Revocable living trusts are often a very useful tool when it comes to estate planning, and most of my clients opt to set one up. This is particularly true if minimizing probate involvement upon your death is a major planning goal. However, I find that many clients grossly overestimate what can be accomplished with their trust documents.
Here are the most common myths I've run across in regards to living trusts:
"I will avoid probate if I have a living trust."
This is the most popular myth about living trusts. If you take the necessary steps and fully fund your living trust then you will certainly minimize the necessary probate court procedure. However, at least in Connecticut, even if you do everything perfectly and keep all of your assets out of probate, there are still at least a few documents that you will need to file with the local probate court, the most prominent of which is the estate tax return.
"A living trust will protect my assets if I end up in a nursing home."
This would be fantastic if it were true, but it's not. Assets in a typical living trust are not protected from the nursing home or any other creditor. There are other types of trusts that could be used, but they are typically income-only, irrevocable, someone other than yourself needs to be the beneficiary, and you still have the 5-year look-back to worry about. That is a level of trust planning that goes well beyond revocable living trusts.
"A living trust will allow me to avoid estate tax."
A living trust definitely can include special estate tax planning provisions. But you can accomplish the same type of tax planning in a last will & testament. Please note that the current estate tax exemption in Connecticut is $2 million.
"A living trust will allow me to avoid probate court fees."
This makes absolute sense. If you use your living trust and take other measures to keep all of your assets out of probate when you die, then there would be no probate court fees, right? Unfortunately, that's not correct. Even if absolutely no assets go through probate, the court will still charge a fee based on the overall size of your estate, and that calculation includes all of your non-probate assets. So it's referred to as a "court fee", but it operates more like a tax. This is how the Connecticut probate court system is funded.
"I don't need a last will & testament if I have a living trust."
It's true that you don't technically need a will if you have a living trust. "Need" is a strong word. But it's highly advisable to have a will to accompany your living trust. The purpose of the will is to take any assets that end up accidentally going through probate (despite your best planning efforts) and transfer them over into your living trust. Unfortunately, those assets will have to go through a probate process before going into your trust, which was what the living trust was designed to avoid in the first place. So make sure that you do the appropriate planning to keep everything in the "non-probate" category at all times.
DISCLAIMER: This blog does not offer legal advice, nor does it create an attorney-client relationship. If you need legal advice, consult with a lawyer instead of a blog.
