When it comes to protecting your assets after you die, a revocable living trust offers many features that provide what a last will and testament does not provide. A revocable living trust, also often referred to as a living trust, is legal entity created to govern the ownership of a person’s assets. The term revocable means that the creator of the trust has the right to modify the trust, sell the property included in the trust and even revoke the trust completely.
What is the Purpose of a Revocable Living Trust?
The purpose of a revocable living trust is often to make sure that the grantor’s property is protected from the probate process, as well as the expenses that go along with going through probate. It also helps to minimize federal estate taxes and gives the grantor much more flexibility and freedom than other trust options, such as an irrevocable trust.
How Does a Revocable Living Trust Work?
A revocable living trust is traditionally created by an attorney. The document itself creates a separate legal entity that can own, buy, sell and manage property according to the terms of the trust. The attorney will assist in getting the trust its own tax ID number, and any income that is earned through assets of the trust will need to be appropriately taxed. The income will be taxed as a pass-through instrument since in a revocable trust, the assets pass through to the grantor.
Four parties are involved in the creation and administration of a revocable living trust, and these parties include:
- The grantor, which is the person who created the trust and funded the property in the trust;
- The trustee is the position appointed by the grantor who manages the assets in the trust. In a revocable living trust, the initial trustee is often the grantor;
- The beneficiary is the person who will receive the assets of the trust in the end;
- An attorney is often involved due to the complexities involved in creating and administering a trust.
Why Do You Need a Revocable Trust?
An individual may choose to execute a revocable living trust for many different reasons. For one, if the estate is handled through a revocable living trust, all matters will be handled outside of probate court. Many people choose to do their estate this way for privacy purposes, not wanting their estate to be handled in probate court, the records of which are public record. In addition, many other clients will choose to create a revocable living trust for purposes of avoiding or off-setting federal estate taxes. A revocable living trust also allows the grantor to put certain conditions on the beneficiaries getting their property that would not otherwise be able to be included as part of a will. The grantor can work with the trustee if it is his or her wish that property be given to the beneficiaries incrementally or upon satisfaction of certain circumstances. A revocable living trust allows for much more creativity than other estate planning options.
Irrevocable Versus Revocable Living Trust
Both a revocable and irrevocable trust are separate legal entities that allow grantors to put their property into them for legal protection, to manage them outside of the probate proceedings and to take advantage of federal estate tax benefits. However, a revocable living trust allows the grantor the freedom to be able to manage, dispose of, sell, or essentially do anything he or she wants with his or her property. The grantor can also modify the trust or even revoke it. With an irrevocable trust, the grantor loses the ability to modify the language of the trust, including changing beneficiaries and trustee appointments, as well as controlling any of the property that is included within the trust. The trustee is a third-party that controls the property in the trust according to the terms written by the grantor in the original irrevocable trust document. Many clients prefer the revocable trust over the irrevocable trust since it gives them the freedom to control their own property. However, for individuals who anticipate going into long-term care in the near future, the irrevocable trust is often the best option since the person does not technically “control” the property, which means it is not considered assets that would disqualify the person from Medicaid.
Revocable Living Trust Versus Will
Several important differences exist between a revocable living trust vs will. A last will and testament only becomes operable upon the death of the testator. It does not provide for handling that person’s assets in the event of incapacity or disability, whereas a trust document will provide for who will handle the person’s money and assets in the event of disability. If a testator has only a will, he or she will need a separate power of attorney document and advanced directive to handle those issues. A revocable living trust does not require probate to handle the person’s property, but a will does require that the document be submitted to probate and a legal proceeding started to divide up the property and handle the individual’s assets and debts.
A trust also requires the person fund the trust by transferring title of assets to the name of the trust, which can be more complicated and requires more money in terms of legal fees to properly set up the trust. If the person does not have a lot of property with the exception of one home, and has no strong feelings about probate, many estate planners will suggest the person use a Lady Bird Deed or Quitclaim Deed to handle the property, leaving the small remainder of assets to go through probate.
What Are the Benefits of Having a Trust?
The concept of a living revocable trust is appealing to many individuals considering an estate plan for several reasons. One of the biggest reasons is probate avoidance. Many individuals do not wish to put their loved ones through the process of probating their estate. The process is of public record, it can be costly and also lengthy. All of the person’s property will be inventoried and reported to the court, and many states require an inventory fee be paid on the total assets before the case can be closed. In addition, by not having to go through probate, the deceased’s loved ones can access the assets much quicker through a trust, so long as the trustee approves the disbursement.
In addition, revocable living trusts also protect the grantor during his or her life time in the event the grantor becomes incapacitated. In most revocable living trusts, the grantor then no longer is the trustee, and the successor trustee handles the grantor’s financial matters under the trust. This avoids the need for a guardianship or conservatorship proceeding since it will all be laid out per the revocable living trust. All of this can be done immediately without any court interference.
Many grantors prefer the trust because it offers them privacy that a will simply cannot provide. Probate is a matter of public record. Technically, anyone can look up information about each case and can pull up every document, including the will. This lack of privacy can be a major concern for many individuals who are worried about their very private matters being brought into public life.
In addition, a revocable living trust can be used to help off-set or completely avoid paying federal estate taxes. Currently the federal estate exemption level is set at $11 million, which many people are well below the exemption level, but in the event the exemption level changes or the person has a large amount of assets, using a revocable living trust can be helpful in trying to avoid paying federal estate taxes upon the grantor’s death.
Lastly, many grantors prefer to use the revocable living trust for the control that the document gives them. In most states, when a beneficiary is the age of 18-years-old, he or she gets the right to access the property left to him or her in a will. However, arguably most 18-year-olds are not mature enough to handle a large amount of money. Further, before that time, it is the guardian of a minor child who would have access to that money, unless a separate conservator is named. There is very little protection for that money if that is what the grantor/testator wants. In a revocable living trust, the grantor can put whatever conditions he or she wants on when and how the beneficiary gets the money. For instance, the beneficiary can receive a percentage of it upon graduating from college with the remainder at the age of 30. If a beneficiary is known to be loose with money, the grantor can put in certain provisions that require the money to be used for a certain purpose or can be given to the beneficiary in small increments. It depends on the circumstances of the family as to what the grantor wants, but the point is the revocable living trust gives the grantor that freedom to be creative in the preparation of the document that a last will and testament cannot provide.
What Are the Disadvantages of Revocable Living Trusts?
Creating a revocable living trust can cost more money than a will. It takes more work to prepare the proper language for the document, as well as other documents needed to help fund the trust, such as warranty deeds. While the revocable living trust will eventually save the grantor’s loved ones money in the long run in that it will avoid probate and all of those associated costs, it does cost more upfront to prepare. An attorney is almost always needed to properly prepare the trust document, and legal fees can be costly. In addition, once the trust document is prepared, it needs to be funded, meaning ownership of the property needs to go into the trust, including real estate, bank accounts, stocks, and other items of personal property that come with titles. This process can take work and effort on the part of the grantor and his or her attorney, but it is important for the trust to fully protect the property.
Many grantors also believe that by doing a revocable living trust, they will not need to prepare a will. However, most estate practitioners also require the grantors to sign what is known as a pour-over will, which is a document that is meant to catch any items of property that are not funded in the trust. The beneficiary of these pour-over wills is the trust, and the property will then flow into the trust that way. However, many grantors get frustrated with the fact they need this document on top of the trust. It is necessary to ensure that the person’s assets are protected in the event he or she forgets to fully fund an item into the trust.
An additional disadvantage to revocable living trusts is they allow more time for a disinherited beneficiary to contest the trust document. All states give a statute of limitations for how long a beneficiary has to challenge a will, ranging between 30 to 90 days. However, when it comes to a trust, the statutes can be anywhere from one to five years, which keeps things going for longer and opens the door for more challenges.
How Much Does a Revocable Living Trust Cost?
Ultimately, how much a trust costs depends on how complex the grantor’s estate is and how much work needs to be done by the attorney preparing the trust. It also depends on where the trust is written, as a trust written in the State of Indiana will arguably be less than one written in the Commonwealth of Massachusetts, as legal costs range between those states. However, preparing a revocable living trust can cost anywhere from $1,500 to $5,000. The thought is that the costs are paid up-front to avoid the grantor’s loved ones having to pay taxes and probate costs at a later date.
Sources:
https://www.superiornotaryservices.com/blog/advantages-and-disadvantages-of-a-revocable-living-trust/
https://www.investopedia.com/articles/financial-advisors/012916/revocable-trusts-101-how-they-work.asp#ixzz5QvTo5cN9
https://www.thebalance.com/the-benefits-of-a-revocable-living-trust-vs-a-will-3505405
