Many clients ask me if they should have a revocable living trust.  These clients may have heard how a revocable living trust is better than a last will and testament.  Often they seek to avoid the tangles and delays of probate.

The word “revocable” means the trust can be revoked without the consent of another individual.  So, for instance, if Mr. Smith established a revocable living trust, Mr. Smith retains the right to revoke the trust any time he wishes.  He can also modify the trust any time he wishes.

The word “living” means that the trust is created during Mr. Smith’s life.  The opposite of a living trust would be a testamentary trust.

A testamentary trust is a trust established in the last will and testament of a decedent. Mr. Smith can establish a living trust during his life, but he would establish a testamentary trust in his Will.  A testamentary trust, like a Will, is only effective when a person dies.  A living trust is effective when the person is alive.

Because a revocable living trust is effective when Mr. Smith is alive, Mr. Smith can put assets into the trust during his life. He can title his house into the trust or his bank accounts.  Theoretically, he could transfer most of his assets into the trust, bur some assets, such a car, might be difficult to transfer into the trust because it would be difficult to insure a car if it were owned in a trust.

I often draft revocable living trusts for clients. In most instances, the client owns real estate in another state, such as Florida.  I advise the client to have a revocable living trust in order to avoid probate in the other state.

If Mr. Smith owns real estate in Florida at the time of his death, then his Will would have to be submitted to probate in New Jersey and Florida. By re-titling his Florida house into his revocable living trust, his estate will avoid having to submit his Will to probate in Florida.  To me, avoiding probate in two states is worth the extra time and effort it takes to re-title Mr. Smith’s house into a living trust.

On the other hand, simply avoiding probate in New Jersey is not worth any extra time or effort. The process of submitting a Will to probate in New Jersey is very simple and very inexpensive.  The cost of probating a Will in New Jersey is about $150 whether the value of the estate is $100,000 or $10,000,000.

Because there are some assets that are difficult to place into a trust, such as a car, in most cases, a person cannot avoid probate with a revocable living trust. And whether a person’s Will has to be submitted to probate for a $10,000,000 estate or for a car only, the cost and time involved in submitting a Will to probate is exactly the same.  For that reason, in most cases, I typically don’t recommend having a revocable living trust if you don’t own real estate in another state.

To make matters even more complicated with a living trust, I have seen many couples who have joint revocable living trusts. A joint revocable trust is a trust that is established by both members of a married couple and that is funded with the assets of the couple.  For instance, Mr. and Mrs. Smith put all of these assets into one trust.  When either spouse dies, his/her assets typically pass into a sub-trust inside the main trust for the benefit of the surviving spouse.  When the surviving spouse dies, all of the assets typically pass to the couple’s children.

The problem with these trust is, the trust documents are frequently very long, very complicated legal documents. Ironically, Mr. and Mrs. Smith established the trust to avoid costs to their estate and complications, but the time involved in properly administering a joint living trust far outstrips the costs of having separate Wills for each member of the couple.

Living trusts can be useful tools that can reduce the cost and expense of estate administration after your passing, but if used improperly, they can actually result in significantly greater costs to your estate.