Do You Need A Revocable Living Trust? Here are 3 Reasons to Consider One

Range Certified Financial Planner
Range Certified Financial Planner
October 25, 2022

There’s a common misconception that estate planning and trusts are just for the ultra-wealthy. But that’s simply not the case.

Instead, estate planning and trusts can be valuable tools for anyone with dependents counting on them or with assets they want to distribute after death. And one of the most powerful and widely used tools is the Revocable Living Trust.

First, what is a revocable living trust?

A revocable living trust is a legal arrangement that allows you to put your assets into a trust during your lifetime, with the option of taking them back out or using them as needed.

There are a few critical aspects of a revocable living trust:

A revocable living trust is not designed to minimize your estate taxes.

Because of the structure of revocable living trusts and the ability to change them while you’re alive (revocable), they do not come with estate tax benefits.

But, for most, that won’t be an issue because estate taxes usually only affect people with significant wealth (think $12+ million per individual). So for the average person looking to direct their assets after they die, a revocable living trust is a great fit, even though it doesn’t minimize estate taxes. Alternatively, an irrevocable living trust offers estate tax benefits for high-net-worth individuals, but can’t be changed once the assets are transferred into the trust.

One of the key benefits of a revocable living trust is avoiding probate.

Probate is the court-supervised process of reviewing and authenticating your will and approving your executor so they can distribute your assets to your heirs.

It sounds straightforward, but unfortunately, it can be costly, time-consuming, and complex. According to Legal Zoom, probate can take anywhere from a few months to more than a year and cost up to 10% of an estate. This can be a challenging process for your dependents after you pass, costing them time and money during a difficult period of loss. But, with a revocable living trust, your estate can transfer directly to your heirs without going through the probate process. This is one of the most valuable aspects of having a revocable living trust.

You can still access your assets.

Lastly, one of the key elements of a revocable living trust is you can still access your assets during your lifetime.

This is perfect for anyone that wants to ensure their assets pass directly to their heirs once they die but still needs to use those assets during their lifetime. This provides a lot of flexibility, making a revocable living trust an excellent fit for many.

But, do you need a revocable living trust? Here are 3 reasons to consider one.

Reason #1: You have assets to distribute after you pass away.

If you have assets you want to distribute after you pass away, a revocable living trust may be right for you.

That’s because when you set up a revocable living trust, you can specify which assets go where, in what amounts, and at what times. This gives you significant control and direction over your assets after you pass. Alternatively, without a proper estate plan in place, your assets will be distributed based on the inheritance laws in your state, which may or may not align with your wishes.

Reason #2: You want the benefits of a revocable living trust.

In addition, if you want the many benefits of a revocable living trust, both for you and your heirs, then it may be worthwhile.

First and foremost, your estate can bypass the probate process, reducing the cost and complexity for your heirs. In addition, you will still have access to your assets during your lifetime, giving you a lot of flexibility with your funds. And lastly, having a revocable living trust in place will give you the peace of mind that if you were to pass away, your dependents would be taken care of financially.

Reason #3: You want to set your heirs up for success.

Lastly, establishing a revocable living trust is another way to set your children up for financial success.

That’s because when you set up your revocable living trust, you can create a “step-distribution schedule.” This schedule allows you to choose how much your heirs receive at specific age intervals and can include certain stipulations like being drug or gambling free.

For example, without a revocable living trust, your children will receive the total amount of their inheritance the day they turn 18. This can be tricky as many 18-year-olds aren’t equipped to manage that financial responsibility. Instead, you can create a step-distribution schedule that specifies when to distribute assets to your children.

Every situation is unique, but a typical structure would look something like this:

  • Distribute funds from the trust to your children as needed for health, education, maintenance, and support.
  • Then, at age 25, distribute 1/3rd of your child’s inheritance.
  • Then, at age 30, distribute 1/3rd of your child’s inheritance.
  • Then, at age 35, distribute the remainder of your child’s inheritance.

This helps you set your children up for financial success by allowing them the opportunity to manage their inheritance in bite-sized pieces as they mature rather than one lump sum at age 18.

But what about cost and complexity?

Because of the complexity of trusts, they come with an added cost.

Fortunately, costs have dropped dramatically with the proliferation of tech-enabled estate planning solutions. So, if your situation is relatively standard and you use an online service, you can expect to pay between $500 and $1,000 for an entire estate plan with a revocable living trust.

Alternatively, if your situation is more complex or you simply want the comfort of working with a local professional in person, expect to pay between $1,000 and $3,000 for an entire plan with a revocable living trust.

And keep in mind that there will be some additional administrative burden with your revocable living trust. Specifically, you will need to retitle any assets you want to transfer into the trust, listing the name of the trust as the asset title. This shouldn’t be too difficult but can take time depending on where your financial assets are custodied and their unique retitling process.

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