The average consumer often confuses the terms “living will” and “living trust.” These two estate planning tools could not be more different. A living will states your healthcare wishes and takes effect if you are incapacitated. A living trust is a way to transfer your assets after your death.
In recent years, the revocable living trust has become a popular alternative to the traditional will, especially among baby boomers. In most circumstances, it is faster and more private than a will, and it bypasses the probate system. It also centralizes administration of a person’s estate after death. Everything that your heirs will need is collected all in one place.
What Is a Revocable Living Trust?
A revocable living trust is a written agreement designating someone to be responsible for managing your property. It is called “living” because it is established while you are still alive. It is called “revocable” because the creator can change or dissolve the trust at any time for any reason, as long as the creator remains mentally competent. A revocable living trust becomes irrevocable as soon as you die.
In effect, a revocable living trust acts as a “holding bin” for your assets.
Everything that you own is transferred to the trust. The person who creates and funds a trust is called the grantor. Married couples can do this jointly. The person who manages the assets in a trust is called the trustee. The beneficiary is the person that receives the income or principal from the trust. This can be the grantor during his or her life and the grantor’s heirs after death.
Who Controls a Revocable Living Trust?
In a revocable living trust, the grantor usually also functions as the trustee, retaining complete control of all the assets in life. You can sell the assets, buy additional assets, exchange assets and invest assets. When the grantor dies or becomes incapacitated, another person or a corporate trust company becomes successor trustee. Assets can be passed on immediately, or be portioned out over time.
Benefits of a Revocable Living Trust
If an estate is large enough, a traditional will must go through the probate process, in which assets are collected and debts paid before any assets are distributed to heirs. The more complex the estate, the longer this takes. A properly constructed revocable living trust bypasses probate and allows for immediate distribution of the assets.
In addition, a revocable living trust keeps all documents private after your death - unlike a will, which becomes public. It provides for continuity of management of your assets (rather than freezing them, like the probate process). It is much less likely to be successfully contested by a disgruntled heir.
Shortcomings of a Revocable Living Trust
By itself, a revocable living trust does not avoid income, estate or gift taxes. If your primary goal is to avoid taxes, it is not the most efficient tool. You can use an irrevocable trust to minimize taxes, but you sacrifice the ability to make any changes to the trust once it is created.
One of the main disadvantages of a revocable living trust is that the trust property is still owned by you and not protected from creditors or lawsuits, like in bankruptcy or divorce, as long as you are alive and the trust is revocable.
A revocable living trust is usually more expensive and time-consuming to set up, but the cost and time may be saved when it comes time for distribution. If a bank or trust company becomes successor trustee after your death or incapacity, there will be a fee for that service.
Call an Estate Planning Lawyer
The issues surrounding creation and administration of a revocable living trust can be complicated. This tool is not for everyone. Plus, the facts of each case and the laws of each state are unique. This article provides a brief, general introduction to the topic. It is not legal advice. For more detailed information about your specific situation, please contact an estate planning lawyer.