6 Potential Problems With Revocable Living Trusts

Revocable living trusts have become an increasingly popular option in estate planning for many reasons including flexibility and potential savings. However, as with anything of this nature, there are some misconceptions about revocable living trusts which can lead to potential problems without proper guidance.

The following is a list of some common potential problems, all of which can be avoided with the guidance of an experienced lawyer.

1. Lawsuits. Some people believe that assets placed in a revocable living trust are not subject to lawsuits, but this is not the case. Only assets placed in a permanent trust are exempt from lawsuits, although the interest from assets in permanent trusts can still be included in a lawsuit. Revocable living trusts offer more flexibility than permanent trusts, but this flexibility also means that assets are protected in a different way.

2. Refinancing. When interest rates drop, many people look to refinance some of their assets such as houses. If those assets are in a revocable living trust, they cannot be refinanced until they are removed from the trust and the ownership is transferred back to the individual. This is not impossible, but it does require some paperwork.

3. Medicaid qualification. A popular misconception is that by putting your assets into a trust of this nature, it will be possible to qualify for Medicaid benefits that you would not otherwise be eligible for. This is not the case.

4. Does not cover all issues. A revocable living trust is not a complete estate plan - you may still need a supplementary will, generally referred to as a pourover will, as well as a healthcare power of attorney and/or a durable power of attorney.

5. Confusion about taxes. Trusts of this nature do not lower your taxes in and of themselves, although they can be part of tax planning that will result in lower taxes.

6. Forgotten assets. It is important to keep your trust updated as you acquire new assets or if you transfer assets out of the trust. For example, if you choose to take something out of the trust to refinance it but forget to have it transferred back into the trust, your heirs may have issues later.

A revocable living trust can be an important part of your comprehensive estate plan, but it is important to understand the limitations of a trust of this nature. The best way to ensure that your estate plan is both comprehensive and complete is to get advice from a trusted, experienced, and local estate planning lawyer.