The revocable living trust is often the foundation of an estate plan. But what is it? To answer this question, we’ll consider the definition, the advantages, and the limitations of a revocable living trust.
Revocable Living Trust Defined
A living grantor creates a revocable living trust by transferring property to a trustee.
The trust is called “living” because the grantor creates it while the grantor is alive. Typically the grantor and the trustee in charge of the trust are the same person during the grantor’s lifetime. The trust is called “revocable” because the grantor retains the power to change or entirely revoke the trust. However, when the grantor dies, the trust often becomes irrevocable. Then distributions may be made to the grantor’s beneficiaries just as the grantor directed in the trust.
Advantages of Revocable Living Trusts
One of the biggest advantages of a revocable living trust is its ability to keep you and your estate out of court.
Revocable living trusts can help the grantor should the grantor become incapacitated. The trust enables the successor trustee the grantor appointed – someone the grantor knows and trusts – to step in and manage the trust assets for the grantor’s benefit. This avoids the necessity of a conservatorship or guardianship court proceeding to manage your estate. Guardianship proceedings are difficult for everyone. They’re court actions in which you essentially sue someone, let’s say for example your mother. You sue her to have her declared incapacitated, to have some of her rights taken away, and to receive permission from the court to manage her assets.
After the grantor dies, a revocable living trust continues to keep the grantor’s estate out of court. Again, the successor trustee appointed by the grantor steps in to manage the trust assets – this time for the sake of the beneficiaries. Without a trust, a probate proceeding is necessary for any sizeable estate. A probate proceeding is a court action, with all its costs and delays. Wills do not avoid probate; a probate is necessary to prove up a will. A probate may be relatively simple and completed in a few months. But a probate can be complex and drag out for years. This depends on the judge, the attorneys, and whether family members contest or argue about the estate in court. If an estate includes property in multiple states, without a trust, ancillary probate proceedings may be required in all those other states.
A grantor who carefully establishes a trust controls who manages and what happens to the grantor’s assets if the grantor becomes incapacitated or dies. In a trust, the grantor decides who receives what property, and under what conditions or guidelines. With these guidelines, the grantor can promote family goals and values in the use of gifted property. Trusts can provide the trustee and, if the grantor desires, the beneficiaries, with immediate access to trust property during incapacity or after death. The terms of the trust can powerfully protect the beneficiary’s inheritance from predators, creditors, and potential divorcing spouses. Unlike probate proceedings, trusts are private – which also helps protect estate property and beneficiaries from theft, scams, and disputes.
Limitations of Revocable Living Trusts
A revocable living trust does have limitations. On its own, it does not make a complete estate plan.
A trust is only as good as its funding. Property must be owned in the name of the trust or titled in the name of the trust, or the trust will not control that property. For example, if a parcel of real property was owned in the grantor’s name rather than in the name of the trust, then a probate proceeding may be necessary to manage that property when the grantor dies or becomes incapacitated. However, some assets usually don’t belong in a revokable living trust, including for example qualified retirement accounts such as 401Ks. Other assets, including life insurance, payable on death accounts, and property owned in joint tenancy with a right of survivorship, pass outside the terms of the trust. This is why thorough estate planning attorneys want to review all your assets with you. Everything must be properly arranged for your estate plan to work as intended. Generally, a living trust does not provide any asset protection for the grantor.