Revocable Living Trust: What It Is and When You Need One
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When it comes to estate planning, a commonly used tool is a revocable living trust, also called a revocable trust or living trust.
What is a revocable living trust?
A revocable living trust is a legal document that allows you to put your assets into a trust and select a trustee to manage the assets for your benefit (and that of your beneficiaries). A revocable living trust is changeable and often created in conjunction with a will.
» What kind of trust works for you? Compare revocable vs. irrevocable trusts
Advantages of revocable living trusts
1. Protection when incapacity seems likely
There’s no way to know precisely when an ailing person might become incapacitated, so a revocable living trust allows for smooth transition planning. The trust must be created when the ailing person is deemed mentally capable of agreeing to the document. Otherwise, it won’t be legally binding. When the person dies or becomes incapable of handling their financial affairs, the successor trustee takes over.
2. Help to avoid probate
Probate is the legal process during which a court validates your will and then authorizes your executor to distribute your estate to your beneficiaries as you have instructed. If you die without a will — or intestate, in legal terms — the probate court decides how to distribute your property and to whom.
Probate, however, applies only to assets that are part of your personal estate when you die. If you establish a living trust and legally place property into the trust, that property is typically no longer subject to probate oversight.
In addition to being time-consuming and often expensive, probate proceedings are public. However, assets in a living trust generally don’t have to go through probate, so they are kept away from prying eyes. A living trust generally is a private document that only the trustees and particular beneficiaries can read after your incapacity or death.
Disadvantages of revocable living trusts
1. They can be expensive to set up
Depending on how complicated your estate plan is, working with financial professionals or lawyers can be expensive — perhaps more expensive than setting up a will.
» Learn more: How trusts work and how to set one up
2. The process can be time-consuming
After a living trust has been established, you still have to transfer ownership of any accounts or assets to the trust. Retitling assets can be difficult, especially if you have multiple different assets you want to put in the trust.
3. No tax advantages
Revocable living trusts are named as such because the grantor of the trust maintains control of the assets in the trust and can “revoke” or change the trust at any time. Therefore, revocable living trusts do not provide much relief for income or estate taxes. If you’re looking for ways to reduce tax liability, you may want to consider an irrevocable trust instead.
4. No protection from creditors
Assets in a living trust do not have protection from current or future creditors in the event of your death.
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How to create a revocable living trust
1. Create a trust document
The trust document is a written agreement that lists assets the grantor wishes to include in the trust. This document should also establish a trustee and include the heirs or beneficiaries who will receive assets after the grantor dies.
2. Sign and notarize the trust agreement
After the trust is written, it must be signed by the grantor and notarized to make it official.
3. Transfer assets into the trust
The grantor should transfer assets — such as bank accounts, investment accounts and real estate — to the trust by retitling the assets in the name of the trust.
Do I need a lawyer to set up a revocable living trust?
Not necessarily — it depends on your situation and how complicated your estate plan might be.
You don’t need special licenses to create a trust. However, it can be a lot of work. If your estate plan is fairly simple and you have the time, you can write your own living trust. However, if you foresee that your estate plan might be complex or you don’t want the headache, it might make sense for you to seek legal advice to create a living revocable trust.
» Need some help? Check out our roundup of the best wealth advisors
Is a trust better than a will?
You probably still need a will if you set up a trust.
» Writing a will? Here are our top picks for online will makers
Trusts tend to deal with specific assets rather than the sum of your personal holdings. So even if you try to put everything into your trust, chances are you’ll overlook something or acquire assets that may not make it into the trust.
Wills are crucial in determining guardianship of minor children.
If you’re relying on a trust for most of your personal property, you may want to have at least a bare-bones will to state who should inherit property not in your trust.
A pour-over will could help handle assets not in your trust that are discovered after you die; typically, this type of will states that those assets will go into your trust.
Do living trusts avoid estate tax?
If you’re looking for a living trust to help reduce estate taxes, look elsewhere.
Because the grantor maintains control of a living trust and can change or cancel it at any time, all assets in the trust are still considered owned by the grantor. Therefore, the grantor must report all of the trust’s assets on their personal income tax return — rather than file a separate tax return for the trust. The assets are part of the grantor’s estate for estate tax purposes.
If keeping part of your estate out of Uncle Sam’s tax clutches is a significant motivation for you, irrevocable trusts might be a better solution. Working with an estate planning attorney and tax and financial advisors can help you accomplish your estate planning and tax goals.