Revocable Living Trusts

This post is not legal advice and does not provide any legal solution. Don't be silly contact an attorney to answer questions to specific facts.

General Overview

The revocable living trust (RLT) is an arrangement by which a person transfers ownership of property into a trust throughout the course of his or her lifetime. There are four main components to a RLT:

  1. Grantor - the creator of the trust.
  2. Trustee - the person or entity that manages the trust property according to the trust documents.
  3. Trust Assets/Corpus - property transferred into the trust.
  4. Beneficiaries - those who receive the benefits of the trust.

An RLT can be used as a substitute for a Will, in many respects, by providing for the distribution of assets upon the grantor's death. Unlike a Will, a revocable living trust governs the distribution and use of the trust assets during the grantor’s lifetime, which can make it a useful planning tool in case the grantor becomes incapacitated during his or her lifetime.

Description & Operation

State law regulates a person's ability to utilize certain estate planning instruments and even provides the requirements for a trust to be valid and the rules governing trust administration. The RLT is established by a written legal instrument or declaration that appoints a trustee to manage and administer the property of the grantor. Competent adults with the requisite mental capacity can generally establish an RLT. In essence, the trust is like a guidebook for how the grantor’s assets are to be handled while alive and incapacitated or even after death.

Advantages of the Living Trust

  1. Avoidance of Probate. Probate is the legal process for transferring property upon a person's incapacity or death. Assets owned by an RLT are not generally subject to the probate proceeding and do not have to go through the probate process. The benefit is efficiency by providing an avenue for  faster and less costly method of managing or transferring property by Will. Depending on local law, Wills are subject to probate statutes and proceedings, which could require informal probate or even court supervised probate. An RLT can be especially useful in avoiding multiple probate proceedings when real estate or other property is owned in several states.
  2. Changeable or Revocable. The RLT allows the grantor to make changes (or amendments) to the trust document while still alive and with the requisite mental capacity.
  3. Privacy Preservation. Trusts allows for the disposition of property or assets to remain private within the constraints of the trust document. Generally, the probate process may require disclosure of beneficiaries, creditors and inventories of an estate to the public.
  4. Segregation of Assets. A RLT may be useful for married couples with substantial separate property acquired prior to the marriage. The trust can help segregate those assets from their community property assets. Moreover, in community property states, passing property to children or other beneficiaries can be tricky. Having the RLT provide mechanisms to deal with a beneficiary's property characterization can help keep inheritances separate long after they receive them.
  5. Estate Tax Minimization. Generally speaking, the RLT does nothing to save estate or income taxes during life, but provisions can be included in the trust to take advantage of or preserve estate exemption amounts at death along with income tax planning. However, using the RLT in conjunction with advanced estate planning can power effects on the Estate / Gift / Generation Skipping Tax and Income of property.
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