A revocable living trust is a legal arrangement by which legal title to property is transferred from personal ownership into the legal ownership of the trust. The person creating the trust, typically referred to as the “grantor” must actually change the title of ownership for each asset that will be placed in the trust from his or her name to that of the trust in order for the terms of the trust to govern distribution of these assets. The “trustee” is the person designated by the trust to manage the assets according to the specific terms of the trust document for the benefit of the beneficiaries identified in the trust. The trustee is quite often the same person who has created the trust (i.e., the grantor), a family member, friend, a corporate entity (such as a bank or trust company), or a combination of these. As the trustee, the grantor can maintain full control of the trust until his or her death or incapacity. When the grantor dies or becomes incompetent, legally incapacitated, or resigns, a successor trustee identified in the trust agreement takes over. The successor trustee has legal responsibility for administering the trust prudently and for the beneficiaries.
Assets held in a revocable living trust do not go through probate. The trustee already has legal title to the trust assets and can transfer title, without probate, to the beneficiaries named in the trust agreement. In addition to avoiding the time and expense of probate, the use of a living trust may reduce the risk of a will contest, and provides privacy of your financial affairs at death. Finally, a revocable living trust is also an effective way to do tax planning so that you and your spouse pass your assets on to your beneficiaries in the most tax-efficient way.
Trusts – An Introduction
The most common reasons people setup Trusts is to be able to effortlessly transfer assets to their heirs, reduce taxes on estates and avoid probate.
Trusts were at one time viewed as only being affordable and available to the wealthy. Although there is some truth to this stereotype decades ago, today this is not the case and there has been a surge in the use of these accommodating and effective estate planning tools. Today, Trusts are used by almost every economic class and not just the wealthy.
To simplify things, a Trust is a legally created plan where a specified amount of assets and/or property are held by an entity or a natural person for the benefit of one or more persons.
Why Create A Trust?
- In order to retain control of your assets in the event that you become incompetent are not able to handle your assets due to the impairment
- Estate tax savings
- Get around probate
- If a substantial amount of assets exists in an estate, a Trust may be created even after the original estate owner has passed away in order to keep control over the assets
Which Type Of Trust Do You Need?
The type of trust that you create will be dependent on what your trying to accomplish and the Trusts overall purpose. A trust can be created in many different arrangements. The uses of the trust are virtually limitless. Notwithstanding these endless possibilities of formations, there are really only four major categories or types of trusts, irrevocable, revocable, living and testamentary. Although there are trust attorneys that may offer domestic and offshore trusts, these additional types of trusts would still fall into one of the four mentioned trust types.
In an irrevocable trust, the owner or otherwise known as the settlor of the assets, relinquishes control and ownership of the property in the trust to the trustee or trustees which may be a person or an entity who agrees to hold the trust property for the benefit of its beneficiaries. One of the drawbacks with this type of trust is that it cannot be changed after its been created. Irrevocable trusts are often created in order to fund the education of children or grandchildren, gifting property or life insurance.
After the creation of an irrevocable trust, putting in any assets into the trust essentially strips the owner’s rights and ability to control the assets. Funding the trust usually depends on the purpose for which the trust was created and a trust and estate planning attorney can help in selecting the best way to accomplish this. When real property is transferred into an irrevocable trust, the title of the property must be changed or re-titled in the name of the trustee.
Revocable trusts can be revoked or amended during the settlor’s lifetime. When the settlor has died, the revocable trust generally becomes irrevocable by operation of law. Additionally, the ownership and control in the trust property still remains with the owner/settlor. Generally, in a revocable trust, the settlor is the only trustee of the trust so that he is freely able to move assets in and out of the trust unrestricted. Moreover, the settlor is free to change any terms and/or conditions in the trust as well as its beneficiaries.
When compared to a will, a revocable living trust generally less expensive to settle. Although creating a revocable living trust is more expensive than creating a Will, the savings are usually offset by the elimination of probate fees and costs.
Revocable vs. Irrevocable Trust?
Generally, if the main objective of the Trust is to get around the hefty estate taxes, the Irrevocable Trust is the ideal vehicle, since this Trust does not require any tax payments. On the other hand, if being able to manage and control assets in the Trust as well as the Trust beneficiaries is important in the event you become incompetent, a Revocable Trust is your best choice. Always consult with an estate planning attorney if you are not clear on which type of Trust is best for your particular situation.
Keep in mind that there are a number of state and federal laws that have to be complied with in order to setup a Trust properly. In some jurisdictions setting up a Trust on your own or using a legal web service are prohibited. Although there is nothing wrong with doing your own Trust, it is always wise to consult an estate planning attorney when finalizing your Trust.
Another consideration is that in a Revocable Trust you can be taxed for the Trust property during your lifetime since technically you’re still the owner of the property. Conversely, in an Irrevocable Trust, you cannot be taxed on the Trust property since it is under ownership of the Trust.
A Trust that becomes effective in the course of the settlor’s lifetime is deemed a Living Trust. Similar to other Trusts, a Living Trust is generally created in order to avoid probate, due to the fact that upon settlor’s death the assets in the Trust are under the control of the successor trustee and do not have to go through probate allowing the assets to easily go to the beneficiaries.
Additionally, Living Trusts do provide a particular amount of privacy when it comes to the terms of the Trust, the assets and how those assets are to be distributed since the only person with this knowledge is the trustee. This is very different from a Testamentary Trust since it is portion of a Will which is a publicly available document.
A Living Trust is usually a bit more expensive that other types of Trusts since there is a significant amount of paperwork and changes that can occur during the lifetime of the settlor.
A Testamentary Trust is generally the type of trust which is included in a Will. The person who creates the Testamentary Trust is known as the testator. A Testamentary Trust is only in effect after it maker has passed away. A Testamentary Trust may be thought of as a revocable trust due to the fact that the Will can be modified during the maker’s lifetime.
Testamentary Trusts are generally funded after the testator’s death with the assets of the remaining estate. To properly fund the Testamentary Trust, the Will must have specific language indicating that all of the assets in the estate should be moved into the Trust upon the testator’s death.
Who Are Trustees And What Is Their Role In The Trust?
Trustees are accountable for the administration and the accounting of the trust. A trustee’s duties include tax preparation for the Trust, payment of any income tax from the trust and abiding by all of the federal and state laws as they pertain to the administration of the trust. Trustees also work closely with the beneficiaries of the trust.
The trustee also has the duty of investing the trust assets and grow the principal for the beneficiaries’ benefit and needs. Additionally, the trustee has the duty of distributing the trust assets in a diligent and responsible manner to the beneficiaries as either income or property as to the instructions in the trust.
Almost anyone can serve as a trustee, including but not limited to the settlor, friends, family, attorneys, accountants or business entities such as banks or trust companies. In the event that the settlor names himself as a single trustee, he must also name a successor trustee in order for the trust to continue to be administered and managed after the settlor’s death.
Common Uses For Trusts
A commonly created trust is the revocable living trust, which is similar to a will and the general purpose is the distribution of the maker’s assets after his death to the named beneficiaries.
A revocable living trust is very often created in order to avoid probate so that it is easier to distribute the trust assets. How is probate avoided with a revocable living trust? Since at some future date everyone will die, any assets that we have title to will have to first go through probate before going to our heirs. A revocable living trust removes this issue with title and ownership because once the trust is created and the assets are put into the trust, ownership of the assets is passed to the trust. The retitling of assets is commonly referred to a living probate.
What You Should Know About Probate
First, probate can take a significant amount of time to complete. A probate administration can last anywhere from four months to decades to be completed. Today, the average in the United States is a little over thirteen months. Most U.S. jurisdictions have adopted the Uniform Probate Code in order to streamline and better regulate informal probate proceedings. In many situations probate is a costly process. It is very difficult for most estate planning attorneys to tell you with any degree of certainty what your probate will cost. According to several accredited estate planning experts, anywhere between five to fifteen percent of the estates value will be eaten up by the probate process.
Probate And Privacy
People are always startled when they learn that when the estate enters probate, private financial and business information that was contained in their deceased relatives’ Will has become a matter of public record. In some cases, social security numbers and even the date of birth are not redacted and become part of public record as well as some deeply personal and private information that is placed in Wills.
Formal Probate Administration
A formal probate administration is a very rigid process that is strictly followed to the letter of law. A formal probate presents zero flexibility when compared with an informal probate administration.
Challenges To A Will During Probate
As you may have guessed, challenges to a will from disgruntled and/or disinherited family members greatly increase during the probate process. While many of these challenges fail, they do slow down the probate process considerably and end up driving costs significantly in order to complete the probate administration.
Probate And Inheritance For Disabled Heir
Several issues may arise and deem an inheritance ineffective, when a disabled person receives an asset through inheritance. The primary concern deals with the management of the asset by the disabled person. Second, in the event that the disabled person is receiving benefits from a government program, the inheritance may be disqualified. A way around these issues is by appointing a guardian for the estate of the disabled person.
Probate Won’t Protect An Inheritance From Creditors
Assets received as part of an inheritance can be seized by the IRS and directed to pay IRS liens and other judgments from other creditors.
Revocable Living Trusts Offer Privacy
The Revocable Living Trust is absolutely private and only privy to trustees, beneficiaries and only those persons directly involved. The Revocable Living Trust is a highly amenable and offer attorneys a lot of control to make the right Trust that is fully customizable to the needs of the settlor. Additionally, challenging the validity of a Trust is usually quite difficult.
Costs In Creating A Trust
The costs in creating a trust can differ depending on the trust type, its complexity and the manner that must be used to set it up. Web based user created Trust services range in price between $200-$500. These are perfectly fine if your objective is to name the beneficiaries and trustees, however a Trust attorney should be consulted before your Trust is finalized. In some cases, using an online service can end up costing you more money than if an estate planning attorney was used from the beginning. An estate planning attorney can give you peace of mind that your trust is complete and legally valid, which can save you thousands of dollars down the road.