A revocable living trust is an arrangement which involves a transfer of property to someone who promises to hold such property for another according to the transferor’s instructions. The three main reasons for using a living trust (rather than a will) as the centerpiece of your estate plan are to:
- Avoid probate and administrative costs for property in the trust,
- Provide for property management, especially during any time you become incapacitated, and
- keep your estate plan private.
HOW A REVOCABLE LIVING TRUST WORKS
Typical Provisions of the Trust
Requirements for establishing a revocable living trust vary from state to state. The typical revocable living trust document:
Names you as the initial trustee, with the power to manage and access property transferred to the trust, as you deem necessary or appropriate.
Names a successor trustee to take over management of the property of the trust for your benefit in the event of your incapacity, and to hold and manage such trust property for your beneficiaries after your death, in accordance with your wishes.
Names the beneficiaries who are to receive the property of the trust after your death, and specifies what specific assets or shares of such property they are to receive, as well as any conditions which may apply related to such receipt.
Provides that you can revoke or amend the trust at any time until your incapacity or death, at which time the trust becomes irrevocable.
Funding the Trust
Property must be transferred into a revocable living trust in order to order to make the trust effective. If the property is real estate, you must execute a conveyance instrument which takes the form of a deed, in which the trustee of the trust is named as grantee. Bank accounts require a change of the title on existing accounts or you simply open up a new account in the name of the trust. A transfer of registered securities is effected by signing a stock power document and lodging it with the stock transfer agent or custodian of the securities. Assets without title documents (e.g., jewelry, antiques, equipment) can be transferred to a trust by way of a written assignment.
Managing the Trust Assets
During your life, you have complete control over the property owned by the trust, just as though the trust did not exist. You can use the trust property and any income generated from it as you please. If you want to sell or refinance trust property, you can do so in your capacity as trustee of the trust or you can transfer the property from the trust back into your own name, whichever the buyer, financial institution, or title company prefers.
Amending or Revoking the Trust
During your lifetime, you can change the terms of the trust as you see fit or revoke it entirely. For example, you may need to amend your trust to:
- Change the designation of your successor trustee;
- Add or remove one or more persons who are named beneficiaries of the trust; or
- Modify the amount of property passing to a beneficiary or the manner in which such property is distributed to them.
If You Become Incapacitated
Your successor trustee takes over the management of the property of the trust for your benefit, in the event you become incapacitated, and he/she makes sure that your bills are paid and carries out your instructions without the need for court intervention. The successor trustee can also take over any duties you had in providing for other family members.
At Your Death
The successor trustee, typically, pays your taxes and debts from the property of the trust, and then holds and distributes the remaining balance for the beneficiaries you’ve named, all in accordance with the terms of the trust. With a properly drafted and funded living trust, your estate will not need to go through probate. If there are no assets in your name alone upon your death, except for “small estates,” (discussed below) in which some probate assets have not been transferred into the trust, your estate may qualify for simplified probate procedures available for small estates.
No probate will be needed to transfer ownership of the same to your heirs. Even if some probate assets have not been transferred into the trust, your estate may qualify for simplified probate procedures available for small estates.
ADVANTAGES & DISADVANTAGES OF A REVOCABLE LIVING TRUST
Choosing whether to create a will or a revocable living trust as centerpiece of your estate plan can be a difficult decision. Each has its own benefits and drawbacks, costs and anticipated savings. In the end, you’ll need to balance the advantages and disadvantages and make your decision. Your estate planning attorney can offer you invaluable advice on the actual costs and likely savings available with each, as well as advising you on state laws that make one or the other more attractive.
Avoids the expense and delay of probate
In some states, probate can be expensive and time consuming. In a probate administration, typically your executor will need to hire an attorney for assistance. The tasks required in a probate proceeding include:
- Filing a petition with the probate court to admit your will to probate;
- Provide notice to heirs and interested parties of their right to contest the will;
- Petition the court for the appointment of an executor;
- Prepare an estate inventory;
- (Pay claims, debts, fees and taxes; and
- Distribute your assets to your beneficiaries.
With a living trust, the settlement process is usually quicker and more simplified. The successor trustee holds and distributes the property of the trust to your beneficiaries on your death pursuant to the instructions you provided in the trust document. No probate is necessary for any property of the trust.
Avoids multiple probate proceedings in other states
If you own real estate in more than one state, a living trust can eliminate the need to open a probate proceeding in each state in which real estate is owned by you.
Enables you to plan for your incapacity
A living trust can designate a successor trustee to take over management of the property of the trust in the event you are no longer able to manage your property and financial affairs. In that regard, the trust instrument can specify under what circumstances you are considered incapacitated and by whom such a determination is made.
For example, the trust instrument could provide that the successor trustee will take over when two physicians sign a statement that you no longer have the capacity to manage your affairs. No expensive court proceeding to appoint and oversee a guardian should be necessary. Unlike the holder of a power of attorney, a successor trustee has legal authority over the property of the trust. The authority extends to transferring real estate and writing checks, and is more likely to be recognized by title companies and financial institutions.
Keeps your estate plan private
A revocable living trust can protect your privacy. Unlike a will, a trust is not required to be filed with the clerk of the court and made a public record. Most of the time, the provisions of a trust are private and the trust operates without any court involvement. With a trust, you can keep private the value of the property of your estate and the manner in which you have decided to distribute it after you’re gone. Probate proceedings, on the other hand, are public. Anyone will be able to read your will and see who you named as beneficiaries of your assets.
Allows you to have your estate administered by an out-of-state trustee.
State law may require that the executor designated in your will be a resident of your state of domicile, or be bonded. If you have a trust, you can name a trustee who does not live in your home state. For example, you may want to designate an adult child of yours who has moved away from your state of domicile, as your successor trustee.
Is easier to amend than a will
Typically you can amend a living trust with a simple notarized document. Unlike changes to a will, no witnesses are required.
Requires more effort than a will to maintain
Unlike a will, which does not “speak for you” after you’re gone until it is admitted to probate, a living trust speaks for you immediately upon its creation. But in order to get the benefits intended by the trust, you have transfer your assets into it, which takes time and money. You must also ensure that all newly-acquired assets are titled in the name of the trust if your goal is to avoid probate.
Can be burdensome to own certain assets through a trust
Mortgage lender’s sometimes refuse to title new real estate purchases in a trust, thus requiring you to close and later contact your attorney to arrange a second transfer into the trust. Sometimes, third parties may be reluctant to accept checks drawn on a trust checking account. Automobile loans may have to be paid off before the car can be transferred to the trust, and insurers may be hesitant to insure an automobile held in trust, or may underwrite auto insurance coverage using commercial rates which are normally higher than auto insurance covering an auto used personally.
Provides less oversight of estate administration
Without probate, there is no court oversight to ensure that the successor trustee adheres to the terms of the trust instrument after you die. If a court is to determine disputes or issues of facts regarding beneficiaries or trust administration, a separate action must be initiated.
Real estate transfers could incur extra expenses or jeopardize other legal benefits
While not true everywhere, in some places transferring real estate to a living trust could trigger transfer fees and taxes. In some states, placing your home in a living trust could also jeopardize your homestead exemption (which protects your home from creditors’ claims) and your eligibility for Medicaid benefits.
A living trust can cost more to create, fund, and administer than a will, but could eventually save your family more by way of0 reduced or eliminated probate fees and costs, depending on the extent of your estate and how expensive the probate process typically is where you live.
COMMON MISCONCEPTIONS ABOUT WHAT A REVOCABLE LIVING TRUST CAN DO
Despite its many benefits as an estate planning tool, a revocable living trust DOES NOT do any of the following:
Provide tax benefits
People often think that a revocable living trust provides some special tax benefits not available with a will. People say to me all the time, I won’t have to pay estate tax because I have a trust. This is NOT TRUE. A revocable living trust offers no special tax benefits. Any tax planning that can be done with a living trust can also be done with a will. Although property which passes via your trust is not part of your “probate estate,” such property is part of your “taxable estate,” for estate tax purposes. Any planning designed to minimize or avoid estate taxes can employed in either a will or revocable living trust.
Make a will unnecessary
Even if you have a revocable living trust, you still need a will. A revocable living trust deals only with property which is held by and owned in trust. When you die, you could own property which you have not transferred into the trust. For example, you might have acquired property shortly before your death or simply overlooked it. In addition, your estate could have acquired property after your death, such a tax refund or the repayment of a debt. For these reasons it is necessary to create a “pour-over” will. A pour-over will provides that upon your death, any property in your name alone at you passing “pour-over” into your trust, to be held and distributed in accordance with its terms.
Prevent a contest
A living trust doesn’t prevent disappointed relatives from contesting your choices of beneficiaries. Living trusts, just like wills, can be contested on the basis that you lacked mental capacity, were unduly influenced, or a victim of fraud. However, trust are more difficult to contest than wills. By setting up your trust a while before your death and managing your own assets as the trustee, you will provide strong evidence that you were competent. As in a will, you can discourage a trust contest by including a no contest clause in your trust. A no contest provision states that if a beneficiary brings an action to set aside or attack your living trust, such beneficiary receives nothing from the trust.
Protect assets from claims of your creditors
Generally, you cannot shield your assets from creditors simply by placing them in a revocable living trust. Creditors can reach the assets owned in a living trust both during your life, and many of them after your death. In fact, in many instances, probating a will offers more protection against creditors than a revocable living trust.
During probate, creditors must submit their claims in a certain form and by a certain deadline. If the creditors miss the deadline or otherwise fail to follow the rules, the creditor can be barred from pursuing its claim. If the property of a trust is distributed to beneficiaries outside of probate, in some cases, creditors can still come after them and may have a longer time to do so.
However, in many circumstances, it is possible to immunize your assets from certain creditors. This is a subject matter which requires a thorough discussion with your lawyer.
Help you qualify for public assistance
Placing your assets in a revocable living trust will not help you qualify for Medicaid benefits or other public assistance because you still have complete access to and use of the assets. In fact, placing your home in a living trust can impair your eligibility for Medicaid nursing home benefits, as a home owned in a trust is not an exempt asset, while one owned outright is. Although you can transfer your home out of the trust to become eligible, the delay could cost you some benefits.
WHAT PROPERTY YOU SHOULD TRANSFER INTO YOUR REVOCABLE LIVING TRUST
What property you transfer to your revocable living trust depends, in part, on the reason(s) you have created it. Your estate planning attorney will review your assets and advise you what is best for your particular situation and goals. Here are some general rules.
If you created the living trust to avoid probate, you must transfer to the trust those assets which otherwise would be required to pass through probate in order to be distributed to your heirs/beneficiaries upon your death. These are assets not already subject to a probate avoidance device, like:
- Contractual arrangements, such as life insurance;
- Joint ownership, where on the death of one joint owner, the property passes to the other joint owner; or
- Payable on death accounts.
Additionally, although you keep some non-probate assets (such as life insurance), in your own name, you may name the successor trustee as the beneficiary to receive the proceeds at your death and distribute them in accordance with the trust.
If you are using the trust primarily to prepare for your disability, rather than to avoid probate, you may prefer to leave the trust unfunded. You can then execute a durable power of attorney authorizing your agent, in the event of your incapacity, to transfer your assets into your trust.
Avoiding probate in other states
If you created a revocable living trust because you own real estate in more than one state and want to avoid probate in multiple states, you could choose to transfer only the out-of-state real estate to the trust, and keep your other assets in your name.
FEDERAL TAXES AND YOUR REVOCABLE LIVING TRUST
Because you retain the right to revoke your living trust, the trust is ignored for federal tax purposes during your life. The trust’s income is directly taxable to you and you are entitled to take any deductions available to the trust (e.g., the home mortgage interest deductions available with respect to the home that is titled in the name of the trust and the mortgage payments that you make as the trustee). You don’t have to file a separate return as the trustee or obtain a taxpayer identification number for the trust.
Estate and Gift Tax
The trust’s assets are included in your estate at fair market value, as if they were owned in your name. However, you won’t owe any estate taxes unless at the time of your death, the value of all property transferred to a non-spouse exceeds the value of your lifetime applicable exclusion amount against estate tax ($11.40 million in 2019). For gift tax purposes, transferring your property to a revocable living trust does not constitute a completed gift to any of your named beneficiaries because you, as the transferor, retained the power to revoke the trust, amend its terms, and remove the property from the trust which is the subject matter of the gift, thereby cancelling the gift.
REASONS WHY A REVOCABLE LIVING TRUST MAY NOT BE THE RIGHT SOLUTION FOR YOU
Although an excellent estate planning tool with many benefits, a revocable living trust isn’t the right choice for everybody. You may decide against a living trust if you fit into any of these categories.
You live in a state where probate is streamlined and relatively inexpensive
Avoiding probate is generally a good plan. However, in some states probate is less complicated and expensive than in others. If you live in one of these states, you may find that the costs of setting up and maintaining a living trust equals or exceeds the costs of probate. After all, probate does not need to be paid for until death, but a trust must be paid for up front. If you bring your estate planning attorney an inventory of your assets and liabilities, he or she can advise you whether a living trust will save money in the long run.
Your estate qualifies for simplified or expedited procedures for small estates
Virtually all states have some type of expedited or simplified probate procedure for “small estates.” What constitutes a “small estate” varies widely from state to state. For example, in Illinois, if a decedent at his/her death does not own real estate and has personal estate valued, in the aggregate, at no more than $100,000.00, the decedent’s estate qualifies for an alternative procedure to probate, known as a “Small Estate Affidavit”.
Other probate avoidance devices are adequate for your estate
Joint tenancy with right of survivorship, pay on death bank accounts, and beneficiary designations for insurance and retirement plans can be used to pass property outside of probate. These can be simpler and less expensive, but are not available for all assets. Joint tenancy may raise tax concerns and have other drawbacks. For example, you can’t change your mind and revoke the joint tenancy. Conflicts may develop between you and your co-tenant regarding the sale or use of the property.
You are young and in good health
You may decide it’s premature to worry about avoiding probate. For example, if you are in your thirties with minor children and a modest estate, you may decide to use a will and life insurance for the time being. Later, when you have accumulated more property, you can always revise your estate plan to include a living trust.
You have debt problems
Probate may be an advantage if you have many creditors. When an estate is probated, creditors have a deadline by which they must file claims against the estate. If a creditor misses the deadline, the debt is extinguished. Valid claims must be paid before your estate is administered. Your heirs or beneficiaries get their inheritance without worrying about creditors appearing to claim some or all of it.