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Wills and Revocable Living Trusts are two fundamental estate planning documents.
A Revocable Living Trust, (also referred to as a “living trust” or an “inter vivos trust”, is an estate planning document that contains many features that a will-based estate plan does not provide, Including:
Probate Avoidance
Estate Tax Reduction
Mental Incapacity Protections, and
Control Over Assets After Death
Revocable Living Trust Basics
A Revocable Living Trust is an Agreement between three parties:
The Grantor: The person who creates the trust also known as the “trustor” or “settlor”. A person creates a Revocable Living Trust by signing a Trust Agreement.
The Trustee: The person who manages the trust and the accounts and property that are in the trust. The Trustee reads the terms of the trust and makes sure that the Grantor’s assets in the trust are used and distributed as the Grantor intended.
The Beneficiary: The person or people who benefit from the trust assets. The whole purpose of a trust is for someone to benefit from the assets in the trust.
A Revocable Living Trust is a type of trust that has language in it which allows the Grantor to amend or even revoke or terminate the trust after they have signed the trust document. When a Grantor creates a Revocable Living Trust they usually will name themselves as the Trustee and the Beneficiary of that Trust for their lifetimes.
Before setting up a Revocable Living Trust, you as the Grantor should understand what they can—and cannot—do in their dual role as Grantor, Trustee, and Beneficiary of their Trust.
Two Phases of a Revocable Living Trust:
Phase 1: While The Grantor Is living.
Phase 2: When the Grantor has passed or becomes mentally incapacitated
Phase 1 -- While the Grantor is Living
After creating a trust, the Grantor, must retitle accounts and property that they want to be transferred to their trust —such as real estate, financial accounts, stocks, and bonds.
This means that the Grantor’s assets will no longer be in just the Grantor’s name – for example – John Smith. It means these assets will now be in the name of the Grantor’s trust – John Smith, as Trustee of the John Smith Revocable Living Trust. After this transfer, the Grantor—(who names himself/herself as Trustee) still retains control over these assets and will manage them for his/her own benefit throughout their lifetime while they have mental capacity.
Any time before the Grantor’s death, while they are mentally capable of managing their affairs, they have the legal authority to alter, amend, or even revoke their living trust as the Grantor.
For example, the Grantor can place additional money or property in the trust or take money and property out of the trust, make investment decisions about the trust’s accounts, add or remove beneficiaries and successor trustees, and change the rules regarding when and how the Grantor’s beneficiaries receive their inheritance.
However, because the Grantor has a Revocable Living Trust that the Grantor retains control over, there are some things to keep in mind:
No Asset Protection: The Grantor cannot use the trust to shield or protect accounts and property from the Grantor’s creditors.
No Tax Avoidance: The Grantor cannot avoid paying taxes on income earned by the Revocable Living Trust. Because no separate tax identification number is required for trust income, income on the trust’s accounts and property must be reported on the Grantor’s personal tax return.
No Signing as an “Individual”: The Grantor must remember that all assets in the Trust must be signed as “Trustee” and not as the Grantor individually. The Grantor/Trustee will need to sign as the Trustee instead of as an individual. This limitation is manageable, however. It usually means the Grantor/Trustee will sign as “John Smith, Trustee of the John Smith Trust” instead of “John Smith.”
Phase 2 -- After the Grantor Dies (or Becomes Incapacitated)
The advantages of a Revocable Living Trust over a Will based estate plan is that:
Incapacity: There are also built-in protections for those assets if the Grantor becomes mentally incapacitated.
Upon Death: Any asset that is in a Revocable Living Trust at the time of the Grantor’s death will avoid probate and can be controlled long after the Grantor has died.
The Successor Trustee: When the Grantor passes away or suffers from incapacity, a Successor Trustee that the Grantor has chosen takes over trust administration per the instructions you provide in the trust document.
While The Grantor Is Incapacitated: While the Grantor is living – but incapacitated – the Successor Trustee’s job is to manage the assets and make distributions on the Grantor’s behalf – as the Grantor is still the beneficiary of the Trust.
Upon The Grantor’s Passing: Upon the Grantor’s passing, the Successor Trustee will carry out the terms of the trust for the Grantor’s chosen remainder beneficiaries named in the trust.
This may include managing the Trust accounts and property for an extended period on behalf of the remainder beneficiaries or terminating the trust and distributing its money and property directly to the remainder beneficiaries.
A Revocable Living Trust will turn into an “Irrevocable Trust” upon the Grantor’s Death. That means that the Trust Terms can no longer be amended or changed – as the Grantor was the only person that could change the terms of the trust.
Design a Revocable Living Trust That Fits Your Needs and Goals
A Revocable Living Trust allows the Grantor to retain all control and benefit of their assets while they are living but then upon their passing has the ability to become an “irrevocable trust” and therefore avoid probate, reduce estate taxes and protect those assets for the Grantor’s remainder beneficiaries.
Having a knowledgeable estate planning attorney design the terms of your Revocable Living Trust is key to successful estate planning.
This article is a service of Attorney Chad A. Ritchie and the Ritchie Law Office, Ltd.
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