The main benefit of a revocable living trust is that it saves your family time and money by avoiding probate after your death. But there are other advantages as well.
Protection From Court Challenges
Court challenges to living trusts, like challenges to wills, are rare. But if there is a lawsuit, it's generally considered more difficult to successfully attack a living trust than a will. That's because your continuing involvement with a living trust after its creation (transferring property in and out of the trust, or making amendments) is evidence that you were competent to manage your affairs.
Someone who wanted to challenge the validity of your living trust would have to bring a lawsuit and prove that:
- when you made the trust, you were mentally incompetent or unduly influenced by someone, or
- the trust document itself is flawed—for example, because the signature was forged.
You needn't concern yourself with the possibility of a lawsuit at all unless you think that a close relative—someone who would inherit from you if you hadn't made the trust or will that you did—might have an ax to grind after your death. Pay attention to certain kinds of simmering family tensions, which sometimes boil over into lawsuits. Here are a few red flags:
- You have children from a previous marriage who don't get along with your current spouse, and either your spouse or the children might feel slighted.
- You are in a relationship—for example, with a same-sex partner—that your closest relatives don't approve of.
- You have a history of mental illness, which might lead relatives to conclude you weren't thinking clearly when you made your trust.
- You don't plan to leave much or any property to your closest relatives, and they fear you are being unduly influenced by someone.
See a lawyer if you fear a court battle after your death. If you think relatives might try to turn your estate plan topsy-turvy after your death, talk to an experienced lawyer about how you can bolster your defenses.
Avoiding a Conservatorship
Having a living trust can be extremely useful if you someday become incapable, because of physical or mental illness, of taking care of your financial affairs. This is because if you've made a trust with your spouse or partner, he or she has authority over all the trust property. If you've made an individual trust, your trust document probably authorizes your successor trustee, whose normal job is to take over as trustee at your death, to step in and manage trust property if you become incapacitated.
This feature of a living trust can be a godsend to family members who are distraught, or quite possibly overwhelmed, by caring for someone who has been struck by a serious illness or accident. Without the authority conferred in a living trust document, family members must usually go to court to get legal authority over the incapacitated person's finances—a painful, public process. Typically, the spouse or adult child of the person asks the court to be appointed as that person's conservator or guardian.
Most trust documents require that before a successor trustee can take charge of trust property, your incapacity would have to be certified in writing by one or two physicians. Once that determination has been properly made, the successor trustee has legal authority to manage all property in the trust, and to use it for your health care, support, and welfare. The law requires him or her to act honestly and prudently.
EXAMPLE: Margaret creates a revocable living trust, appointing herself as trustee. The trust document states that if she becomes incapacitated, and a physician signs a statement saying she no longer can manage her own affairs, her daughter Elizabeth will replace her as trustee. Elizabeth will be responsible for managing trust property and using it for her mother's benefit. At Margaret's death, Elizabeth will distribute the trust property according to the directions in the trust document.
A successor trustee who takes over must also file an annual income tax return for the trust. (As long as you are the trustee of your own trust, no separate trust income tax return is required.)
Even if you have a living trust, you should also make a durable power of attorney, because your successor trustee has no authority to manage property that's not held in the trust. And everyone has, at one time or another, some property that isn't owned by their living trust. So it's always a good idea to prepare and sign a document called a Durable Power of Attorney for Financial Management. In this document, you can authorize your successor trustee to make financial and property management decisions for non-trust property if you become incapacitated.
In addition, if you are concerned about making sure doctors know your wishes about the use of various life-sustaining treatments—not being kept alive artificially, for example—you'll want to prepare and sign some other documents, commonly called a Directive to Physicians (living will) and Durable Power of Attorney for Health Care.