Revocable Living Trusts
- Last Updated: Thursday, 29 October 2020
One of the most efficient ways to transfer someone’s property after their passing away is through a revocable living trust. These trusts also allow a trustee to manage the distribution of the grantor’s property, without going through a potentially extended probate process.
In this article, we’re going to discuss the topic of revocable living trusts. As part of that discussion, we’ll first define the term, and then talk about the structure of these trusts. Next, we’ll briefly mention how to go about establishing a living trust. Finally, we’ll talk about the disadvantages and advantages they offer versus other asset transfer mechanisms such as wills.
Also known as revocable trusts, RLT, and inter vivos trusts, a revocable living trust is defined as a written document that contains provisions allowing the person creating the trust to alter its terms. As long as this person is living, interest earned on the assets placed in the trust are distributed to the creator. After the death of this person, the property is transferred to the beneficiaries of the trust.
Revocable Trust: Structure
There are typically four components of a revocable trust, including the persons playing a role in this process:
- Grantor: also known as the settlor or trustor, this is the creator of the trust, the original owner of the assets placed into the trust.
- Trust Assets: these are the grantor’s assets being transferred into the trust. This can include cash, investments such as stocks and bonds, real estate, as well as property.
- Beneficiaries: these are the recipients of the assets after the passing of the grantor.
- Trustee: the grantor is also the original trustee, the successor trustee is the person or organization that manages the grantor’s assets placed in the trust and distributes them to beneficiaries as per the wishes of the grantor after their death.
A revocable living trust is a document, or declaration, that outlines exactly how the grantor would like to distribute the trust’s assets when they pass away. The successor trustee ensures the beneficiaries receive those assets as outlined in the trust’s documentation. As the name implies, a revocable trust can be changed as long as the grantor is deemed to be of sound mind.
The outline of a typical trust might include the following elements:
- A Declaration of Trust: a statement declaring it is the will of the grantor to create the trust.
- Revocation Clause: a provision that reserves the right of the grantor to revoke the trust.
- Trustee Provisions: names the trustee and outlines their responsibilities, liabilities, fees, and powers under the law.
- Grantor Statements: outlines what happens if the grantor becomes incapacitated and what happens after their death.
- Named Beneficiaries: includes the names of the beneficiaries as well as secondary beneficiaries
- Property Distribution: explains how the assets of the trust are passed from the grantor to the beneficiaries.
- Signatures: at the very least, this would include the signature of the grantor as well as that of a notary public.
Creating a Revocable Trust
While it’s possible to find examples of revocable living trusts online, the ability to “do it yourself” needs to be balanced with the importance of the document. If the purpose of the trust is to ensure the assets are distributed in an equitable manner, then it’s best to seek the advice of a professional. This includes reputable producers of software tools in addition to attorneys.
Software tools can be purchased for less than $200, while a lawyer might charge closer to $2,000 for this service. Regardless of who drafts the trust, the following information will be needed:
- A detailed listing of the property / assets to be placed in the living trust.
- Legal names of the beneficiaries as well as the names of alternate beneficiaries.
- Trustee name, which is the same as the grantor when alive.
- Name of the successor trustee, which will administer the trust after the death of the grantor. This is typically a spouse, close relative, or a trusted friend.
- If a beneficiary is a child or young adult under the age of 18, it may be necessary to name a person to manage the affairs of this beneficiary until they become an adult.
Advantages and Disadvantages of Living Trusts
When discussing the pros and cons of revocable living trusts, they are often compared to wills. This is because living trusts provide a means of avoiding probate. This allows the successor trustee to begin distributing assets placed in the trust in a relatively fast manner.
- Probate: Revocable living trusts avoid the probate process, which is a legal proceeding that transfers property after someone dies, and delays the distribution of assets to beneficiaries.
- Disputes: family members can challenge a will if they feel the distribution of assets is not fair. A revocable living trust allows the grantor to disinherit anyone challenging the trust’s guidance.
- Control over Guardians: when small children or young adults are the beneficiaries of the trust, it can specify how the guardian uses the assets on behalf of these children.
- Revocability: the guidance established in the trust can be changed as long as the grantor is of sound mind.
Two of the significant disadvantages of a living trust include:
- Recordkeeping: as assets change over time, there is a need to update the provisions of the document. This can be both time consuming and expensive.
- Title Changes: if real estate or other titled property is placed into the trust, the owner of the asset may need to be restated as the trust.
Finally, regardless if the property is transferred using a will or a revocable trust, the inheritance taxes due, if any, would be the same.
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