Revocable Living Trusts: A Beginner's Guide
A revocable living trust can save your family member's estate thousands of dollars, while still giving him the control he wants over his assets, before and after death.
The advantages of a revocable living trust
A revocable living trust is one of the single most important documents for older adults -- or anyone with assets -- 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 isn't. 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, an estate will go through probate, a costly and lengthy process in which the court administers the distribution of the estate. And if the estate holds property in multiple states, it will have to go through probate in each state.
A revocable living trust lets a trustee control who inherits what -- and when
Revocable living trusts also give elders control over the distributi
on 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 and funding a revocable living trust
Primary and secondary trustees.
Biteler says many people 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 they're mentally capable, they'll have complete control over their assets." This is accomplished by naming the grantors -- the people setting up the trust -- as the primary trustees of the trust.
It's only when those trustees choose to relinquish control, or when they lose the capacity to manage their own affairs, that the "secondary trustee" takes over. Bi teler recommends that a person's doctor be the one who decides when he has lost that capacity. Otherwise, it's the trustee's decision to decide when control transfers, Biteler says.
If someone is concerned he'll lose control of his trust too quickly, he may have chosen the wrong person to be his secondary trustee. "If that's the concern, then that person shouldn't be the senior's agent," she says. He should name someone he trusts 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 the last surviving trustee dies, it's this secondary trustee who carries out the primary trustee's' wishes, making sure assets go to the beneficiaries named in the trust.
Funding a 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 the people creating the trust 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 assets are in it. "It doesn't do any good to have a beautiful trust with nothing in it," Biteler says.
Generally, all of the person's 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. A financial planner and attorney can and should assist the trustee in transferring his assets into the trust.
Drafting and revoking a revocable living trust
Drafting the trust. When creating a revocable living trust, a person may find the help he needs in a good self-help book, software package, or forms he's 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 ove r the years.
Some people prefer to go directly to an attorney to draft and finalize the living trust document for them. If your family member wants to go this route, look for a lawyer who has experience in estate planning.
As a third option, your family member 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's made final.
Revoking the 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 family member amends or restates his trust, he doesn't need to retitle his 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 family situations and assets may have changed as well. The trustee may have changed his mind about who he wants as his secondary trustee. Secondary or contingent beneficiaries may have died or gone through a divorce. New grandchildren may have been born. Updating his trust ensures that his assets will go to those he intends, no matter what the law or circumstances.