Estate Planning and Revocable Trust Misconceptions

May 4, 2016

Estate planning and revocable trust misconceptions have proven themselves so prevalent and persistent that our estate planning attorneys are setting the facts straight. The truth is hidden amidst the complex legislation surrounding estate planning – and this article aims to discuss and dispel them.

Misconception: A Living Trust is the Same as a Revocable Trust

Fact: Not All Living Trusts Are Revocable Trusts

A revocable trust is a specific type of trust where the person setting up the trust, known as the grantor or settlor, retains the right to amend or cancel the trust. So, the term revocable trust refers to a specific type of trust created during lifetime. The term “living trust” is a more general term that refers to a trust created during lifetime or that comes into use during lifetime. A living trust can be a revocable trust, but it also could be an irrevocable trust created during lifetime.

So, not all living trusts are revocable trusts. One would not want to mistakenly set up a “living” trust that did not allow the creator to revoke it. A revocable trust by its terms should allow the grantor or settlor to amend or revoke it at any time.

Misconception: A Trust is Expensive Compared to Alternatives

Fact: Not True, if You Avoid Probate.

People often worry that a trust plan will be too expensive. Indeed, a trust plan will be more expensive upfront than a simple will. It also takes more time and effort to set up and properly fund. However, if you are able to avoid a probate after you pass away, the actual cost will likely be significantly less than if you had a Last Will and TestamentSee Will. (WillA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause.) based estate plan. Thus, while the upfront costs and trust funding are more extensive, the trust will simplify the process later on and typically the overall costs will be substantially less than with a will-based plan.

In addition to financial outlays, there is the cost of your loved one’s time and effort. A trust plan, by avoiding probate, will drastically reduce the amount of paperwork, time, effort and frustration that your loved one’s experience by avoiding probate.

Misconception: You Give Up Control with A Revocable Trust

Fact: You Maintain Control During Your Life Time and Choose Your Trustee at Death

Typically with a revocable trust, you are the person creating it and the initial trustee (or if married you and your spouse create it and  are both the initial trustees). Therefore, you can retain control over your trust and its assets just like you have before its creation.

You can also change or revoke the trust for as long as you are alive and competent. You will be able to sell, transfer, or gift assets without a trust just like you can do now. You can revoke or cancel your trust or change your beneficiaries and trustees through amendments or restatements.

In short, a revocable trust allows you to maintain full control over your estate plan, assets, and future trustees while you are alive and competent. (To be clear, irrevocable trusts do not allow such flexibility. An irrevocable trust is very different from a revocable trust.)

Misconception: Trusts Are Only for the Wealthy

Fact: Trusts Are Not Only for The Wealthy – A Chief Purpose Is to Avoid Probate and Higher Costs On Smaller Estates

At one time, trusts were indeed used primarily for tax avoidance. These days, trusts are a primary vehicle for avoiding probate, which is a tactical approach to reducing overall costs and lessening the time and effort burdens that your loved ones face administering your estate after you pass.

A revocable trust can also keep your financial information and beneficiary information private, unlike a Will based plan.

Misconception: Trustees Fees Are Expensive

Fact: Trustee Fees Are Typically Less Than Probate Executor Fees

While you are alive and competent, you will likely serve as your own trustee of a revocable trust and will do so without a fee. So there is typically no trustee fee while you are alive; nor are there other maintenance costs. Conversely, will-based estate plans often do require maintenance actions that will incur expense.

Upon death, trustees fees are generally less expensive than a will that goes to probate. A family member (such as a child) may be entitled to receive a trustee’s fee, but they often do not take a fee or they often take a discounted fee.

By avoiding probate, the amount of work required will be less than if an executor (personal representative) is needed in a probate. In a probate, the personal representative (executor) fee is set at 2% of your estate by Wisconsin law. A trustee’s fee will normally be significantly less than 2%.

Misconception: A Trust Eliminates the Need for a Last Will and Testament

Fact: A Pour Over Last Will and Testament is part of a Trust based Estate Plan

A Last Will and Testament (Will) should still be completed as part of the estate planning process even when a revocable trust is at the center of an estate plan. The type of will required will differ from an estate plan that does not include a trust.

When we draft a revocable trust based estate plan, we will also draft a simple Pour Over Will or Pour Over Last Will and Testament. This type of will names the trust as beneficiary, so that in the event that there are assets that pass through the will, these assets still go into and through the trust to your chosen beneficiaries.

The trust will contain the “dispositive” provisions naming your beneficiaries and distributing assets, but the will could be needed to make sure that assets outside the trust without beneficiaries named go into the trust at death. This helps ensure that the persons or organizations that you’ve named as beneficiaries in your trust will be the ones receiving your assets at death. Without a Pour Over Will in a case where assets go to probate, the assets would instead be distributed according to intestacy laws created by the state in which you live, and not to the beneficiaries named in your trust.

A Pour Over Will works to help ensure that the persons you named in your trust, will in fact be the beneficiaries of your assets. It also works to revoke a previous will that you may have created in the past that is no longer relevant.

We do not typically want a Pour Over Will to be used at death where a client has a revocable trust, but it is essential as part of the process in case there are unexpected probate assets at death. Again, the goal is normally to avoid probate and avoid the use of a will. However, a Pour Over Will is an important “safety” document in case an asset inadvertently goes to probate. Don’t allow someone to tell you that you do not need a will with a trust based estate plan, as best practices dictate that a Pour Over Will be created.

Misconception: A Trust Will Not Avoid Probate

Fact: A Properly Drafted and Property Considered Trust Estate Plan Will Avoid Probate

While the the goal of a revocable trust is often to avoid probate, it is our experience that a trust alone will not avoid probate. Unfunded trusts may or may not avoid probate depending upon the circumstances of the client creating it, the assets of the client, and the supporting estate planning documents.

At Wokwicz Law Offices, we spend a lot of time with clients discussing the options and what needs to be accomplished to avoid probate if a revocable trust is created. Often this involves transferring assets to the name or the trust, or changing beneficiary designations to the trust or other individuals, or transferring real estate to the trust or designating the trust as the beneficiary of a transfer on death deed for real estate. Trust funding is part of the process that we discuss in depth with clients to decide how best to make the client’s estate plan work.

For married couples we can avoid probate through the use of a “non-probate funding martial property agreement” that allows the trust to be designated as a beneficiary of certain probate assets such as Wisconsin real estate. We discuss this in depth with our married couples and typically will include a “non-probate funding martial property agreement” to help avoid probate at the death of the first or second spouse. For single clients we are not able to use this approach since it is part of the marital property code, so other techniques become even more important when working to avoid probate.

The important take away is that a trust alone does not avoid probate. A review and consideration of your unique assets and circumstances must be taken into account and discussed as part of a comprehensive plan, along with a revocable trust, to avoid probate.

Talk to Us – Dispel the Revocable Trusts Misconceptions

We know that our clients do not have all the answers or even know the questions to ask when undertaking estate planning. We consider it our job to walk them carefully through the estate planning process, discussing advantages and disadvantages of various estate planning options. We can help you work through the estate planning and revocable trust misconceptions.

To avoid probate and other costly problems, please contact Paul B. Wokwicz for an appointment to review your situation and options. Paul and his colleagues have the experience and knowledge to successfully help you achieve your estate planning goals.