Revocable Living Trusts: A Beginner's Guide

The advantages of a revocable living trust

A revocable living trust is one of the single most important documents for your parents to have in their estate plan. It functions as a will, allows their estate to avoid probate, makes a potential guardianship process unnecessary, and gives them control of their assets for as long as they'd like or are able to manage them. They don't need to be rich or have vast assets -- a life insurance policy, checking account, house, or any asset of value merits establishing a revocable living trust.

There are other important advantages to this type of trust. "While a will is a matter of public record, a trust is not. You may have an issue in your family that you don't want the public at large to know about, but anyone can get access to a recorded will," says Ashley Biteler, a trusts and estates attorney in Chesapeake, Virginia.

Also, without a trust, your parents' estate will go through probate, a costly and lengthy process in which the court administers the distribution of your parent's estate. And if your parents own property in multiple states, their estate will have to go through probate in each state.

A revocable living trust lets parents control who inherits what -- and when

Revocable living trusts also give your parents control over the distribution of their assets in a way no other legal vehicle can. "A lot of parents are worried about a child's money-management ability, or they're concerned that a child's marriage seems rocky. Leaving them their inheritance in trust is a lot safer than leaving it to them outright."

Why? A revocable living trust offers what Biteler calls "creditor and predator protection." A properly drafted trust ensures that the assets can't be tapped via a lien to pay a beneficiary's debts, nor will a divorcing in-law be able to lay claim to the assets. It can also prevent children from a first marriage from being intentionally or unintentionally disinherited. For example, if your mother dies and your father remarries, typically your father will hold his assets jointly with his new wife. Without specific provisions, his assets would pass to his second wife at his death. She likely has a will that would pass those assets on to her own children, not her second husband's children. A revocable living trust, in which your father would have named specific beneficiaries, avoids this potential problem.

The bottom line, says Biteler, is that a revocable living trust "allows you to have more control over your assets and money, even when you're gone. You can make sure your assets go exactly where you want them to go."

Transferring control of the revocable living trust

Biteler says many parents are initially concerned they'll lose control of their assets if they set up a revocable living trust. "That's a myth," she says. "As long as your parents are alive and mentally capable, they'll have complete control over their assets." This is accomplished by naming the grantors, your parents, as the primary trustees of the trust.

It's only when your parents choose to relinquish control, or when they lose the capacity to manage their own affairs, that the "secondary trustee" takes over. Biteler recommends that your parents' doctor be the person who decides when your parents have lost that capacity. Otherwise, "it's the parents' decision to decide when control transfers," Biteler says.

If your parents are concerned they'll lose control of their trust too quickly, they've probably chosen the wrong person to be their secondary trustee. "If that's the concern, then that person shouldn't be your parents' agent," she says. Your parents should name someone they trust completely. That doesn't have to be a family member. In fact, in some families it makes sense for a trusted family friend to fill that role instead. In rare situations, Biteler says, people don't have anyone they're comfortable appointing as secondary trustee. In that case, nonprofit organizations such as Catholic Charities or Jewish Family Services can provide someone to serve in this role for a fee, which would be paid from the estate.

Once your last surviving parent dies, it's this secondary trustee who carries out your parents' wishes, making sure assets go to the beneficiaries your parents have named in their trust.

Funding your parents' revocable living trust

A revocable living trust alone isn't enough to avoid probate. Once the trust is constructed, it needs to be "funded." This means your parents need to retitle their assets, such as real estate or brokerage accounts, as belonging to the trust. The trust itself is like an empty box; its value is determined by what's been put inside it. A trust can only avoid probate to the extent that your parents' assets are in it. "It doesn't do any good to have a beautiful trust with nothing in it," Biteler says.

Generally, all your parents' assets should be placed in the revocable living trust. The exception would be an IRA, which doesn't go into the trust; instead, either the trust or a specific individual is named as a beneficiary of the IRA. Life insurance is usually handled in the same way. Your parents' financial planner and attorney can and should assist them in transferring their assets into the trust.

Getting help with revocable living trusts

When creating a revocable living trust, your parents may find the help they need in a good self-help book, software package, or forms they've found online. One caveat is to make sure that such resources are state-specific and current, as state laws controlling living trusts differ and also change over the years.

Some people prefer to go directly to an attorney to draft and finalize the living trust document for them. If your parents want to go this route, look for a lawyer who has experience in estate planning.

As a third option, your parents may be most comfortable learning about living trusts by reading a book or reviewing software, then doing a draft and hiring an attorney who will agree to review it before it is made final.

Revoking a revocable living trust

A revocable living trust means just that -- the trust can be revoked. Very few people do this, however, Biteler says. But most people can, and should, revise their trust periodically. It can be amended or restated in its entirety. (When your parents amend or restate their trust, they don't need to retitle their assets.)

"People think estate planning is static, but it's not. Trusts should be reviewed and revised, just like your investments and your insurance," Biteler says. Every five years is a good benchmark. Laws change, and your parents' family situation and assets may have changed as well. They may have changed their minds about who they want as their secondary trustee. Secondary or contingent beneficiaries may have died or gone through a divorce. New grandchildren may have been born. Updating their trust ensures that your parents' assets will go to those they intend, no matter what the law or circumstances.