Myths About Living Trusts

Creating an estate plan that includes a revocable living trust is something that almost everyone can benefit from. Whether you want to avoid probate, ensure that your estate is kept private, or protect against the possibility of incapacity, a revocable living trust will allow you to do this. However, revocable living trusts are not suitable for all estate planning purposes. In fact, some of the widely believed myths about this estate planning tool are very inaccurate. Let us take a little time to dispel some of these commonly held and circulated myths.

Myth 1. Your revocable living trust lets you avoid estate taxes.

While this myth is completely untrue, it’s also, fortunately, not as potentially harmful as you might think. Since 2013, the estate tax exemption has been set at $5.25 million per individual, and that amount will increase slightly in 2014. What this means is that unless you have an estate worth over the exemption limit, you don’t have to worry about estate taxes at all.

If you do own assets in excess of the $5.25 million limit, however, you will want to consider potential estate tax mitigation strategies. Though these strategies include a number of different tools you might be able to use, a revocable living trust does not offer any estate tax mitigation benefits. Regardless of the type of property you own and regardless of the type of property you transfer to your living trust, a revocable living trust does nothing to reduce your estate tax bill.

Myth 2. I can simply create a revocable living trust and forget about it.

Revocable living trusts are not magic. Once you create the trust, you aren’t granted some super powerful legal protection that automatically springs into place, protecting you from the ills of probate. While revocable living trusts can give you some significant protections, you will have to work for them.

When you create your living trust document, your next step must be the funding of the trust. Funding is the process of taking some of your individually owned property and transferring it into the trust’s name. Though the trust will become the legal owner, you will still be able to use and benefit from the property it owns. You’ll also be able to transfer the property outside of probate after you die.

Yet the funding process must be done properly in order for you to obtain the benefits your trust affords. If you fail to fund all of your property, or make mistakes in the funding process, the left out property won’t be able to avoid probate.