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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.”
A revocable living trust is a legal document created during your lifetime that allows you — the grantor or creator — to retitle assets in the name of the trust and select a trustee to manage the trust assets for your benefit (and your beneficiaries). Often, a revocable living trust is used in conjunction with a will.
» What kind of trust works for you? Compare revocable vs. irrevocable trusts
Do you need a revocable living trust?
As with everything financial, it depends on your situation. However, there are some general instances in which a revocable living trust could be a good idea.
1. When incapacity seems likely
As we age, health plays a prominent role in our quality of life. A 2021 study by Edward Jones and Age Wave found that retirees’ most-feared condition continues to be Alzheimer’s and other forms of dementia. According to the study, losing memories and becoming a burden to their families scare older Americans more than cancer, stroke, heart attacks, or infectious diseases such as COVID-19.
The Alzheimer’s Association projects that 12.7 million Americans ages 65 and older will have Alzheimer’s by 2050. So if you’re worried about memory loss or incapacity in older age, setting up a trust can help get your affairs in order, designate someone you trust to oversee your wishes and put you at ease.
Since there’s no way to know precisely when an ailing person might become incapacitated, the trust option 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.
The successor trustee takes over sole management responsibility after the grantor dies or is determined to be incapable of handling their financial affairs.
2. When you want 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 no longer subject to probate oversight.
For those who own property in multiple U.S. states, a living trust can be especially beneficial. Instead of having to keep up with and handle probate in numerous states, transferring these properties into a trust helps you bypass the headache of potentially lengthy and costly court proceedings.
3. When you want privacy
For people who value it, privacy is a definite advantage of a living trust.
In addition to being time-consuming and often expensive, probate proceedings are public. However, since assets placed in a living trust don’t have to go through probate, they are kept away from prying eyes. A living trust generally is a private document that only the trustees and particular beneficiaries will be able to read after your incapacity or death.
So if you don’t want relatives and acquaintances poking around to find out the size of your estate and who received an inheritance from it, a trust can shield you and your heirs from any intrusive eyes.
Don’t forget your will...
Remember, though, that your will still exists as part of the public record in most states. And, yes, you still need a will.
Why? 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 shortly before you die that won’t make it into the trust.
Wills are also crucial in determining guardianship for your minor children.
If you’re relying on a trust for most of your personal property, estate experts recommend you have at least a bare-bones will to state who should inherit any property not in your trust.
Another option is a so-called pour-over will. This document states that if an asset not in your trust is discovered after you die, it will go into your trust. That asset still will have to go through probate, but at least it should ultimately end up as part of your trust estate plan, to be distributed as the arrangement details.
... and look elsewhere for tax relief
If you’re looking for a living trust to help reduce your estate’s tax burden, you need to look elsewhere.
Since the grantor continues to maintain control of a living trust, with the ability to modify or cancel it at any time, all assets in the trust are still considered to be owned by the grantor. Therefore, the grantor must report all of the trust’s assets on their personal income tax return without a separate return required for the living trust. The assets also remain as 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 to attain some tax savings.
For most people, though, the federal estate tax is not a concern. Few Americans leave estates large enough to trigger the levy. For the 2022 tax year, if you die and leave assets of more than $12.06 million (or $24.12 million for a married couple), the amount over that exclusion figure could be subject to a federal tax rate of 40%.
Estates valued at less than that amount aren’t subject to the federal estate tax but could face taxation in a handful of states with lower estate and inheritance taxes thresholds. One caveat here: Estate tax exemptions can change and may adjust lower over time.
Working with an estate planning attorney and tax and financial advisors can help you realize the optimal solution to accomplish your estate planning and tax goals.
» Need some help? Check out our roundup of the best wealth advisors