REVOCABLE LIVING TRUSTS|
Revocable Living Trusts are not the first answer for the average person. The higher up-front cost and greater up-front effort may not be justified when net worth primarily consists of a jointly owned home, jointly held bank accounts and life insurance.
However, I am convinced that Revocable Living Trusts are well suited for business owners regardless of the dollar amount of their estate/assets. Here are some of the factors to consider when deciding if it makes sense to spend the extra time and money to set up and properly administer a Revocable Living Trust:
It is a mistake to believe that Revocable Living Trusts are only for the few with very substantial estates. Creating and properly funding a Revocable Living Trust is about solving problems and achieving goals. You, your business and your loved ones may well benefit from a Revocable Living Trust approach.
- Business Continuity: Wills do not address what happens if you are disabled. If there are co-owners of the business and a well-crafted buy/sell agreement is in place, no problem, maybe. Assuming the co-owners have the inclination and ability to make the purchase, no problem. If you are the sole owner, the Probate Court will eventually appoint a third party to run your business. This can spell disaster.
In the event of death of a sole owner, the court appointed personal representative, when finally appointed, will make the decisions concerning continuation of the business, etc. Tremendous value can be lost in the process.
A Revocable Living Trust can help avoid these problems.
- Privacy: Probate Court proceedings and your Will, after your death, are public records. This is also true for proceedings concerning your disability. Anyone who wants to know about your personal and business affairs can do so. A Revocable Living Trust is a private document and can avoid these problems.
- Real Estate: A separate Probate Court proceeding is required in each State where you own real estate. Retitling your real estate ownerships into a Revocable Living Trust will avoid the cost and time delays of multiple Probate Court proceedings. This savings alone can more than justify the extra cost and effort involved in creating and funding a Revocable Living Trust.
- Minnesota Estate Tax Savings: Minnesota estate tax operates differently than the federal estate tax. If you are married, there is a potential to protect up to $3,000,000 of assets from the approximately 10+ % estate tax this year. A simple Will does not allow you to do this. Creating a sub-trust in your Revocable Living Trust (the "Family Trust") allows for this potential savings. In other words, your estate can be increased by $300,000+ through a Family Trust. Not chump change in my neighborhood.
- Children, Young and Old: The business owner should be concerned with who would be a guardian for minor children, who should be a trustee of the assets (read company ownership interest, etc.) and whether and how special needs of a particular child should be handled. Many families have a child or children with special needs and special abilities. Working a plan that addresses those needs and abilities is smart. Just having your assets split equally among your children may not be a good plan. The older business owner with children should take heed of the fact that lump sum inheritances are, statistically speaking, often dissipated within a few years. Perhaps more importantly, there is the question of which child/children really want to and should be a part of the business. All of these issues are better addressed via a Revocable Living Trust.
- Florida, Here I Come: Your Will may not be effective if you move to another State. At a minimum, different laws will apply which can create unforeseen consequences. If you move, you will need to have a local lawyer review and, most likely, revise/redo your Will. A Revocable Living Trust is a contract created under Minnesota law and subject to interpretation under Minnesota law regardless of where you are a resident when you become disabled or die. As a valid contract in Minnesota, your Revocable Living Trust must by afforded full faith and credit by any other State.
- Disability: With each advance in medicine, the probability that disability will precede death increases. Health care directives and powers of attorney do not address the details of what you want done from a financial/business standpoint during a period of disability. A Revocable Living Trust can address issues important to the continued operation and success of your business as well as continuing care for you and your loved ones. A Will, by definition, does not apply until you are dead.
- Will Challenges: As noted above, a Will and the Probate Court proceedings are of public record once you die. A Revocable Living Trust, which becomes irrevocable upon your death, is a contract/private document and notice does not have to be given to anyone. Your successor trustee, named in your Revocable Living Trust, simply follows the orders you laid out concerning distribution of your assets etc. If you only have a Will, your heirs as determined by Minnesota law (whether or not they are named in the Will) will receive official notice and will be given an opportunity to contest the Will. And this gets very expensive real fast.
- Cost - "Pay Me Now or Pay Me Later": Revocable Living Trusts cost more to create than a Will. However, the cost of implementing your directions/orders after your death is substantially lower with a Revocable Living Trust than with a Will.