FAQs about Revocable Living Trusts

What is a trust? A trust a legal agreement about the management and distribution of property. One person (the Grantor) transfers property ownership to another person or organization (the Trustee) to manage assets for the benefit of a third person (the Beneficiary). 

What is a revocable living trust? A living revocable trust (RLT) is a trust you create during your lifetime. It is revocable because you will have the ability to change it or even terminate it during your lifetime. Most people with RLTs start as the Grantor, the Trustee, and the Beneficiary all at the same time.

What are the PROs of having an RLT?

• During your lifetime, you can efficiently hand-off Trustee responsibilities to your back-up Trustee. At your death, your back-up Trustee continues (or assume) the duties seamlessly.

• Any assets held in an RLT will avoid probate (not be subject to the court's probate process). The same is true of any other non-probate asset you own (more on that here). However, there are situations where the court's probate process is preferable (keep reading).

• An RLT is (slightly) more easy to change than a Will. The laws about how an RLT (and amendments) must be signed have fewer requirements than how a Will (and codicils) must be signed.

• RLTs can handle complex family and life situations and plan for variable outcomes better than Wills (generally).

• After your death, your RLT can endure further into the future than your Will (even if your Will has a Testamentary Trust provision).

What are some MYTHS about RLTs?

• An RLT will protect your assets from creditors. FALSE. Assets owned by an RLT are subject to creditors in the same ways other assets are.

• Having an RLT means my assets will altogether avoid probate. MAYBE. If you have no probate assets at death, yes. Achieving this goal takes intentional and ongoing attention to all assets you own or acquire. It's common for one or two things to be missed (or for an asset to pop-up after death that you didn't know about).

• If I have an RLT, I don't need a Will. FALSE. Because of the fact stated above (about things getting missed or unknown things popping up), you'll still need a Will that transfers these things into your RLT.

• RLTs will allow my heirs to get my assets quicker. NOT ALWAYS. Before making distributions, both Trustees and Executors (of Wills) have to organize assets and determine (and pay) any tax burdens, among other tasks. The time it takes a Trustee to do this may or may not be faster than an Executor. 

• RLTs will reduce my income tax bills during life and my estate tax bills at death. FALSE. During your lifetime, income on RLT assets is subject to the same taxes as income on assets outside the trust. And, the Grantor will be responsible for any tax liability. After death, an RLT won't automatically reduce estate tax burdens. You can include tax savings provisions, but they are available for use in a Will or an RLT. 

What are the CONs of having an RLT?

• There are situations when the court's probate process is beneficial. The clerk of court monitors the probate process, and specific steps are required. Some of these steps are quite beneficial, such as:

  • Creating a cutoff date for creditor's claims; 

  • Ensuring all bills and debts are paid; and 

  • Verifying that assets get distributed to your intended heirs.

• Estate plans with RLTs are more expensive to create than estate plans without them. For some people, this is worth it due to the savings they expect from no or minimal probate fees after their death. Ask an estate planning attorney to help you estimate potential probate fees without having an RLT see if it's worth it to you.

• The Grantor (you) will have the responsibility of funding the RLT properly. Saying, or writing down, that certain assets are in the RLT is generally not enough to fund the trust. Also, some assets can create unintended consequences if they owned by a trust. Many people consult a financial advisor to determine which assets should go into the RLT.

Want to talk about whether an RLT is right for you? Contact me.

Not quite ready to talk about it? Read other &Law blog posts for more estate planning information.