Revocable Living Trusts

A living trust may only be appropriate for a small percentage of the population, but it has some pretty substantial advantages over a standard Will.

If you’ve ever come across the term and wondered if a living trust might be for you, read on to help you get a sense of exactly what a living trust is, how it works, and why you might want one.

A living trust, which typically refers to a “revocable trust” (more on revocable and irrevocable below), is basically a trust fund that owns your assets while you are still living. Most of the time, the trustee of a living trust is the same person who created it (the grantor), but you can also designate a “successor trustee” to manage the trust.

The main benefits of a living trust are that they allow you to avoid the probate court process, keep your affairs private, and make it easier for your successor trustee to manage your assets if you become incapacitated.

Many kinds of valuable assets can be put into a living trust:

• Real estate
• Financial accounts (bank, savings, and brokerage accounts)
• Automobiles
• Personal belongings (fine art, jewelry, antiques, etc.)
• Intangible assets (for example, intellectual property)

Other kinds of assets are not appropriate for a living trust because they already avoid probate court:

• Anything with a beneficiary (IRA, 403 B, 401(k), HSA, qualified annuity, etc.)
• Anything you own jointly with another person, like a spouse of child (a joint bank account, for example)

It’s also worth mentioning that a living trust cannot appoint a guardian for your children. That can only be done through a Will.

The three primary benefits of a living trust are:

• Avoiding Probate — Assets transferred into a living trust prior to your death will avoid the probate process. In essence, the trust serves as a Will, and your successor trustee is authorized to handle the assets according to the trust’s instructions.

• Increasing Privacy — Because a Will is a public document that must be filed with the probate court upon a person’s death, anyone can access the information in it. A living trust, on the other hand, is private. No details are accessible unless the trustee shares the information.

• Greater Protection in Cases of Incapacitation — If a person has a living trust in place when they become either mentally or physically disabled, there is no need to seek a conservator in the probate court. The successor trustee can simply continue to manage the trust and its assets in accordance with the terms of the trust.

In addition, a living trust is more difficult to challenge than a Will because the process of setting up and funding a living trust are more complicated than creating a Will. Someone challenging a living trust would have to prove that you were coerced into seeing the entire process through, step by step.

While the benefits of a living trust are clear and usually outweighs the down side, there are some potentially negative considerations that must be addressed:

• Intermittent Inconvenience — Once you put an asset into a living trust, it’s no longer technically your property. It belongs to the trust. If you decide to sell an asset—a house or vehicle or piece of artwork—you need to work with the trustee to remove the item from the trust prior to the sale. Of course, if you are the trustee (which is often the case with living trusts), that’s not an issue.
• Higher Costs — It does take more time, and is therefore more expensive, to set up a living trust than to set up a will. Though some people might choose to create their own will, a trust should always be set up by an attorney who has the knowledge and experience to ensure that everything is handled to your best advantage.
• Additional Legwork — Setting up the trust is only the first step in the process. Unless you “fund” the trust (transfer the ownership of assets to the trust), you won’t reap any of the benefits. This process requires retitling and re-deeding assets to name the trust as the owner.

There are three main steps to forming a living trust:

1. Setting up the trust with an attorney
2. "Funding" the trust by transferring the ownership of assets from your name to the trust’s name by retitling deeds and accounts
3. Naming a "trustee," which is usually the person who created the trust for themselves (the grantor), but which can also be a relative, advisor, or professional trustee (typically from a legal or financial organization)

Once your revocable trust is set up, you and the trust are considered one and the same for income tax, credit, and estate tax purposes. For example, if you put real estate in a revocable trust, nothing changes in terms of your ability to deduct the property taxes on your tax return.

And if you sell the property—whether for a gain or a loss—that transaction is treated the same whether you own the property as an individual or whether the property is owned by the trust.

There are some common misconceptions about how living trusts work. The two most common ones are:

• That you need to put assets into a trust to avoid or reduce estate taxes. That is not the case.
• That a living trust automatically protects assets from creditors or long-term care costs. Because you control everything in your own trust, it cannot protect assets in this way.

In addition to a revocable trust, there is also something called an irrevocable trust. As their names indicate, the main difference between the two is the ability to change the trust.

• You are not only the creator (grantor), you can also be the trustee.
• You retain full control of your assets in the trust. Ownership only changes on paper.
• You can amend or even revoke the trust entirely at any point in your lifetime.
• You can name a successor trustee to take over management of your assets in case you become incapacitated.

• An irrevocable trust is also called an “asset protection trust,” and is intended not only to avoid probate, but also to protect assets in case of a future long-term care crisis.
• You cannot serve as a trustee, and must instead name someone else to that role.
• This means that you lose control of your assets, and must rely on someone else to act as trustee in your best interest.
• The goal is to transfer assets into the trust so that they will not be jeopardized by the five-year look-back period that applies to Medicaid applications.
• You cannot revoke an irrevocable trust, but you do retain certain powers such as changing the beneficiaries or trustee.

We hope that this overview has helped you get a better sense of what a living trust is, how it works, and why it’s worth considering as part of your estate planning. But, we realize that each person’s situation is unique.

If you have any questions about living trusts in general, or a personal scenario, please feel free to reach out. We’d be happy to answer any questions you have.

Related Posts:

Free Report: Should You Add a Trust to Your Estate Plan?

What Assets Belong in a Trust?

Should You Be a Trustee? (What You Should Know Before You Say Yes)

Revocable Trusts vs. Irrevocable Trusts: What’s the Difference?

Can a Trust Protect a Trustee from Wrongdoing?

Trusts and the Probate Process: What You Should Know

Should You Choose Family or a Professional Trustee? Know the Pros and Cons