Do I need a trust? A look at some alternatives- Part one.
Probably the most frequently asked question by my clients is whether they need a Revocable Living Trust (RLT). A properly drafted and funded RLT offers some very attractive benefits. But the key to the value of the RLT is in the follow-through. Setting one up an RLT, but not “funding” it is really a waste of money.
Setting up a Revocable Living Trust may be right for you if,
Setting up a Revocable Living Trust may be right for you if,
• You want protection in the event of a “joint death” (both you and your spouse die in a single accident);
• You want protection in the event of your disability (or a joint disability);
• You want to avoid the cost and delays associated with probate;
• You want the ability to control how and when your estate is distributed to your heirs in the event of a joint death;
• You own any property in another state; and/or
• You want make sure that you have a coordinated estate plan which deals not only with your probate assets, but also non probate assets such as insurance and retirement plans.
Are there alternatives to a living trust? Sure, but I believe that an RLT is a better choice than most of the alternatives that also provide certain of these benefits. In this post, I will explain why I think an RLT is often a better way to protect joint property than joint tenancy.
Disadvantages of Joint Tenancy
Joint death
If you are married, and you and your spouse own your house as joint tenants with right of survivorship, in the event of a death, your spouse will automatically become the sole owner of the house. This will happen without probate (though you will need to file some documents to clear a potential estate tax lien). It is an easy way to pass property outside of probate. But what happens if both you and your spouse are in an accident together and both die? Well, then the property is going to be stuck in probate and, possbily two probate proceedings. So joint tenancy doesn’t avoid probate, it only defers it until the second death.
Disability
You can, and should, have a durable power of attorney (POA) as part of your estate plan to deal with the possibility that you make be incapacitated at some point and will need someone to act on your behalf, sign your name on checks, etc. A POA will allow your spouse, or other trusted person to do what is necessary in the event of a disability.
But I have heard stories about banks not honoring POA’s unless they are on the bank’s special form, or if they are too old, or other technical complaints. I have heard about cases where because the POA did not explicitly authorize the agent to access a safe deposit box, that a family had to go to court to have a conservator appointed to accomplish that.
Now granted, those are horror stories, but they have happened. With an RLT, your disability trustee or your co-trustee will have a much easier time handling your assets in the event of your disability. And in the event that both you and your spouse are incapacitated, having an RLT means the disability trustee can take over immediately to manage your financial affairs.
Blended Families
In a blended family, owning property may cause your children to be partially disinherited. If you have children from a prior marriage, if you own property with your new spouse as joint tenants, that property will go directly to your new spouse, and your children won’t be entitled to any of that property. If that’s what you want to happen, then this is not a problem, but you wouldn’t want this to happen because you didn’t think about it in advance.
Tax issues
If you put someone other than your spouse on title to property as a joint tenant, there may be gift tax consequences.
I am not saying that joint tenancy is not the correct option occasionally, but you do need to understand some of the risks associated with this option.
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