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A Brief Description of a "Living" or "Revocable" Trust

| Leslie Kelly

By Leslie Kelly, CFP®, AIF®


A Living or “Revocable Trust” is a document drafted by an attorney to help his/her client create an easier and less expensive way to manage his or her assets in the event of incapacity due to illness or injury and to control, at that person’s death, the transfer the properties held by the trust to the heirs without the time-consuming and frequently expensive probate process.


Probate is the process by which the courts of the state in which the individual lives validate that person’s will. Assets that have stated beneficiaries such as life insurance, annuities and retirement plans are not distributed through the will so are not exposed to probate, but real estate, taxable investment accounts, personal property, checking accounts, etc. may be distributed through the will. If these assets are owned by the Revocable Trust, they are not subject to probate. If the deceased individual owns property outside of his or her state of residence, the validity of the will might be required to be proven (probated) in each of those states.


The term “Revocable” means that this trust can be changed at any time during the life of the person who is establishing it (the “creator” and initial trustee). A living or “revocable” trust is an agreement where the creator (the person setting up the trust with his or her attorney) transfers his legal possession of a his home, personal property, savings accounts, checking accounts, investment accounts, and any other assets that belong to himself to a trust for which he is the trustee and beneficiary.


The tax identification number for the trust is the same as the creator’s Social Security number. The creator who transfers his property into the trust is the trustee until such time as he dies or is incapacitated by illness or injury. The trust document language spells out how incapacity is defined. In the document, the creator names one or more successor trustees (someone to take over when he dies or is incapacitated). When he dies or is incapacitated, the successor trustee steps in to manage the financial affairs of the trust and to distribute the assets as per the instructions of the trust.


At the death of the creator, the trust becomes “irrevocable” which means the successor trustee cannot change anything in the trust but must follow all of the provisions of the trust. The provisions of the trust are completely private, unlike a will, which is public.


The advantages of having a Revocable/Living Trust are as follows:


1.It permits an easier transition to heirs at the time of the creator’s death.


2.It permits the successor trustee to manage the creator’s affairs if the creator is unable to do so which means that bills for mortgages, insurance, nursing homes or medical expenses can be paid. Should the creator recover, he can retake control of the trust. In the absence of this type of arrangement, a family member might have to obtain a power of attorney or go through the courts to be named as a guardian of the creator to manage his financial matters. The Revocable Trust by-passes these issues as long as a successor trustee is named.


3.It saves the time and potential expense of probate. This is particularly important when the creator owns properties outside of his state of residence as those properties, if distributed to heirs by the way of a will, could be exposed to probate in the states in which they are located – an unnecessary and time- consuming process.


4.It may help ease the process of distributing assets to heirs at the death of the creator as there is a clear successor trustee and legal instruction from the creator as stated in the Trust.


5.The Trust itself does not pay taxes. Any taxable income or capital gains created by the management of the Trust are the responsibility of the creator. Once the creator dies, the Revocable Trust becomes Irrevocable and will require its own tax identification number and tax status.


Disadvantages:


There are three potential disadvantages to the Revocable Living Trust.


1.The first is the cost to have one drafted by an estate-planning attorney. In addition to the Revocable Trust, the attorney will draft a “pour-over will” which serves to transfer any assets at the creator’s death that the creator forgot or neglected to transfer to the trust.


2.The second disadvantage is going through the process of ensuring the ownership of all eligible assets is transferred to the trust. This is called “funding the trust”. If the trust is not “funded”, the assets the creator wanted to protect will still be exposed to the probate process.


3.The third disadvantage is that this Trust is not a tax savings vehicle. It does not avoid income or estate taxes. However, with current estate tax exemption limits, only those with estates in excess of $5,450,000 or higher if single or $10,900,000 or higher if married would currently be exposed to federal estate taxes.


This is merely a brief summary of some of the provisions of the Revocable Living Trust and is not considered the practice of law. We recommend you visit with an estate planning attorney to review the provisions of a Revocable Living Trust and whether it is right for your specific situation. Having dealt with a number of clients who have had relatives die with and without funded Revocable Trusts as well as our own experiences we can say without hesitation that they are truly a final gift you can provide to your heirs.


Connect with Leslie J. Kelly at lkelly@afadvisors.com


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