Revocable trusts offer advantages compared to wills for transferring wealth to beneficiaries, and they also have some disadvantages that we will discuss together today.
Revocable trusts offer advantages compared to wills for transferring wealth to beneficiaries, and they also have some disadvantages that we will discuss together today.
See last week’s Blog or call Brown CPA Group regarding the proper way to set up a revocable trust. I assume you read last week’s Blog. (If not read it now! J) we will move directly to discussing the disadvantages and myths of Revocable Trusts vs. Wills.
Disadvantages of Revocable Trusts vs. Wills
Re-registration of Property – Property must be re-registered in the name of the trust. This may involve other costs like filing fees.
May Not Automatically Adapt to Changed Life Circumstances – wills change automatically upon divorce, marriage or the birth of a child in most jurisdictions. Most jurisdictions don’t automatically change revocable trusts. So when circumstances change the grantor must be sure to make the necessary amendments to the revocable trust.
Myths About Revocable Trusts
“Revocable Trusts do not save taxes.” revocable trusts do not save income taxes and estate taxes. In most cases the property in a revocable trust is treated as if it were the grantor’s own property for both income tax and estate tax purposes.
“Heirs can challenge a Revocable Trust.” Revocable trusts, like wills, can be attacked by unhappy heirs.
“Revocable Trusts do not protect assets from creditors.” Creditors can reach the assets during the grantor’s lifetime.
The deaths of celebrities often have important lessons for estate planning. Failing to clearly define your wishes in a trust or will document can mean your intentions might not be carried out the way you intended after death.
When Farrah Fawcett passed away, her partner, Ryan O’Neal, took an Andy Warhol painting from her home, alleging that it was his. The University of Texas sued O’Neal because Fawcett’s revocable living trust stated that all her artwork was to be given to the school. There were two copies of the painting in question. The University of Texas already received one of them. O’Neal had the other copy. O’Neal won the rights to keep the painting.
Fawcett’s estate illustrates just how easy it is to become confused by the intentions in documents. When there are multiple copies of an item, or when documents don’t clearly identify which items another person is to inherit, can initiate arguments between family members and third parties like in Fawcett’s case.
In conclusion, the primary benefit of creating a revocable trust is that it provides a pre-arranged mechanism provide for continued management and preservation of your assets, should you become disabled and/or after your death. Most revocable trusts can now be treated as part of a decedent’s estate for federal income tax purposes. Which means a revocable trust shares many of the tax advantages of an estate.
Revocable trusts are not for everyone. Whether a revocable trust is appropriate for you and your beneficiaries depends greatly on your specific needs and circumstances. Although the advantages of creating a revocable trust usually outweigh the disadvantages, the decision to create a revocable trust is complicated and requires a thorough legal analysis considering all of the above factors as they affect each individual and family.
To schedule an appointment to implement this strategy and others within the context of your unique tax situation, Contact Brown CPA Group, Ltd., at (847) 509-4100.
About the author: Ken Smith is an Enrolled Agent and Senior Staff Accountant with Brown CPA Group, Ltd. We know that success means different things to different people. While a business owner strives to maximize profits, increase efficiency and plan for succession; an individual client is more concerned with tax planning, wealth management, retirement and estate planning. At Brown CPA, we work with you on the total picture. Together, we succeed.
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