Trusts have various uses. Some trusts are created for tax planning, others protect assets should the individual need nursing home or home care and still others protect people with special needs. Trusts may be testamentary trusts – trusts set up through your will – or living trusts – trusts set up while you are alive.
One type of living trust is the revocable trust. A revocable trust is not set up for tax or Medicaid planning but rather to manage assets while a person is alive and to avoid probate. There is some debate about the utility of revocable trusts. However, there are a few trends that justify another look at them.
First, some background is needed. If you have a last will and testament, your will must be probated in order for it to effectuate the transfer of assets from your estate to your heirs. Probate is a court proceeding whereby the court determines the validity of your will. A living trust avoids probate because the trust does not need a court proceeding to determine its validity.
Probate used to take less time than it does now. Courts are more underfunded and understaffed than ever before. If there is a problem, it may take years to probate an estate. Thus, probate avoidance is more attractive now and a revocable trust is a useful tool in accomplishing that end. If you anticipate a problem in the administration of your estate, such as an unhappy heir or probate in multiple states, you should certainly avoid probating your estate.
Furthermore, financial institutions very often are resistant to accepting powers of attorney, even if they are drawn properly. For whatever reason, they seem to be more comfortable with trusts. Therefore, it may be easier to administer the financial affairs of an incapacitated person through a living trust rather than with a power of attorney.
A revocable trust costs more to set up than a will and requires assets to be transferred into it. However, the extra time and expense in the beginning may pay multiple dividends in the end.