What are the Disadvantages of a Revocable Trust?
We are happy you found Hope Wood JD in your research on Revocable Trusts. In this article, we outline Iowa law for Revocable Trusts, explain the reason a Trust is more expensive than a Will, and what happens if you don’t have a Trust in Iowa.
Do I need a Revocable Trust if I live in Iowa?
Yes, with a few exceptions. The two primary reasons to have a Revocable Trust as a resident of Iowa are (1) avoid probate for real estate and (2) manage inheritance access for beneficiaries.
How does real estate transfer after death in Iowa?
Real estate interests with no living owner require court supervision in probate court to transfer or sell the real estate. This is true even if you have a Will that gifts the house to a beneficiary. Commonly, couples will hold real estate as joint tenants with full rights of survivorship (JTWRS). In this type of ownership, if the joint tenant survives you, then your legal interest transfers completely to the joint tenant. If real estate owners die simultaneously, then probate is required; this is a reason to have your home owned in a Revocable Trust.
Another reason to have a Revocable Trust when the real estate is owned in joint tenancy with full rights of survivorship is that the surviving joint owner doesn’t have the burden of creating a Revocable Trust after a joint tenant has died. The surviving joint tenant has lost a very important person and the burden to update their estate planning is heavy. If the real estate is owned in Trust, then the surviving joint tenant already has probate protection of the real estate upon their death.
How can a Revocable Trust manage inheritance for minors?
If your beneficiaries are minors, they cannot inherit assets until they are eighteen (18). If a minor inherits more than $50,000 through a Will or a beneficiary designation (like a life insurance policy), a court-supervised conservatorship is required. The conservator holds the funds until the minor turns eighteen (18) and then the minor receives all of the funds. If the assets in the conservatorship are needed for support of the minor, the conservator must get court permission to withdraw the funds. The law in Iowa is that a conservatorship for a minor terminates at age eighteen (18). The decision to permit the conservator to use funds for the minor is at the discretion of the judge. The assets in the conservatorship have to be held in a restricted account which means the conservator cannot withdraw the money unless they have a court order authorizing the withdrawal. A court-supervised conservatorship is cumbersome and expensive. A report has to be filed annually with the court and the conservator typically hires an attorney to assist them.
A Revocable Trust does not have the same restricted access to funds as a conservatorship. A Trust has an appointed trustee and the terms of the Trust state how the trustee may distribute funds for the health, education, and support of the minor child. If a beneficiary designation is a Revocable Trust or a Testamentary Trust, then a conservatorship is not needed. If a minor inherits through a Testamentary Trust and there is real estate owned by the decedent, then probate is necessary. Probate is required for the transfer or sale of real estate because a Testamentary Trust cannot own assets until the Will is administered.
How can a Trust manage inheritance for adult children?
If your adult children are young, inexperienced with money, or need assistance managing their affairs, a Revocable Trust is invaluable. The money they inherit through the Trust is controlled by the terms of the Trust. A Trustee administers the distribution of Trust assets by following the instructions of your Trust document. Your Trust can state that until a child attains the age of twenty-five (25), the Trustee makes decisions on distributing funds for the child’s health, education and support. As the creator of the Trust, you determine what age a beneficiary receives their inheritance.
Why are Revocable Trusts expensive?
An experienced estate planning attorney has a higher value and is essential to implement your transfer of assets. If the Trust isn’t drafted and funded correctly, then the lower price you pay for a Trust will be offset by attorney fees your beneficiaries will pay to handle issues that occur.
Using a Trust form instead of hiring an attorney
I won’t go into the details of why hiring Hope Wood JD is extraordinarily better than a DIY form for a Trust. I will share an example about DIY and the transfer of assets after death. The decedent used a DIY quitclaim deed to transfer real estate to a family member during their lifetime The deed did not get recorded with the county until the decedent died, which was several years after the deed was signed. The validity of the deed can now be challenged in court. If the decedent had hired an attorney to prepare the deed, the attorney could testify as to the date it was signed and their interpretation of the intent of the decedent. The attorney would have recorded the deed after it was signed and notarized. Because the document was DIY, the ownership of the house can be contested.
Using an attorney without Trust expertise
Having an attorney with experience drafting Revocable Trusts is very important. Hope Wood JD has assisted with Probate matters that could have been avoided with proper attorney attention and knowledge that comes with experience. In one such case, the decedent had moved out of Iowa to a different state. An attorney in the new state prepared a Revocable Trust. The existing real estate in Iowa was not transferred to the Revocable Trust, and the decedent died before the Iowa real estate was sold. The real estate required a full probate administration to transfer because there was not a joint tenant with a right of survivorship. To make matters worse, the attorney did not prepare a Last Will and Testament. A Revocable Trust is not a default Will, it is a separate document that can only control assets that it owns. The beneficiaries named in the decedent’s trust were not the same people as those who inherited under Iowa intestate law. The real estate did not get gifted in the way the decedent intended, and probate was required in Iowa. It was a one-two punch for the intended beneficiary.
In another case, an attorney used an attorney-focused estate planning software program to prepare a Revocable Trust for the Iowa farm owner’s real estate. The trust named charitable beneficiaries, but it was unclear from what portion of the estate their percentage was to be determined. The distribution of the Trust restricted the transfer of the land so the Children of the decedent could never own the land during their lifetime, but then gave some land outright to the Grandchildren-beneficiaries. The document was too complex to accomplish the decedent’s goals. The costs and time to administer a multi-generational trust as written were unreasonable, and the beneficiaries knew it was not their parent’s intent to have it held in a restricted Trust. In Iowa, a Revocable Trust becomes irrevocable when the creator of the Trust dies. To modify an Irrevocable Trust, there must be consent by all of the beneficiaries and it requires court permission. The court has full discretion on whether to modify an Irrevocable Trust. The cost of attorney fees to modify an Irrevocable Trust could have been more than the cost the decedent paid for the Trust.
Revocable Trusts are more expensive than a Will
A Revocable Trust document creates a new legal entity and requires assets to be titled in the Trust to accomplish the goal of the Trust creator. This work requires an experienced estate planning attorney who will charge for their expertise. The attorney will draft the Trust to implement the client’s goals for asset transfers and assist in the retitling of assets to the Trust. Revocable Trusts allow for multiple transfers of an asset, whereas a Will is limited to a one-time transfer, which occurs immediately without restrictions. For example, if you own farmland and your wishes are for your grandchildren to inherit the land after your children, then a Revocable Trust is the legal solution to implement your wishes. If the same language is in a Last Will and Testament, only the transfer to the children is legally enforceable. A Revocable Trust provides a lot of flexibility and control of assets during the creator’s lifetime and after their death. A Will does not have flexibility and cannot own assets during your lifetime.
Cost of a Revocable Trust compared to probate
If your home is assessed at $350,000 and requires probate to transfer, the attorney for the estate is entitled to a statutory fee of two percent (2%) of the entire value of the estate (less life insurance with a beneficiary). If you have a $350,000 home, $10,000 in a bank account, $75,000 in a 401K, and a $5,000 car, the attorney fees add up fast. The calculation for attorney fees is as follows: (value of gross estate - $5000) * .02 + 220. For the above scenario, the attorney fees are $8,920 to administer the transfer of the real estate in probate court. If your home is assessed at $350,000 or more, the cost of a Revocable Trust is often less than the statutory probate fees in Iowa.
What happens if I don’t have a Revocable Trust in Iowa?
It depends on what assets you own at the time of death and how the assets are owned.
How does real estate transfer at death without a Revocable Trust?
In Iowa, if there is no surviving owner of real estate, and it is not owned in a Trust, then probate is required to transfer or sell the asset. The cost of a Trust is likely less than the cost your beneficiaries will pay to an attorney in probate.
How can my minor child inherit if the assets are not owned in a Revocable Trust?
A minor cannot directly inherit assets. If you have a Revocable Trust, you can name it as the beneficiary of your asset. This is important when you have minor children. If you name your minor children as beneficiaries, rather than a Trust, then a court-supervised conservatorship is required. For example, if a grandparent gifts an account to a grandchild in a beneficiary designation or in their Will and the grandchild is under age eighteen, a conservatorship for the minor is required and the funds are restricted. The grandchild receives all of the assets of the conservatorship when they turn eighteen. If the grandparent had designated a Trust as a beneficiary and the grandchild was a beneficiary of the Trust, then the conservatorship would have been avoided. When a Trust is the designated beneficiary of an asset, then a Trustee can manage the asset for a grandchild’s health, education, and support until they attained an age designated by the grandparent.
Should I gift an asset to a person with intent for them to manage it for someone else?
This method is not advised; instead you should have the asset owned in Trust and the funds managed by a Trustee. If you gift an asset to a person, it is their asset and their inheritance. There is no legal enforcement to require them to share it with anyone else. If you have two beneficiaries and one has a tendency to mismanage money, gifting it all to the responsible beneficiary with instructions on distributing it to the irresponsible beneficiary can cause unintended consequences. The asset they inherit is considered theirs and may result in tax consequences. If the amount given to the irresponsible beneficiary is more than the gift tax exemption, then a gift tax return must be filed. While the money is in the responsible beneficiary’s account, it earns interest, which will be included in the responsible beneficiary’s income tax return. If the responsible beneficiary has adult children in college, the asset is counted on their children’s FASFA application as an expected family contribution (EFC). Gifting all the assets to the responsible beneficiary sets the stage for conflict between the beneficiaries, which can be avoided when you establish the distribution rules in a Trust.
What are the disadvantages of a Revocable Trust?
There is no practical disadvantage of a Revocable Trust if it is prepared by an experience estate planning attorney.
Disadvantages of a Revocable Trust
There is a higher cost for getting a Revocable Trust. But the calculation of attorney fees in probate often show that a Revocable Trust is less expensive to invest in than to have your beneficiaries pay more to inherit.
If the Revocable Trust is done by an inexperienced attorney, the creator of the Trust may have a mistaken peace of mind that probate will not be required. The Trust has to be funded with the asset that it controls. And the funding must be done correctly.
How do I know if I need a Revocable Trust?
Hope Wood JD has the perfect option for you. A 60-minute consultation with an experienced estate planning attorney is at your fingertips. Schedule a trust consultation today. In the consultation, you will receive legal advice about the advantages and disadvantages of a Trust for your specific estate plan. At the end of the consultation, you will receive a flat fee price if you want to hire Hope Wood JD for your estate planning. Even if you don’t hire us for your estate plan, you will leave the consultation with a wealth of knowledge about your estate circumstances and what is in your best interest.
