Do Parents Need a Revocable Living Trust?

This article contains affiliate links. Please see disclaimer. 

 

If you are making a high income, you will eventually acquire some assets. These assets need management. While we are alive this usually isn’t an issue. We can manage these ourselves or hire some professionals to assist us. If we become incapacitated or die, it’s a little harder or impossible to manage these. This is where a revocable living trust can come in handy. This is basically a legal entity that lets you direct your assets where you want them to go after you no longer have the ability to do so.

What is a Revocable Living Trust?

A revocable living trust (referred to as “the trust” from here on out for simplicity) holds ownership of the grantor’s assets. Since it is revocable the grantor can take the assets back at any time.

A trust also involves a trustee. That is usually the same person as the grantor, namely you. The trustee/grantor manages the assets as if they are his own. There isn’t even another tax identification number associated with the trust. You continue to file taxes as if the trust doesn’t exist. The trustee/grantor claims the assets as his own for tax purposes while he is living.

If he becomes incapacitated or dies, the successor trustee takes over. This is someone you name in the trust.  His job is to carry out the grantor/trustee’s wishes with the assets held in the trust. He pays all the grantor’s bills, taxes, etc. and then distributes the rest of the assets to the beneficiaries of the trust in the event of the grantor’s death.

 

What are the advantages of a revocable living trust?

There are a few things a trust helps you accomplish.

A trust can help avoid probate. Probate can be a costly process that draws out the process of distributing your assets after you die. I’ve seen figures of the cost of probate to be 2-4% of an estate’s total worth. You will have to ask an attorney if this is reasonable in your state.

A trust is private. Anyone can read your will. An angry relative could contest it in court. A trust is only made public in litigation, otherwise, your successor trustee is the only one that needs to read it.

A revocable living trust can apply before you die. If you become incapacitated, your assets could still be distributed to your beneficiaries. A will is only executed after your death.

Do Parents Need a Revocable Living Trust

Exciting Reading!

How is a trust better when you have kids?

If you have beneficiaries that are minors and no trust, any assets with be placed in a court-supervised guardianship for the minors until they turn 18. If you want those funds to go to your kids before they reach 18, a trust will help achieve that. The successor trustee can distribute those funds to the minor as you wish. For example, say you want to buy your kids a car at age 16, the trustee could distribute funds up to a certain amount specified by you to buy that car. You can also stipulate that the funds don’t go to your heirs until a certain time period.

The successor trustee can distribute those funds to the minor as you wish. For example, say you want to buy your kids a car at age 16, the trustee could distribute funds up to a certain amount specified by you to buy those cars. You can also stipulate that the funds don’t go to your heirs until a certain time period.

For example, we have set our full final asset distribution to occur when each child turns 30 years old. Before that, they get funds to pay for college educations and a monthly stipend while fully enrolled in school. The also get a predefined amount for a downpayment on their first homes.  You could stipulate things like this and whatever else you can imagine in the trust.

 

Do I still need a will?

You still need a will. A will directs your assets to the beneficiary you want to have your assets. It also directs who takes care of your kids if you pass away. When you become a parent, establishing a will might be one of the most important things you do. If you don’t have this the court will decide who takes care of your kids and they might not always be who you want.

When you have a trust, you will most likely need a pour over will. This ensures that any assets not placed in the trust “pour over” to your trust when you die. If you don’t fund the trust by placing assets in the trust’s name then they might still have to go through probate. This depends on the asset and the state where you live.

 

Who needs a Revocable Living Trust?

I think parents with some assets and minor children could greatly benefit from a trust. You can direct how funds are distributed and take better care of your kids after they have gone through a tough time of losing their parents.

Do Parents Need a Revocable Living Trust

A pretty thick document

What was the process like for you?

When we set ours up it cost $1500. That was about 5 years ago. The estate planning attorney I used streamlined the process. We had an initial hour consultation that if we decided to proceed with the trust, he included in the overall price.

Then he forwarded us a long worksheet that helped my wife and I think through the process and convey our wishes. I bet we spend four or five hours going over that worksheet. It was a long discussion but also very good for us to hash out all our wishes if the worst happens.

He then gave us another 20-30 minute phone consultation to review our wishes and clarify any questions he had. A few days later he had all the documents emailed to us for review. After we reviewed everything, he sent us the documents for notarization and witnessing. We did that and the document should be legally binding after all that.

 

It sounds like a hassle. Was it worth it?

I think it was but this depends on your situation. If the trust allows you to avoid probate, it could save a lot of money with your asset distribution after death. Probates costs include an executor, tax preparation, and attorney fees.

Depending on who does these things and the disputes you have with your estate, these can really add up. This link gives numerous examples of a wealthy estate being decimated by probate costs. Elvis Presley is one of the most famous examples. He left an estate over $10 million but by the time the attorneys and finished probate, his heirs received about $3 million.

I think this is too complicated to do without a professional. There are services like LegalZoom that can help you start the process. I recommend getting a referral from a friend or doing some research on your own. I used a firm with good online reviews and testimonies that a friend recommended.



Do Parents Need a Revocable Living Trust?


I’ve done my best to give you an overview of the revocable living trust advantages and disadvantages. Every family will have a different situation and you should consult an estate planning attorney to confirm everything I’ve said. I tried to give you a glimpse into the process for us. Like I said, I think it was worth it. We have some assets and young children. I don’t want finances to be a worry if they happen to lose both their parents. Hopefully, we don’t need these documents for a very, very long time.

What do you think? Did you get a revocable living trust? How was the process for you? Do you have more question?

Tom
Tom is a doctor, husband and father of five with a passion for parenting and finance. When he isn't skateboarding, riding BMX, or jumping on the trampoline with his kids, he is reading and writing about personal finance. He helps high income parents educate and mentor their kids to become financially, emotionally, and intellectually self sufficient.

3 Responses to “Do Parents Need a Revocable Living Trust?

  • Thanks for the overview. I need to do something like this, and I know LegalZoom is pretty streamlined about it. But I’ve got a lot of questions and will probably just pony up for someone I can spend lots of time on.

    I’d hate for stuff to be tied up in court. I’d love to understand more the tax implications/benefits of trusts, and the types of covenants once can place e.g. can’t touch money before 35, and at which time, you can only draw $50,000 a year from the trust that can only be used for rent/mortgage/education.

    Would you be interested in going DEEP on this subject and writing a guest post on Financial Samurai one day? It can be like a version 2 of this post with new considerations you’ve had, the nitty gritty numbers, etc. Will be a good boost for your traffic too!

    Best,

    Sam

    • I’m a DIY guy too in most areas (investing, deciding on insurance products, etc) but after looking into all the various aspects of a high income earner, insurances, real estate, multiple investment accounts and multiple heirs (in my case five) to establish a revocable trust, I was happy to get some advice from a professional.

      I put some stipulations in our trust to incentivize our kids to get an education and not depend on Mom and Dad’s money if we aren’t around. As mine are getting closer to college our trust is still applicable but I will need to change some things as they graduate.

      That sounds like a great guest post idea. I need to sit down and think about some of the consideration I have as they age and as assets increase. That could be something to include.

      When we started the trust the main asset was life insurance but has changed quickly over the last five years. It should change even more in the coming ten.
      Thinking about how things change as we age and how often to change the trust is also something I need to think about. Factoring in specific college costs and potential other gifts like cars, first home purchases and wedding funds could also be included. Transferring specific real estate to multiple heirs can be complicated too.
      I’ll do some more brainstorming but I’d love to guest post. I’ll get some thoughts on email and get back to you asap. I appreciate the opportunity and you reading and contributing Sam!

      Tom @ HIP

Comment Below

Your email address will not be published. Required fields are marked *

Follow on Feedly