Advantages and Disadvantages of Revocable Living Trusts

Similar to a last will and testament, a revocable living trust (inter vivos) is a legally binding document that’s used to distribute property and assets to the grantor’s beneficiaries when certain conditions are met. For instance, a parent may choose to give his or her children their home when they pass. Rather than placing this decision in the hands of the probate court – which may or may not transfer the property to the children – the parent can create a revocable living trust, indicating exactly who gets what and when.

Like all estate planning tools, however, there are both advantages and disadvantages associated with a revocable living trust. Before making the hasty decision to use it for the distribution of your estate, you should familiarize yourself with its characteristics. Only then can you decide whether or not it’s the right tool for your estate planning needs.

Living Trust vs Last Will: What’s The Difference?

Before we discuss the pros and cons of a revocable living trust, let’s first talk about the differences between it and a last will and testament. While both instruments are used to specify how a person’s estate will be distributed, there are key differences between the two that shouldn’t be overlooked.

The key difference between these two instruments lies in their method of operation. A last will and testament allows the grantor to distribute his or her estate only in the event of their passing. A revocable living trust, on the other hand, is used for both lifetime and after-death estate management.

Furthermore, a last will and testament is unique in the sense that the grantor can specify guardianship for his or her minor children. If the sole parent of a minor child dies without a will, the local courts will decide who is given guardianship of the child. This may be another family member, or could be a foster home. A last will and testament allows parents to choose their child’s guardian.

Advantages of a Revocable Living Trust

Arguably, the single greatest advantage of choosing a revocable living trust is the simple fact that it avoids probate court. With a last will and testament, the named beneficiaries must go through a lengthy court hearing before they are able to legally obtain the estate and/or assets specified in the grantor’s will. In addition to being a headache, probate court can also be expensive, especially when there’s a dispute regarding who is entitled to what.

Because they avoid the probate court, revocable living trusts offer a higher level of privacy when compared to other estate planning tools, such as a last will and testament. When beneficiaries are forced to go through probate court to obtain the grantor’s estate, everything becomes public knowledge – something many people want to avoid, especially during events such as loved one’s death.

Disadvantages of a Revocable Living Trust

But there are also some potential disadvantages to using a revocable living trust., including the limitations on transfers. The underlying principle of a living trust is that the grantor’s estate is held by the trust company. Therefore, IRAs, retirement plans, and jointly owned assets cannot be included in a living trust. If you don’t have or plan on using any of these assets, it shouldn’t be a problem. But if you do, you’ll need to seek an alternative estate planning tool.

It’s a common assumption that revocable living trusts are tax-free, but this isn’t the case. Just because the estate is held by a trust doesn’t mean the grantor is off the hook from paying Uncle Sam. There are ways to reduce the estate taxes within a revocable living trust, but they cannot be avoided.

When compared to a last will and testament, revocable living trusts are more labor-intensive and time-consuming to create. This means you can expect to pay more to have a revocable living trust drafted by a lawyer.

The contesting period is longer for a revocable living trust than a will. Most states allow individuals to contest a will for 30-90 days, at which point no one can legally make a claim against a beneficiary. With a revocable living trust, however, the statute of limitations is usually around 1-5 years, sometimes even longer. This means conflicts may arise long after the living trust has been executed.

Do I Need To Notarize a Revocable Living Trust?

As with any legally binding document, you’ll want to make sure everything is in order when creating a revocable living trust. This includes having it witnessed and notarized if necessary. Laws regarding the notarization of revocable living trusts vary from state to state. According to LegalZoom, Florida requires all revocable living trusts to be witnessed by two people and notarized.

“In Florida, not every type of trust must be in writing, but a revocable trust that transfers property outside of your estate after your death must be signed with the same formalities as a will — two witnesses and a notary,” wrote the folks at LegalZoom.com.

You’ll want to check with your respective state to determine whether or not notarization is required for a revocable living trust. When it doubt, though, it’s best to err on the side of caution by having it notarized. Doing so adds another level of security to your estate plan, reducing the risk of conflicts.