Years ago, when someone died with a will, a friend or relative needed to file a complaint in court to “probate” the will. In those days, probate was a process where the court appointed who would be in charge of the affairs of the deceased person and directed that person on how to act. The executor was required to pay the decedent’s debts and distribute the remaining assets to any beneficiaries. Before he could do that, however, he needed to make a formal accounting to the court and receive court approval.

In order to avoid having to resort to that court process, the revocable living trust was born. The revocable living trust was provided as a will substitute. It really wasn’t a trust for a few reasons: 1) the Grantor may terminate it at any time and take his/her money back, 2) in a typical revocable living trust the Grantor does not keep trust assets very separate from his personal assets and uses trust assts for personal purposes and 3) the Grantor is usually also a trustee and beneficiary.

The myths associated with this instrument are many. The instrument would be used to avoid the probate process outlined above. Very simply, if someone were to die with all his assets in a revocable living trust, he would have to assets in his personal name which would need to go through the probate process. the RLT document itself would name a successor trustee at the death of the Grantor and that person would be permitted to pay debts and distribute assets free of court supervision.

In addition to all of these benefits, placing your assets into a RLT also protects them from creditors. And it avoids all of the those pesky death taxes when you die. That’s three benefits (assets protection, probate avoidance and tax avoidance) for the price of one!

Sounds great, right?

First of all, a RLT provides no asset protection. Due to their revocable nature, in 49 of the 50 states, if a judgment is entered against you, the RLT will be easily pierced and the assets turned over to your creditors. (The one exception is Oklahoma which allows a special type of revocable Domestic Asset Protection Trust, if trust assets are invested in Oklahoma). Even in Oklahoma a normal RLT like the ones sold on the internet will still over no protection.

Second: In most states, including New Jersey, the probate process is nothing like the old-fashioned process described above. In New Jersey and many other states, probate is unsupervised. In New Jersey, for instance, to probate a will all one has to do is go down to the Surrogate’s Office with the original will and the person to be sworn in as personal representative, pay a small fee and follow the instructions given by their office. In New Jersey, probate is not something you really want to avoid as it is no more complicated than administering a RLT after death.

Third: Tax Avoidance: Although assets in a RLT are not considered to be part of your estate for probate purposes, they are part of your estate for tax purposes. There is no protection in an RLT which will save you even a dime on any federal or NJ death tax which could not just as easily be put in will.

There are certain limited purposes where an RLT makes sense, as everyone’s situation is different. If you live in New Jersey, but own real property out-of-state in a state which still has an old –fashioned probate process, then it usually makes sense to have a little RLT which olds just the out--o-state property. This way you can avoid probate in that state. Or – just to avoid having to file for ancillary proceedings, the RLT would be the way to go.

Leaving assets in trust is a simple matter using a testamentary trust rather than an RLT. The testamentary trust is a trust that doesn’t come into being until you die, and if drafted correctly can offer great protection to your loved ones.

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