Understanding the Revocable Living Trust and Its Many Benefits
by Don Drake, Connelly Law Offices, Ltd. 7.17.24
"As we grow older and think about our financial well-being, it's important to focus on two main areas, ensuring we have enough funds for a comfortable retirement and putting in place a thorough plan for the distribution of our assets through estate planning," said professional fiduciary and certified elder law Attorney RJ Connelly III. "When planning to transfer your assets as you age, it's essential to establish a comprehensive strategy to ensure a smooth process for you and your loved ones. At Connelly Law, our team specializes in creating tailored living trusts, addressing various aspects of estate planning, and seamlessly aligning these plans with your unique financial objectives. In today's blog post, we will delve into revocable living trusts and their importance in estate planning."
The Revocable Living Trust
A revocable living trust is a legal document outlining how your assets will be managed after your passing. This includes real estate, valuable possessions, bank accounts, and investments. Unlike testamentary trusts, which come into effect after death, the revocable living trust is created during your lifetime. It allows you to make changes or revoke it as you see fit. This flexibility is why it's termed "revocable."
"Before deciding whether a revocable living trust suits your needs, it's important to grasp some key terms and concepts," said Attorney Connelly. "Understanding the basics of how trusts work is critical, and remember that trust laws vary from state to state."
The individual who establishes the trust is called the trust-maker, trustor, or grantor - all of which denote the same person. Typically, the trust-maker of a revocable living trust also acts as the trustee, responsible for managing the trust's administration, including tracking income and tax returns. It's important to designate a successor trustee in your trust documents who will take over trust management when you can no longer. Additionally, it's essential to identify the beneficiaries, who are the individuals, organizations, or entities that will receive assets from your trust upon your passing.
"If you are considering a revocable living trust, be prepared to invest effort upfront to streamline the distribution of your estate in the future," stated Attorney Connelly. "I suggest you begin by creating a detailed inventory of your assets. Then, carefully consider who you want to inherit your assets and who you can appoint as trustees. Once the document is drafted, you must transfer the relevant properties into the trust."
This transfer process may vary depending on the asset. Some assets may only require listing in the trust document. In contrast, others may necessitate contacting banks, insurance companies, and transfer agents to update beneficiaries, issue new investment certificates, retitle cars, and sign new deeds. Additionally, it's advisable to establish a "pour-over" will, which ensures that any unfunded or unallocated assets are included in your trust.
Living Trusts versus Living Wills
"Living trusts and living wills both offer important estate planning benefits as they provide the flexibility to name beneficiaries and plan the distribution of assets," Attorney Connelly said. "They can be amended if circumstances or desires change. However, it's important to understand the distinctions between the two."
Living trusts cover three stages of life: while the individual is alive and well, while they are alive but may be incapacitated, and after their passing. The terms of a living will only go into effect after the individual's death. Additionally, living trusts can help avoid the probate process, reduce the likelihood of court disputes, and keep the details of the estate private, as opposed to wills which become public records.
Having a living trust does not replace the need for a will, and this is especially true if not all assets are properly added to the trust or if the trust does not have sufficient funds to cover the costs of asset distribution. Wills also enable individuals to designate guardians for minor children. At the same time, a revocable trust only allows individuals to decide when their children can inherit and the appointed trustee until the children reach eighteen.
Benefits of a Revocable Living Trust
A living revocable trust is a versatile estate planning tool that dictates the distribution of assets after your passing and allows for efficient management of these assets during your lifetime. Let's look at some reasons a revocable trust should be part of your estate plan:
Flexibility - Revocable living trusts offer the flexibility to make changes as needed, allowing you to adapt to any changes in your circumstances. This can be especially useful if you are uncertain who you want to designate as your beneficiaries. The ability to make amendments at your discretion also makes these trusts an attractive option for individuals beginning their estate planning at an early age.
Avoiding Probate - When a person passes away with a will, their assets typically go through a legal process called probate. Probate involves the court overseeing the distribution of the deceased person's assets according to their wishes as outlined in the will. This process can be quite slow, often taking several months or even longer. Moreover, if the deceased person owned property in multiple states, their beneficiaries may have to navigate through multiple probate proceedings, adding further complexity and delay to the process.
Additionally, the costs associated with probate can significantly reduce the amount that beneficiaries inherit. On the other hand, with revocable living trusts, the need for probate can be eliminated. Instead, a designated successor trustee can efficiently transfer the assets to the beneficiaries without awaiting a court order. This usually results in a faster and more cost-effective process for the beneficiaries, ensuring they receive a more substantial portion of the assets.
Less Problems Long Term - Due to its intricate nature compared to a standard trust or will, creating a living trust typically involves more funds and time at the outset. Properly establishing and maintaining a living trust necessitates a significant commitment of resources. However, the initial effort and ongoing upkeep can help you avoid probate's complexities and higher costs. Additionally, living trusts are more robust in the face of potential legal challenges to their provisions, which can significantly save money and time.
Privacy - After your passing, when a will goes through the probate process, it becomes a public record. This means that anyone can access and review the contents of your will, including the stipulations, beneficiaries, and the specific assets or property each beneficiary is entitled to inherit. However, the estate distribution occurs privately when assets are placed in a living trust. This means that the details of the trust, including asset distribution and the identities of the beneficiaries, are not available for public review. This privacy measure is in place to safeguard the confidentiality of your assets and protect your beneficiaries' privacy.
Federal Protection - Under the Federal Deposit Insurance Corporation's (FDIC) rules, an owner's trust deposits are insured for up to $250,000 per eligible beneficiary, up to a maximum of $1,250,000 if five or more eligible beneficiaries are named. If a trust deposit has multiple owners, each owner receives separate coverage up to this limit.
Negatives of a Revocable Trust
Creating a revocable living trust can be more time-consuming than writing a will because it involves several important steps. One crucial task is re-titling all assets you wish to transfer to the trust. Failing to re-title assets may result in them being subject to probate. However, there are exceptions for certain assets, such as retirement plans, insurance policies, and annuities.
In addition to re-titling assets, you'll need to contact your bank and other relevant entities holding your assets to update all the accounts you want to be owned by the trust. This process can be lengthy and costly, making it advisable primarily for complex estates.
It's worth noting that revocable living trusts don't provide direct tax benefits. This is because you retain control of the assets while you are alive, and any income generated from those assets is reported and taxed on your tax return. Unlike an irrevocable trust, where you relinquish control over your assets, a revocable living trust allows you to maintain control during your lifetime.
A Final Word
"A revocable living trust is a flexible estate planning tool that allows individuals to maintain control over their assets during their lifetime and specify how those assets will be managed and distributed after passing," said Attorney Connelly. "This type of trust offers flexibility, making it a valuable option for individuals in the early stages of estate planning who are unsure about specific beneficiaries. Transferring assets into the trust initially requires effort and detailed documentation, but it does provide significant benefits in the future. Placing assets in the trust may help beneficiaries avoid the lengthy and costly probate process, ensuring a smoother transition of assets after the individual's passing."
Please note that the information provided in this blog is not intended to and should not be construed as legal, financial, or medical advice. The content, materials, and information presented in this blog are solely for general informational purposes and may not be the most up-to-date information available regarding legal, financial, or medical matters. This blog may also contain links to other third-party websites that are included for the convenience of the reader or user. Please note that Connelly Law Offices, Ltd. does not necessarily recommend or endorse the contents of such third-party sites. If you have any particular legal matters, financial concerns, or medical issues, we strongly advise you to consult your attorney, professional fiduciary advisor, or medical provider.
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