A Revocable Living Trust?

My Comments: For the record, I am NOT an attorney.

However, questions always surface about trusts. What are they exactly, how do they work, what kinds are there, which ones are appropriate for me, etc. These words from Jim Probasco go a long way toward a better understanding about the most common form of trust for those of you planning to retire soon, or have already done so. Think of it as a way to speak from the grave.

By Jim Probasco | April 26, 2017

Just what is a revocable living trust and do you need one? Start by thinking of the purpose of estate planning, which includes drawing up a last will and testament. Your will provides guidance to the executor of your estate (chosen by you) when it comes to who takes care of all paperwork, pays off creditors and distributes remaining assets according to your wishes.

All this is done through a process called probate, which requires presenting documents to a probate court and going through a multi-step process. Depending on the complexity of your estate, probate can be a difficult path for even the most skillful executor to navigate.

A Revocable Living Trust Avoids Probate

That’s where a revocable living trust comes in. It lets you control, during your lifetime, the provisions of how your estate will be distributed upon your death. The executor of a revocable living trust is often called the trustee. A trustee is also in charge of the disposition of your estate, but the existence of the trust means that your estate needn’t go through probate. In fact, the main benefit of a revocable living trust is avoiding probate.

How It Works

You begin by placing your assets – including investments, bank accounts and real estate – into the trust. At this point you no longer own those assets; they belong to the trust. And because your assets belong to the trust, they do not have to go through the probate process upon your death.

However, as this is a revocable living trust, you retain control of the assets, even though they no longer belong to you. You can amend or change the trust at any time. Income earned by the trust goes to you and is taxable. The assets do not transfer from the trust to your beneficiaries until your demise.

The Pour-Over Will

Most people with a revocable living trust also have what’s known as a pour-over will. Such a will makes sure that any assets not already in the trust are collected upon your death and “poured over” into the trust. This is a safety feature that provides you and your executor with additional peace of mind and assurance that nothing will be left out of the trust. A pour-over will can also deal with naming guardians for minor children and other matters that do not relate to trust assets.

Additional Advantages for Your Executor

If you own out-of-state property and only have a will, your executor will likely face ancillary probate in that state. A revocable living trust avoids that type of probate, just as it avoids probate in your home state.

A revocable living trust can also be used to retain assets for minor children or to distribute assets on a schedule determined by you if, for example, you don’t believe a beneficiary will spend the assets wisely. As it would all be part of the trust, your executor would not have to take additional action. However, should you become impaired or disabled, the trust can automatically appoint your trustee to oversee it with no requirement to obtain durable power of attorney.

The Downside

Making things easier for your executor comes at a price – both figurative and literal. It takes time and effort to gather up documents, deeds, titles and so forth and create the trust. All this requires legal help, which is not cheap. A typical living trust can cost $2,000 or more. A basic last will and testament can be drawn up for about $150 or so. And once you create the trust, your work isn’t done. Most people need to monitor it on an annual basis and make adjustments as needed.

For all your hard work you will not receive a tax benefit from a revocable trust. Your assets in the trust will continue to be subject to creditors and legal action. Upon your death, some (but not all) debts – student loans are one example – will be forgiven or considered not collectable. Your executor will need to contact creditors to determine if a debt is payable. Absent that, your trustee could be sued by the creditor.

The Bottom Line

With a revocable living trust, you do most of the work up front, making the disposition of your estate and your executor’s job easier. You will have peace of mind knowing that your wishes will be followed, and your executor will have assurance that the complexities and confusion often found in the probate process will not occur. Make sure that your executor knows the location of all your important documents, especially those that pertain to the trust. Finally, as with any major legal issue, you should consult with a trusted professional, in this case someone well versed in estate planning, before embarking on a project of this magnitude.