Revocable Living Trust- Why Many Couples Should Not Put Their Residence In an RLT

As we have discussed elsewhere, RLTs (revocable living trusts) can be quite useful estate planning devices, though they are not the solution for everyone.  Estate planning almost invariably involves trade-offs, a given option will have pros and cons.  As we continue to say, the key component of estate planning is planning, and this is the very component that is lost in do it yourself (DIY) forms obtained online or in trusting your estate plan to a seminar speaker from out of town.  If your entire toolbox consists only of a hammer, everything you encounter looks like a nail

For the moment, assume that in conjunction with proper estate planning you have determined that an RLT will be a beneficial tool for your use.  Does it follow that you should deed your home to the trust?  Well, not so fast…

It is certainly true that the RLT only works for assets actually placed into (or titled to) the trust.    (This process is called “funding the trust”, and we frequently see individuals who have an unfunded trust, meaning they have actually accomplished nothing.)  So if you do not draft a deed conveying ownership of your home to the RLT, the RLT will not control what happens to your home (at least in NC).  In NC, assets must be actually conveyed to the trust in order for the trust to control them after death.

But you say “Rick, that is why I have the Revocable Living Trust.”  Ah, but now for the trade-off.  If you transfer ownership of your home to the RLT, the RLT will (or should) control what happens to the home after you die (assuming that the conveyance was properly done, the RLT is valid, the RLT is not successfully challenged, yada-yada-yada).  But among other potential problems, the transfer may expose the home to creditors to whom it would not otherwise be exposed, and may make loss to Medicaid more likely.

Here is why:  In North Carolina most married couples own their home as tenants by the entireties.  This essentially creates a fictional entity of the married unit, which then owns the home (or any other real estate so titled).  With limited exceptions, creditors of either spouse individually cannot reach the home.  At this point many of our clients will say “I don’t have creditor problems.”  Good for you, but it takes only one car accident, one mistake, one bad business move or bad investment, one awful disease or accident.  It happens.  There are other problems that may occur as a result of conveying your home to your RLT, but this is the most common and usually the most serious.

Now, there may be good reasons for you to convey your home to your RLT.  I can think of situations (and we run across them regularly) where that would probably be the thing to do.  And what we have said here only applies to couples that NC law recognizes as ‘married’.  The key is to assess your circumstances and your preferences in conjunction with a knowledge of what the law is (including tax implications), what the options are, and some sense of what the law is likely to be in the future, and to use all of this in putting together your estate plan.  The moral of the story, if you will (and pardon the pun):  Estate planning is not primarily about the accumulation of a pile of papers.  It is about planning.  Without that, it is just papers.  And sadly, it is sometimes papers that make a real mess.