In the right situation, a revocable living trust can pave the way for a smooth, quick transfer of assets at death without the hassles of probate, which is the court-supervised process of settling an estate. Revocable living trusts (also called revocable inter vivos trusts) are trusts that you establish, and can revoke or alter, while you are alive.
Do assets in a living trust bypass probate? Yes. Only assets held in your name at death are “probate assets.” Assets not subject to probate include property that you own jointly with a right of survivorship, and property that passes by a beneficiary designation such as the proceeds of life insurance policies on your life, and IRAs and 401(k) plans, as well as the assets held in a revocable living trust. Some states have simplified their probate procedures, but elsewhere the process can be costly and time-consuming, eating up 5%, 10%, or more of a probate estate and lasting several years. Apart from increased speed and reduced expense, another benefit of bypassing probate is privacy: once probated, a will is a publicly available document, and the “probate assets” become a matter of public record. In contrast, neither the assets held in your revocable trust at death nor the trust’s distribution scheme will be disclosed to the public.
Does a living trust save taxes? Not necessarily. This is one of the biggest misconceptions about revocable living trusts. Because the creator of a revocable trust (you) retains the power to revoke the trust, you are treated as the owner of the trust property for income tax purposes. All items of trust income, deduction, and credit are reported on your personal income tax return regardless of whether any assets are paid out to you. Additionally, at death, the trust’s assets are included in your estate for estate tax purposes. Nonetheless, if your estate is large enough to be hit by the Federal estate tax – the exemption amount is currently $5 million – your lawyer can incorporate tax-saving measures into a revocable trust, or establish one or more irrevocable trusts to minimize your estate’s future tax burden. It is also worth noting that a living trust does not protect assets from creditors nor does a living trust serve to protect assets if you are sued.
Who should be named as beneficiaries, and who should serve as trustee? If you establish a trust, you and your spouse will typically be the lifetime beneficiaries of the trust with, perhaps, your spouse, children and grandchildren designated as beneficiaries after your death. Typically, you serve as your own trustee (or co-trustee with, say, your spouse or child or a financial institution), meaning you retain control of your assets for as long as you are able to manage your own affairs. When you die, the trust becomes irrevocable, and the then-serving trustee distributes or manages the assets as the trust document specifies.
Are there other advantages of revocable living trusts? One of a trust’s most valuable benefits is that it can provide a blueprint for handling your affairs if you become incapacitated. Your successor trustee (or co-trustee, if you name one) can take over for you. Trusts allow great flexibility in carrying out your wishes. For instance, you can specify in the trust exactly how you would like your trust’s assets to be spent, right down to what kind of nursing facility you prefer. In addition, actions by trustees may be accepted more readily by some financial institutions than actions by agents under durable powers of attorney. Further, if you own real estate, such as a vacation home, in another state, transferring it to a revocable living trust avoids exposure to that state’s probate process.
Is a living trust the only document I need to handle my estate? Even if you have a living trust, you still need a “pour-over” will. This form of will instructs your executor/personal representative to transfer to the trust any assets that you did not transfer before death so that they can be governed by the provisions of the living trust. A will is also necessary to name guardians for minor children. For a more detailed discussion regarding wills, see our September 7th blog post: “Why You Need a Will.” You should also have a durable power of attorney for financial matters and a health care proxy to guide the decisions to be made regarding your care upon incapacitation.
To discuss the roles of a will and living trust in your estate plan, or for help developing a comprehensive estate planning strategy, contact the experienced attorneys at Freed Law LLC at jared@freedlawllc.com.
