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Living Trusts

  1. What is a Revocable Living Trust?
    Simply put, a revocable living trust is a trust that can be “revoked” (terminated) by the grantor (the person who set up and funded the trust). A trust is classified as “living” when it is set up during the grantor’s lifetime.
  2. Wills vs. Trusts
    Many people understand the importance of a will and that it probably makes sense for them to have one. However, few people know anything about trusts and how they work.
  3. What is a Revocable Living Trust?
    Simply put, a revocable living trust is a trust that can be “revoked” (terminated) by the grantor (the person who set up and funded the trust). A trust is classified as “living” when it is set up during the grantor’s lifetime.

    • Similarities: Wills and trusts have several similar characteristics. A will is a legal document that transfers assets on your death, names an Executor to oversee the distribution, and names the beneficiaries to inherit your assets. A trust also outlines the plan of distribution on your death, names a “successor trustee” to oversee the distribution, and names beneficiaries to inherit your assets.
    • Differences: A will only goes into effect when you die. A trust, on the other hand, can actually be used to manage assets during your lifetime. Your will is a matter of public record. Everyone from your friends and neighbors to a con artist can peruse your private records and plan of distribution. A trust is not a matter of public record and can provide total privacy. A will guarantees probate. Assets held in a trust escape probate.
  4. How is a Revocable Living Trust set up?
    First, an attorney prepares the revocable living trust, and it is signed by the grantor and trustee (usually the same person). Second, the grantor transfers assets into the trust.
  5. How is the Revocable Living Trust funded?
    This basically involves filling out forms. For example, if Bob LeBob has a money market account at ABC Bank, the name on the account is now “Bob LeBob”. A form provided by ABC Bank will allow Bob to change the name to “Bob LeBob, trustee, The Revocable Living Trust of Bob LeBob Dated (Date of Trust)”. The money market account is then owned by the trust. On Bob’s death, the assets will pass to his beneficiaries as designated in his trust, avoiding probate.
  6. How does the Revocable Living Trust avoid probate?
    Let’s take the case of Bob LeBob. On Bob LeBob’s death, the probate court wants to place all of Bob’s assets in probate. If Bob has a funded revocable living trust, then Bob has no assets. His trust owns the assets, and trusts are not probated. Everything in the trust will avoid probate, stay private, and be transferred to the beneficiaries in a more efficient fashion.
  7. What are the advantages of a Revocable Living Trust?
    • Avoids probate of the estate: No court is involved.
    • Avoids probate costs: No court costs are incurred.
    • Works while you are alive: Your revocable living trust can designate someone to manage your financial affairs in the event you become incapacitated (e.g., accident, illness, etc.). Your successor trustee would then take over managing your trust assets for your benefit. This also avoids proving incompetency in a court proceeding in which the court would name a guardian and conservator and supervise the guardianship and conservatorship. A will, on the other hand, only goes into effect on your death.
    • Eliminates requirement of public notices: Required with a will, not required with a trust.
    • Keeps plan of distribution private: No one will know who you selected to receive assets.
    • Faster property distribution: Property may often be distributed to the beneficiaries more efficiently than with a will. Probate court approval is not necessary to sell an asset held in a trust.
    • Acceptable in all states: Probate is avoided in all states. This is a tremendous advantage for individuals with property in more than one state.
    • Grantor still controls property: You still control the property as if it were your own. There is no separate tax return (as long as you serve as trustee or co-trustee) and no gifting issues.
    • Allows for estate tax planning: Unlike jointly owned assets, assets held in revocable living trusts avoid probate (even on both deaths, if married) AND allow for estate tax planning (if married).
  8. What are the disadvantages?
    • Cost: A revocable living trust costs more to establish than a will. The cost of setting up and funding the revocable living trust should be balanced against the benefits.
    • Work: With a simple will, you sign documents and you’re done. With a revocable living trust, you sign documents and complete paperwork to transfer assets into the trust. This process has become much easier than it was in the past. As revocable living trusts have become very common, most institutions have developed simplified forms to deal with these transfers.
  9. Is a Will still needed?
    Yes. A will, referred to as a “pour over will” is still needed to serve as a back-up device if you forget to transfer some property to your revocable living trust. Example: Sally Cali sets up a revocable living trust. She transfers all of her assets to the trust. Several years later, she opens a new investment account and titles it in her own name instead of the name of her trust. Sally then dies. If Sally does not have a will, the asset not titled in her trust will be probated and passed to her heirs as decided by her state’s law. Sally’s account may be distributed in a way she would not have chosen. If Sally had a will, the will would likely say that after the asset goes through probate, it should “pour over” into her trust, being distributed in accordance with its provisions.
  10. Is a Durable Power of Attorney still needed?
    Yes. The trustee or successor trustee can only control assets held in the revocable living trust. A Durable Power of Attorney is still needed to allow for the management of property held outside the trust. Example: Sally Cali is the trustee of her own revocable living trust. Sally becomes the victim of a terrible car accident and is unable to make decisions for herself. Sally’s successor trustee takes over the management of her trust assets and manages the trust for Sally’s benefit. Sally’s successor trustee has no control over any assets that are not held in Sally’s revocable living trust. If Sally does not have a Durable Power of Attorney, the Probate Court will ultimately decide who will be granted conservatorship over her assets. If Sally has a Durable Power of Attorney, the agent specified in that document will have authority over Sally’s assets not held in the trust.

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