What are the advantages and disadvantages of a revocable trust?

The term ‘revocable’ means that you can still change it at any time. There are other types of trusts that you’re not able to change, but we’re not going to cover those today.

Let’s start with the advantages of the revocable trust!

One of the primary benefits is that you would avoid probate in California if you have assets over $166,250.

If you just have a will or no will at all you would have to do a probate for your beneficiaries to get your assets. If you own real property more than likely it is to your advantage to have a revocable trust to avoid the probate process. I don’t want you to think that probate is all bad because it does have some benefits like protecting the assets and court supervision.

The next advantage of a revocable trust is flexibility.

You can write the trust to do what you want. If you want to have assets held, distributed or kept. You just have unlimited opportunity to write the trust so the assets are directed as you want. They call that managing from the grave. The management of the assets is nice within a trust in that the trustee just takes over on your death or if on your incapacity and manages the assets according to the trust document. The trustee is given discretion on what to do but they have to benefit the other beneficiaries and/or do things that are for the benefit of the trust and not for the trustee’s own benefit.

Can minor children inherit assets?

Some other problems that you can get into is children under the age of 18 cannot inherit assets over $5,000 because the law says they have to have a legal financial guardian in order for minors to have assets. That’s another advantage in a trust you can set up ahead of time you know in a probate the court would make sure that it is required.

The nice thing about a living trust is it gives you peace of mind.

You can rest assured that on your death that the assets are going to go where you have specified in the manner that you’ve specified. A living trust may save money in the long run.

What costs more in the long run? A Trust or a will?

Creating a trust costs a little bit more when the documents are created and normally cost less after you die because the trustee manages the assets before distributing to the beneficiary. A will usually costs less to create however a will that has to be probated usually costs more than a trust. With all the court supervision and a whole lot of government court forms, the trust takes longer or can take longer to administer to get the assets out to the beneficiaries.

A nice thing about a trust is the assets you have listed in the name of the trust and you become incapacitated, for example with Alzheimer’s, you cannot be trustee. The successor trustee automatically is in charge of your assets. The assets in a trust are managed and you do not need to get a conservatorship which is a court supervised situation looking over your finances. A trust eliminates that whole process so that saves quite a bit.

The assets that end up being outside of the trust if you become incapacitated you will need a different document to manage those to keep out of conservatorship. That document is called the durable power of attorney for financial management. If you have a trust people think you don’t need a will, well you still will need a will when you have a trust and it’s a fairly perfunctory document that says whatever you want to know about my assets where my assets are going to go, go look at the trust. If the trust is invalid, do what the trust says. The will just keeps pointing back to the trust and what we call that is in this case the trust is the centerpiece of your estate plan. If you don’t have a trust then the will is the centerpiece of your estate plan.

Another advantage of a trust is that beneficiaries have a limited ability to challenge the trust.

There’s a code section 1606 1.7 California Probate Code where when the trustee gives notice of the death of the trust maker, the beneficiaries have 120 days or 60 days depending on how the notice is given to challenge the trust document wording.

If the heirs don’t challenge the wording then the trust is exempt from being challenged in the future which is different from a will. A will can be challenged at any time during the probate process.

A major benefit in California for having a revocable trust is that if the person’s on public benefit say they become incapacitated or injured in a car accident and they have to live in a skilled nursing home that can nowadays cost $6,000/month for the entire time the person is alive now medi-cal will pick up the cost if the person in the skilled nursing home has less than $2,000 of cash. If they have a large amount of cash medi-cal is not going to pay anything until all that cash is used up but in the scenario where someone is in a skilled nursing home and they run up a bill over their life before they pass let’s say $900,000 if you have your assets in a will or without a will medi-cal will come back and take other assets. They call it a chargeback. They get reimbursed for what they paid you and that only applies on a will or without a will.

The current law is if you have your house in a trust it does not have the right to do chargeback and take the house back. Overall, a trust will cost you a little bit more now and hopefully cost less in the future and the out-of-pocket cost on a trust is just a little bit more complicated than a will. A will normally costs less to prepare now and normally will cost much more in time, effort and money in the future after you pass away.

What are some of the disadvantages of a revocable trust?

One disadvantage is that you have to re-title your assets. What that means is you have your house, you put it in the name of your revocable trust.

Another disadvantage of a trust after you pass away and the successor trustee takes over there is a chance and it does happen where the trustee takes money that they’re not authorized to use it for either for non-trust beneficial expenses or they steal the money and we try to reduce that risk when using a revocable trust by requiring the trustee to have a fidelity bond.

So there are disadvantages and usually the break point for someone needing a trust is if there are overall assets other than pension plans, annuities and life insurance if their overall assets are more than $166,250 it leans towards having a trust would be better.

If you have California real estate or real estate anywhere, it’s better to have a trust.

There are other types of trusts like an AB Trust that I’m not going to explain in depth in this article, but it splits into two on your death to save on inheritance tax.

There is another type of trust called a Testamentary Trust. You write it in your will and then when you die the probate court activates the trust. Other types of trusts are a life insurance trust or a charitable trust.

There’s a lot to consider, but on the balance of most people that have a modest estate or large estate feel that a trust is better.

Sometimes with a minor under 18 not being able to take direct benefits the property can just stay in the trust until the minor becomes more mature. Often times in the trust we’ll put the distribution to the minors will be one-third at age 25, one-third at age 30 and one-third of the assets at age 35. The rationale here is that if the person goes through and spends the first distribution unwisely then perhaps they’ll be wiser the next time around.

There are a lot of factors to consider and on the balance the majority of people that I see do prefer the revocable trust as the centerpiece for their Estate Plan with other documents.

If you have any questions you can contact us at 925-934-6320

Feel free to email us at rexcrandall@astound.net