Based on a lot of e-mail messages I have been receiving recently, this is the post that a lot of readers have been looking forward to...some honest commentary on how vital it is for one to own a "Revocable Living Trust" (RLT). Public interest in RLT's has been running high for the last several years. This interest has been fueled a great deal by some attorneys who convince every client that they absolutely have to own one. They create this concept of RLT's as documents that can do accomplish everything for you short of slicing vegetables. This isn't the case because every client is different and RLT's simply are not for everyone.
First, we should start with a quick sketch of how RLT's work. When you sign an RLT you essentially create a legal entity that is separate and apart from yourself, and it is a document that directs how and where the trust assets are distributed when you die, just like a will does. You then transfer ownership of your assets (bank accounts, investments, real estate, etc.) into the name of your RLT. So when you die and the Probate Court wants to know what you owned when you passed away so that it can go through the probate process, the answer is that, technically, you owned nothing...your RLT owned eveything. Therefore, no probate.
Here is a message well worth repeating: Planning with living trusts does not end when the trust documents are signed (which is the case with wills). Please notice that a vital step in this process is actually putting assets into your trust, which essentially means re-titling certain assets so that they are legally owned by your trust. Otherwise, you'll end up going through probate and defeating the primary purpose of having a trust. In other words, there are two very important steps to this process. Skipping step #2 (funding the trust) is, hands down, the most common mistake made with living trusts...and it's a big one!
Please note that it is extremely important to sign a "pour-over" will along with your trust. It is a very short and simple will which simply says that upon your death, anything that is not already owned by your trust is poured over into your trust. This ensures that all of your assets are distributed in accordance with the instructions in your trust. Ideally, everything will already be owned by your trust when you die. But just in case you forgot to re-title a particular asset or just didn't get around to it, then the pour-over will finishes the job and gets that asset into your trust. The considerable downside is that the asset now must go through the probate process, which is precisely what you were trying to avoid when you set up the trust in the first place!