Revocable trusts are a popular estate-planning and asset-protection tool. With this type of trust, the grantor creates a document that states which assets will be transferred to the trust and who will receive them at the time of death or incapacity. Assets are passed outright to a child without being subjected to the probate court proceeding, which has many benefits for families and heirs.
You can schedule your consultation with an estate planning attorney if you need help determining the right type of trust for your situation. In general, revocable trusts have helped many lawyers and clients to meet their estate-planning goals. Despite this unsurprising benefit, there are still some myths about these estate-planning tools.
Here are the most common misconceptions about revocable trusts:
Revocable trusts save taxes
A revocable trust is not a tax shelter. Most are revocable only when there is a change in the grantor’s will, which means that their tax position remains unchanged. While no asset is subject to probate, the trust must file and pay taxes on capital gains of excess personal property that was transferred to the trust as well as income from the trust itself. In fact, a probate proceeding may be more beneficial to heirs because it enables them to obtain the asset tax-free. Revocable trusts are not recommended for those who seek to avoid paying estate taxes.
Heirs cannot challenge a revocable trust
This is a common misconception about estate planning. Heirs can challenge a revocable trust. The challenge will likely be based on whether the grantor met the legal requirements of capacity and prudence, which are necessary for a valid transfer of assets to a revocable trust. A lawsuit is not always necessary for challenging the validity of a trust. Moreover, the law provides a number of ways in which a revocable trust can be challenged, such as by going to court to challenge the size and construction of the trust or by contesting the grantor’s execution of the trust for insufficient consideration.
A revocable trust protects assets from creditors
Assets are not safe from creditors when placed in a revocable trust. The grantor of a revocable trust retains all rights to the assets. Therefore, creditors can still pursue the assets following the grantor’s death. While probate may be delayed or even prevented from happening altogether, creditors may still be able to claim an “unpaid debt” against the trust property if they are aware of who owns it following the grantor’s death.