Revocable living trusts are becoming more popular. While revocable living trusts can provide an easy and efficient means for holding and managing assets, they may not always be necessary.
A revocable living trust is simply an arrangement where one person, the trust settlor, gives property to himself as trustee or to another person or entity as trustee, to hold for the benefit of the settlor and/or for the benefit of other third parties. The term “living” specifies that the trust is created during the settlor’s lifetime. Once created, the settlor – who is also the trustee – simply manages the trust assets as he or she would absent a revocable living trust. Moreover, the settlor continues to report the taxable income, deductions and losses on his or her own personal tax returns, as if the trust did not exist.
The term “revocable” generally specifies that the settlor has the ability to alter or terminate the trust prior to (1) his or her demise or (2) his or her becoming mentally incapacitated. Because the settlor has the ability to terminate the trust upon his or her demise, the trust assets will generally be included in the settlor’s taxable estate for estate tax purposes (note the word is “taxable estate,” and not “probate estate”). Upon the mental incapacity of the settlor, most revocable living trusts provide that the successor trustee is to take over management of the trust assets. Upon the death of the settlor, the trust will either distribute the trust property or it will continue to hold the trust property in trust for other parties. In the later case, the trust becomes irrevocable upon the demise of the settlor.
The most common example of a revocable living trust is where a husband places his property in trust for the benefit of himself during his lifetime and his wife after his demise. If the husband becomes incapacitated after he creates the trust, the successor trustee will generally manage the trust assets for the husband’s benefit. When the husband dies, the trust will then either pay out to the surviving spouse or it will continue in trust for the benefit of the surviving spouse.
So why would someone create a revocable living trust? Put another way, what are the benefits of having a revocable living trust?
One benefit of a revocable living trust is probate avoidance. Probate is the process where the decedent’s executor or personal representative gathers the decedent’s assets, pays the decedent’s debts, and distributes the assets pursuant to the deceased’s last will and testament (or pursuant to state intestacy laws if the decedent did not leave a valid will).
In most states probate is handled informally with limited intervention by the courts (such as in Colorado). Thus, the personal representative is able to file the will, an accounting, and an inventory with the court; pay the decedent’s creditors; and close the probate process. Probate is more formal in other states (such as in Texas). In these more formal states, it is often necessary to prove the existence and validity of a will and to comply with strict time requirements for notifying the decedent’s creditors.
Trust assets are not part of the decedent’s probate estate; therefore, the assets are not subject to the probate process. This can save time and attorney’s fees for decedent’s whose state requires more formal probate process.
A revocable living trust can also be helpful in avoiding ancillary probate. Ancillary probate is a second probate proceeding in other states. In most cases ancillary probate is required to clear title to real estate that is located in another state. Real estate held by a revocable living trust is not subject to probate in any state, avoiding the necessity of any ancillary probate.
Revocable living trusts can also be used to keep family and financial matters out of the public domain. Unlike wills, revocable living trusts generally do not have to be filed in the public records. Instead the trust document is left in the custody of the trustee, and the trustee simply retains the copy of the trust document until the term of the trust expires.
Another benefit of revocable living trusts is that they provide for an orderly disposition of the settlor’s assets. If the settlor were to become mentally incapacitated, absent a revocable living trust, the courts would probably appoint a guardian to manage the settlor’s assets. Guardianship proceedings are particularly costly as they involve a lot of court time. Moreover, guardians often are not able to act without court approval, which can result in the guardian not being able to act as timely as one would like.
Revocable living trusts can be employed along side with a will and or power of attorney for property. If one opts not to create a revocable living trust, then they should at least prepare a will and power of attorney for property. The will will spell out how the decedent’s property is to be disposed of and the durable power of attorney for property will provide for who is able to manage the incapacitated person’s assets after they become incapacitated.
Absent a situation where a person owns real estate in another state or where they live in a formal probate state, the will and the power of attorney for property should accomplish the same goals as a revocable living trust.