Should I get a Revocable Living Trust? RLTs: Expectations vs. Reality
By Campbell D. Coxe, Jr. Esq.
Many individuals researching estate planning have heard that a trust can provide advantages and benefits that are not available through a simple Last Will and Testament. While that is true, not every person needs a trust, and many have misconceptions about what a trust can do.
There are many types of trusts that estate planners use to accomplish tax planning, legacy planning, business planning, charitable giving, and asset protection but, for the purposes of this article, we will focus on Revocable Living Trusts (“RLTs”).
An RLT is a trust that is revocable, amendable, and established by you for your personal benefit while you are alive, and then continues on for the benefit of your spouse or heirs after you pass. This article will focus on the expectations vs. realities of having an RLT.
- Avoiding Probate
The most common reason people give for wanting a trust is to avoid probate. Probate is the legal process of passing the estate of a deceased individual to their heirs, either by the terms of the South Carolina Probate Code, or under the terms of their Last Will and Testament. People may feel they should try to avoid probate because it can be time-consuming or confusing. Individuals who are charged with handling an estate often need to rely upon an attorney to help them navigate this process. There are important deadlines and requirements that must be followed, all done under the oversight of the Probate Court. There are fees that will be due to the court but, these are minimal and should not scare anyone away from the probate process unless the estate is of a significant size.
At the root of this reasoning for having an RLT is the little white lie that it will let your heirs completely avoid probate. If all of your assets were held in an RLT, they would not be included in your probate estate as it applies to the court system, but that does not mean an estate case would still not need to be opened with the Probate Court. There is often a piece of property, a vehicle, a forgotten account, or a refund that will be in your personal name, which will make it necessary to probate that asset. An estate may also need to be opened to handle wrongful death claims, creditors, surviving spouses, omitted heirs, and others who might have claims for or against you.
- Avoiding Creditors
RLTs do not protect assets from creditors while you are alive and are subject to creditor claims made against your estate even if the estate technically has no assets. Estates are required to maintain an 8-month creditors period during which your creditors may file claims for payment. If the estate is not opened because everything is held in trust, the creditors will still have the right to open the estate themselves and pursue claims against the trust if they do so within a year after your death. This lack of creditor protection will often lead an experienced estate attorney to advise the beneficiaries not to make any significant distributions of the trust assets until the creditor period has passed for the estate.
RLTs, by themselves, do not provide any relief from income taxes, capital gains, or estate taxes for you. The RLT will use your Social Security Number and will be included in your personal tax return filed every year. Back taxes owed to the IRS will be chargeable against your estate, and therefore your Trust. What an RLT can do is create subsequent trusts after your passing which can save your heirs future estate taxes and capital gains. RLTs can also be supplemented with charitable planning and gift trusts to help alleviate estate taxes when you pass away.
Consult an Estate Planning Attorney
Now that you know a little more about Revocable Living Trusts, you are likely to have more questions about what your estate plan should look like and whether an RLT is right for you. The advice and legal counsel of an experienced and qualified attorney should always put you on the right path to accomplishing your estate planning goals and I recommend that everyone with questions about estate planning speak with such an attorney to better understand their options,