One of my favorite questions from an estate planning client is – why do people get a revocable living trust? A revocable living trusts can be a highly effective and flexible estate planning tool. While a not everyone needs a trust, there are a lot of reasons to consider a revocable living trust. Here my top three reasons to consider a revocable living trust as part of your estate plan:
1. Avoid Probate. When a person owes no significant debts, probate is simply the court process of transferring title of a decedent’s property to his/her heirs. But, why avoid it? For most people, the Court system is a complex and daunting system, and their primary interaction with the Court is through jury duty or a traffic ticket. But, we go to probate court only when someone dies. When you couple the grieving family with an already negative perception of the court, you have the recipe for nightmares, battles, and layers of anxiety. Besides, the cost of probate, both in money and time, is significant. Even in a State like Colorado, where probate court can be mostly an administrative process with little actual court involvement, the typical cost (with an attorney involved) is $3,000 to $5,000 and the typical timeframe is 1-2 years. So, save your family the heartache and nightmare – avoid probate, if possible!
2. Asset Management for Minor Children. If you have minor children (under 21, in Colorado), you will need to have your assets managed for your children until they are at least 21 years of age. By setting up a revocable living trust, you have can plan for the management of your assets for minor children. Without a trust, your assets will go into a conservatorship managed and overseen by the probate court. Are you comfortable with a court overseeing your assets for your kids? Are you comfortable with your court-appointed conservator having to ask for funds from the probate court and report to the probate court on an annual basis? A revocable living trust allows you to appoint and manage, through the terms of the trust, the person you want to oversee and manage your assets for your minor children. You can accomplish this through what we call a testamentary trust, but the major drawback of a testamentary trust is a testamentary trust allows for and sometimes incorporates probate as a necessary aspect of transferring assets upon death into the trust. In other words, a testamentary trust does not avoid probate. See Number 1 reason for a revocable living trust above. So, for maximum efficiency, the revocable living trust is the best option to avoid probate and provide for management of assets for minor children.
3. Distribution Beyond Age 21. Let’s just say you and your spouse have one minor child age 7, and, like a lot of people, you each have a life insurance policy for $500,000.00. In the unfortunate event you were to pass away, your child would inherit a total of $1.0 million in life insurance. If you did not create a revocable living trust or a testamentary trust during your lifetime, then, as mentioned above, your assets would then go into a conservatorship to be managed until your child turns 21 (the minimum age of inheritance in Colorado). But, upon your child turning age 21, the Court is required to turn over whatever assets remain in the conservatorship. So, if you put yourself in your child’s shoes, what would you have done with $1.0mil at the age of 21? Would it be here now? If you had set up a revocable living trust, you could very easily set a different course for your child by setting up a plan for distribution beyond age 21. Most of my clients, when faced with this option, choose a timeframe for distribution between ages 25 to 35. Usually, it is something like one-half at 25 and one-half at 30, or one-third at 25, one-third at 30 and one-third at 35. Either way, you have the flexibility to plan for distributions to your child/children that will best work for and protect them.
A revocable living trust is a very effective and flexible tool in estate planning, especially if you have minor children. If you want more information or to talk more about the options a revocable living trust can give you, please give me a call to set up an appointment. An initial appointment with me is always free!