Revocable Living Trusts

...And Other Ways to Avoid Probate

Revocable Living Trusts (RLT) are very popular these days for a number of reasons.  The primary reason is to avoid probate, the process of getting things that are “stuck” in your name to your heirs through a court process.  Probate is time consuming, expensive and public.  I can think of very limited circumstances (actually none right now, but if you really pushed me, I MIGHT could come up with a reason) why you should go through probate.

A trust is a legal entity that can own property.  Having a RLT avoids probate by changing the legal owner of your property to the trust.  You actually deed your house to your trust, you change the name of your accounts to the trust and (possibly) make the trust the beneficiary of your retirement accounts.  Doing this makes sure that these assets are not stuck in your name at the time of your death.  The trust owns the property but someone has to manage the trust, a Trustee, and typically that person is you as the creator.  You are the Trustee of the trust.  You manage it.  Also, there is a beneficiary of the trust.  That person is typically you also.  Therefore, you create a trust, but you are in control of the trust and you benefit from the trust.  Also, there is someone designated to step into your shoes should something happen to you.  That person is the successor Trustee.  They can step in and manage the trust if you become incapacitated or die.  That is how we avoid probate.  Since the trust is the owner, the trust doesn’t die and there is someone to manage the trust if you can’t.  It is a beautiful tool.

A trust does have some issues.  First, it is significantly more expensive and a hassle to set up.  There are more attorney fees for creating a trust.  We have to put in all sorts of contingency language and standard language to cover all the requirements to create, run and terminate the trust.  However, when compared to the expense of probate, it is typically much less expensive in comparison.  Probate fees typically run 5-7% of the amount of the estate.  A small $200,000 estate, including the full value of the home and any bank account that goes through probate, will usually cost between $10,000 and $14,000.  In comparison, a trust will cost in the neighborhood of $1750 to $2500.

A trust is also quite time consuming to get set up after it is created.  You have to get all your appropriate bank accounts into the trust and that means changing ownership or beneficiary forms.  However, it is much better when you do those things now than paying an attorney to do it at the time of your death with court supervision.

Many people believe and are told possibly by attorneys, that the RLT does protect your assets from Medicaid.  A trust does NOT help you with Medicaid.  Since you are the beneficiary of the trust, Medicaid will count everything in the trust as yours and for your benefit, including the house, which is normally not counted by Medicaid.

Other ways to avoid probate:

Beneficiary Designations: Make someone else the beneficiary of your accounts (rather than co-owner) by making them Payable On Death (POD) or Transfer On Death (TOD).

Life Estate Deeds (or Beneficiary Deeds): These are two ways to make sure real estate goes to the people you want without going through probate.  There are VERY significant issues with each of these relating to Medicaid that you must understand. Do NOT execute these documents without a full explanation of how Medicaid will treat these deeds and whether it is right for you.

Irrevocable Trusts (gifting Trusts, Medicaid Asset Protection Trust “MAPT”): This is a trust used in very limited circumstances to protect assets.  You must understand the pros and cons of this type of trust and its implications with Medicaid prior to creating and funding this trust.