Revocable Living Trusts: Why You May Not Need One (Especially in New Jersey)

UPDATE: To read about circumstances where an Revocable Living Trust is beneficial for New Jersey residents, click here.

If you do any internet searches on estate planning, you might come away with the impression that the “revocable living trust” (“RLT”) is the solution to all of your problems.  In this post, I’ll discuss what an RLT is, how it is very different from “regular” trusts, and when you may or may not need one.  While I recommend “regular” trusts to clients all the time, I recommend revocable living trusts less frequently.

In the old days, when someone died with a will, one of their friends or relatives needed to file a complaint in court to “probate” the will.  In those days, probate was the process where the court appointed who would be in charge of the affairs of the deceased person and directed that person (the “executor”) on how to act.  The executor was required to pay the decedent’s debts and then distribute the remaining assets to any beneficiaries.  Before he could do this, however, he needed to make a formal accounting to the court and receive court approval.

That system in the old days resulted in a lot of fees for attorneys.  The executor was often needing to appear in court, and as a result, he needed an attorney to represent him.  Somewhere down the line, some clever practitioner came up with a way to avoid having to resort to the court process.  The tool to accomplish this was the RLT.

The best way to think of an RLT is as a will substitute rather than a trust. An RLT isn’t a real “trust” as the Grantor uses RLT assets for personal purposes and may terminate the RLT at any time.

RLTs aren’t used because of their utility as trusts; they’re used to avoid the probate process outlined above.  In the simplest scenario, if someone were do die with all of his assets in an RLT, he would have no assets which would need to go through the probate process. The RLT document itself would name a successor trustee at the death of the Grantor, and that person would be permitted to pay the decedent’s debts and distribute assets to the beneficiaries free of court supervision. The RLT would act just like a Will, but without having to go through the probate process.

So the RLT sounds great. Many times it is a good solution. However, before you go running to sign up to spend thousands of dollars on an RLT, let’s debunk a few RLT myths here:

Myth 1: The Probate Avoidance Gained from RLTs is a Huge Benefit.  In most states, including New Jersey, the probate process is nothing like the old-fashioned process I described earlier in this post.  In New Jersey and many other states, probate is unsupervised.  In New Jersey, for instance, to probate a will all one has to do is go down to the Surrogate’s Office with the will, pay a small fee (under $200), follow any other instructions given by the nice people there, and the will is probated.  In New Jersey, the Surrogate and other employees of the Surrogate’s office typically aren’t even attorneys let alone judges. They are normal people and they are there to help you. For that reason, most executors go through the probate process without ever needing to hire an attorney at all. Here inn New Jersey, probate is not something you really want to avoid as it is no more complicated than administering an RLT after death.

Myth 2: RLTs Provide Asset Protection. RLTs provide no asset protection while you are alive. Due to their revocable nature, if you a judgment is entered against you the RLT will be easily pierced and the assets turned over to your creditors. 

Myth 3: RLTs Reduce Taxes. Although assets in an RLT are not considered to be part of your estate for probate purposes, they are part of your taxable estate for tax purposes. Any RLT provisions (such as credit shelter trusts) that save any federal or NJ death taxes can just as easily be put into a will as an RLT. 

All of that said, there are certain limited purposes where an RLT makes sense, as everyone’s situation is different. You can read about those situations here.

Before I close, I would like to touch on one point of confusion I often get from clients. Many clients rightly wish to leave their assets to their loved ones in trust, rather than outright. This has the benefits that I outlined in another post, as well as save federal and/or state death taxes. To leave your assets to loved ones in trust, you do not need an RLT. Your will can create what is called a “testamentary trust.” A testamentary trust is a trust that doesn’t come into being until you die, and if drafted correctly can offer great protection to your loved ones.

As always, feel free to contact me with any questions.

UPDATE: To read about circumstances where an RLT is beneficial for New Jersey residents, click here.

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