The Power of Revocable Trusts

Its not just about avoiding a lengthy and expensive probate, but also about protecting a lasting and positive legacy.

Ask any estate planning attorney about the benefits of establishing a revocable trust, and you will most certainly hear about probate avoidance. Indeed, that is a good answer: without a trust, probate court gets involved and distributes the estate as it sees fit, but not without first cancelling debts and paying taxes. The process is by nature public; after all, people need to know that the person passed so they can go to court and demand payment of outstanding debts. Unfortunately, though, not only creditors, but many others can come out the woodwork hungry for a piece of the pie, only to add complexity and to slow down the process. Probate attorneys can help, but at a cost - typically between 3 to 5% of the value of the estate. While simple probates can take up to three months, an average case can go for at least a year or more to complete. Hence, in the short term a trust can save cost, confusion and conflict among the already grieving survivors bypassing a potentially lengthy and expensive probate.

To me, however, this is only the tip of the iceberg when it comes to the power of revocable trusts. Let me explain...

Once a probate is closed, inheritance passes free and clear. As such heirs can do with it as they please. Ideally, life savings will continue being handled responsibly by the next generation, or at least in a way that would have been approved or intended - maybe in a way that could benefit several generations down the road. In reality, though, close to 70% of inter-generational wealth transfer is wasted or mismanaged by the time they reach the second generation, according to The Williams Group, a financial advisory firm. Even more strikingly, another study found that within two years of receiving the inheritance, at least one third of beneficiaries end with negative savings!

Let me give some not-so-improbable examples, where Dave, Valery, John and Benjamin inherit their parents' life savings:

1. Dave, who is in his second marriage with one kid of his own, and three of his new wife, spends his share of the inheritance for the education of all four children of his new household.
2. Valery always wanted to meet a well known Reiki master in northwest Brazil. Right after receiving her share of the inheritance, she moves to the master's village and donates everything to him.
3. John is a successful photographer of natural landscapes. While driving to Yellowstone Park his car loses control over an icy patch, hits a pickup truck and leaves the driver disabled for life. A jury awards the driver damages well over John's car insurance policy coverage, forcing John to surrender his share of the inheritance.
4. Benjamin has always made reckless and imprudent lifestyle choices. He buys a Lamborghini with a good portion of his inheritance and drives it to Las Vegas where he is found overdosed and unconscious in the presidential suite of a casino.

Shocking to most people, inheritances can evaporate or be seized once they pass to your loved ones. This means your hard earned money can be wasted, gambled, mismanaged or legally snatched by strangers and the courts. Can this be prevented?

Meet the Revocable Living Trust: a tool designed to protect your legacy in the long term against very likely events or circumstances. It is as if you are placing your legacy inside a vault, of which only those who you trust (the trustees) will have access to it and use it as per your instructions.

You see, upon passing, the trustee is responsible of executing your wishes, regardless of how detailed they may be. But it gets even better, a revocable trust becomes irrevocable upon passing, essentially making your life savings out of reach from everybody except the trustees who can only use the assets as provided for in the trust.

 The RLT is popular because it:

• It ensures your legacy goes to whom you designate – and nobody else. It keeps your life savings from ending up with Dave's new wife's kids, Valery's Reiki master, or John's plaintiff.
• It protects life savings against waste, mismanagement, or used in ways not originally intended, like being spent on exotic lifestyle, gambled away or up people's noses. N
• It shields the assets against poor or imprudent business decisions -- even against beneficiaries' own bankruptcy.
• Allows for experienced management and oversight of assets by a professional trustee.
• Enables proper planning for a special needs beneficiary.
• Permits you to name minor beneficiaries as immediate beneficiaries without court-supervised guardianship.
• Facilitates generation-skipping transfer tax planning.

Divorce Creditor - A Common Example

Many parents are concerned that their in-laws may someday become the outlaws; they may someday get divorced and inheritance can be seized by a divorcing spouse.

 Here’s the story of Mary and Tom - which outcome would you prefer for your children?

Option 1:  Mary and Tom love their son-in-law, Mike, and think his marriage to their daughter Liz will last. They gave Liz her share of their inheritance outright at their deaths. Five years later, Liz and Mike divorced and Mike was able to take 50% of Liz’s inherited funds.  

Option 2:  Mary and Tom love their son-in-law, Mike, but recognize that 50% of all couples end up in divorce. It’s an unfortunate reality, so when they did their estate planning, they provided for their children, but made sure the inheritances couldn’t be taken from them. Instead of outright distributions, they passed their estate in trust. Five years later, Liz and Mike divorced and Mike was not able to take any of Liz’s inheritance. 

The mark we leave behind goes to the essence of who we are and how we will be remembered. That legacy is enhanced and protected both in the short and long term by establishing a trust. Want to know more? Contact us today at (305) 924-2918 or email us at [email protected] to schedule a conversation. While every situation is different, we can help you determine whether an RLT is right for you.