt, worldwide exposure, and my Foolish thanks. Interested? If so, send your entry to me at

See you next week. Until then, post your comments on the Retired Fools board.

Best to all... Pixy