What would happen to your business if you weren’t around tomorrow? Does your family have a plan for your wealth if you were gone? The whole domain of trusts and estate planning can feel overwhelming to those with little experience. On the other hand, a Revocable Living Trust is one of many helpful tools for business owners to get their estate in order. It is not that every person needs a Trust, but when applied to the individual life of a business owner, sometimes a revocable trust can be a perfect fit for a great estate plan.
What is a Trust?
A trust is a legal document that predetermines specific actions to distribute assets. There are many types of trusts, but the primary purpose of implementing a trust is to effectively pass money from one person to another. Since 1916, the US Government has charged an estate tax to some estates as a means of collecting tax revenue as money changes hands from estate to heirs. Trusts as well as many other estate planning tools attempt to minimize or eliminate estate taxes to save as much generational wealth as possible.
Your wealth and what is considered part of your estate is the essence of estate planning. No one enjoys the thought of life after their death, but more planning ahead of time can usually make the actual process much smoother. When all of the accounts, real estate, businesses, and other assets are titled to the trust and have a plan for distribution, there is no need to worry or fight about what your wishes were. Specifically related to businesses, many owners do not have a business continuity plan if the business owner dies. Spending the time to plan out the transfer or sale of your business ahead of time could be very beneficial and comforting to your employees and your customers.
Trusts can also help determine wishes for important people as well. Some advisors and attorneys would argue that anyone with young kids should have a trust set as the beneficiary of the estate to protect the kids. Would you want a 14 or 18-year-old child to inherit your entire net worth? Since minors cannot legally open an account, who would be in charge of their money until they are of age? Many times, it can be helpful to outline who would oversee the kids, where they would go, and who would handle the money, among other questions.
A revocable trust is a very flexible tool due to the “revoking” power it provides. There are no unbreakable rules or lock boxes. Instead, the owner can design a better estate plan to transfer wealth without losing access to the money now. Irrevocable trusts on the other hand force any assets within the trust to operate within certain rules. Once set, the owner many times cannot revoke or change the trust again. Sometimes that tradeoff can be worth it, but it depends on the situation.
Advantages
One of the primary advantages of a revocable living trust is to avoid Probate. If you only have a will (or don’t have a will at all) your estate must be approved in the court system through the Probate process before the estate can be distributed. There are many rules, regulations, and exceptions that must be understood. Essentially any asset that does not predetermine beneficiaries will require approval via Probate before distribution. If this sounds complicated, that is because it can be. Having a written will explaining your wishes can help the process but removing all assets that would be subject to the will would help avoid Probate entirely.
When assets are titled within the trust, those assets can bypass the public courts and the Probate process. Instead, assets can be automatically distributed based on the terms of the trust (your wishes). There is no need to wait months or years for a judge to verify your wishes. Outside of the efficiency, this also means your assets and wealth can have an added layer of privacy. The less that your name and assets are publicly disclosed, some would say the better.
Business owners specifically can benefit in this situation due to the ownership structure of all of their businesses. An underlying trust that owns the LLCs and/or real estate properties can benefit from the privacy of avoiding probate. Typically, business owners at this level have multiple assets in other areas of their financial life, which points all the more to the necessity of a single source to distribute assets in an estate.
Disadvantages
Perhaps the most obvious disadvantage is the time and cost required to create the trust. Perhaps some people with a simpler estate could justify not seeing the value, but any business owner should consider the costs. Variables like the attorney’s fee and the complexity of the trust can alter how much it could cost. On the other hand, spending a few thousand dollars to outline exactly how your money should be distributed can be worth multiples.
The time required to execute and fund a trust can also become cumbersome. One of the fundamental differences between a standard will and a Revocable Living Trust (and other types of trusts) is that after creating the trust you must physically fund the trust with assets. This means retitling assets and ownership so the Trust owns the assets, not you personally. While it sounds simple, this can be one of the major reasons why a trust does not work. Simply because people do not actually use the trust.
Some people could make the case that a trust is overkill depending on a certain situation. Those with a much simpler estate may not need to go through the hassle of setting up a trust. If there are only a few assets or accounts involved that are already tied to your desired beneficiaries, then the will may be enough to effectively transfer your assets the way you desire. It is best to ask a Financial Advisor or estate planning attorney and see if a Revocable Living Trust is right for you.
Is a Trust Right for Me?
As with most financial planning tools, a revocable trust can be useful in some situations and unnecessarily in others. Those with multiple assets, businesses, properties, etc. may find tremendous value in setting one up. Taking the time to outline how you want your estate to be distributed is perhaps the most important process of this whole concept. When you have a close friend or relative pass away and you can see the difference that a good estate plan creates, it will motivate you to get your affairs in order and protect your wealth for the next generation.
TC Falkner 