As a vital piece of every modern estate plan, the revocable living trust is more popular than ever. This is especially true in recent years as the federal estate tax exemption has increased and fewer people have had to worry about paying estate taxes. Nevertheless, there are a lot of misconceptions about what a living trust is and what benefits it provides. To help educate you about the benefits of these estate planning tools, let us look at some of the common myths associated with them.
Myth 1: I will avoid probate by creating a revocable living trust.
Yes, a revocable living trust gives you the ability to avoid probate, but it isn’t a guarantee. Simply creating a revocable living trust is not enough to help your estate pass outside of the probate process. To gain all the probate avoiding qualities of a living trust, you need to completely fund it. If you make a mistake during the funding process or forget to transfer some of your property into the trust name, the property left out will not avoid probate.
Myth 2: I don’t need to worry about estate taxes because I have a revocable living trust.
Let’s assume that you will have an estate worth more than the estate tax exemption limit. What happens to that estate property after you die if it’s owned by your revocable living trust? If you believe the answer somehow involves avoiding estate taxes, you may not be correct. While a living trust can be drafted to allow you to avoid estate taxes if you are part of a married couple, it must contain some very specific provisions to obtain that result. Moreover, a living trust alone will not allow an unmarried person to avoid estate taxes; additional planning will be necessary to achieve that result.
Myth 3: I’ll be able to keep my estate completely private if I create a revocable living trust.
Living trusts are also excellent at allowing you to keep your affairs private because your estate will not have to pass through probate. However, the same problem of adequately funding the trust also poses a risk to this privacy benefit. In short, if you don’t make sure your trust is properly funded, you won’t be able to keep all of your estate affairs private.
Further, there is always the possibility that litigation involving the trust could arise. Should this happen, the terms of the trust will likely become an issue in the litigation. However, it might be possible to still keep your affairs private if litigation arises, but you’ll need to speak your estate planning lawyer for more details.