A revocable living trust is a trust that can be revoked, or terminated, by the grantor (the person who set up and funded the trust). A trust is classified as “living” when it is established during the grantor’s lifetime.
What is the difference between a will and a trust?
Wills: A will is a legal document that outlines how you want your assets and affairs handled following your death. Key items accomplished with a will include:
- Who will serve as guardian to your children
- Who will receive your possessions, assets and real estate
An important thing to understand about a will is that it must go through probate, which can be a long, expensive and contentious examination process, especially if family members challenge the provisions of the will.
Trusts: There are many types of trusts, but the type most commonly confused with a will is a revocable living trust. Similar to a will, a revocable living trust allows the grantor, or owner, of the trust to designate how assets are passed to designated beneficiaries following his or her death. Unlike a will, a living trust bypasses the probate process, allowing assets and property to be passed directly to the named beneficiaries. Not only does this speed up the asset transfer timeframe, it also protects the confidentiality of the grantor and beneficiaries.
Similarities between wills and revocable living trusts
- Both wills and trusts are legal documents that direct the transfer assets upon your death.
- A will names an executor to oversee the distribution of assets and beneficiaries to inherit the assets.
- A trust names a successor trustee(s) to oversee the distribution of assets and beneficiaries to receive the assets.
Differences between wills and revocable living trusts
- A will only goes into effect when you die. In contrast, a trust can be used to manage assets during your lifetime.
- A will is a matter of public record. Everyone from your friends and neighbors to unscrupulous salespeople and con artists can peruse your private records and distribution plan. A trust is a private document that guarantees your family’s privacy.
- A will is guaranteed to go through the probate process. Assets held in a trust are excluded from probate.
What is the process for establishing a revocable living trust?
The process is relatively simple. An attorney prepares the revocable living trust according to the grantor’s wishes. The documents are signed by the grantor and trustee (usually the same person). The grantor retitles assets in the name of the trust.
How does a revocable living trust avoid probate?
To put it simply, all assets owned by an individual are subject to probate. If your assets belong to the trust (with you maintaining full control as the trustee), you own no assets. Everything held in the name of the trust will avoid probate, remain private and be transferred to your beneficiaries in a much more efficient manner.
What are the benefits of a revocable living trust?
A revocable living trust allows you to:
- Avoid the probate process – Shortens the estate distribution process and keeps private matters off the public record
- Avoid probate costs – No court involvement = no court fees
- Ensure your wishes are documented and carried out while you are alive – A revocable living trust allows you to designate a successor trustee to manage your financial affairs in the event you become incapacitated. Without this protection in place, your loved ones may have to go to court to prove your incompetency. In addition, the court would have the power to name a guardian and conservator to handle your affairs, which may not be the person/people you would have chosen.
- Eliminate the requirement of public notices – Public notices are required with a will, not with a trust.
- Keep your personal affairs private – A trust ensures confidentiality for you and your heirs.
- Distribute your assets faster – Assets and property can be passed quickly to heirs by avoiding the probate process.
- Distribute assets held in multiple states – A trust allows you to avoid probate in all states, which is a tremendous advantage for those who hold assets in different states.
- Maintain full control over your assets – As the named trustee or co-trustee, you continue to control all property and assets held within the trust. And because your Social Security number is the trust’s tax identification number, there is no separate tax return and no gifting issues.
- Achieve your estate planning goals – Unlike jointly owned assets, assets held in revocable living trusts avoid probate upon both spouses’ deaths and allow additional opportunities for estate planning.
Is a will still needed?
Yes, a “pour over will” is necessary to serve as a back-up for assets or property not owned by your revocable living trust. For example, let’s say you establish a revocable living trust and retitle all your assets at the time to the trust. Several years later, you open a new investment account in your individual name. If you suddenly die and don’t have a will, the assets in the new investment account will likely be subject to probate and will pass to your heirs according to state law. Your account may be distributed in a way you would not have chosen. If you had a will, it would dictate how the assets would be distributed after going through probate. The will allows residual assets to “pour over” into your trust and be distributed according to your intended wishes.
Is a durable power of attorney still needed?
Yes. The trustee or successor trustee can only control assets held in the revocable living trust. A durable power of attorney is still necessary to allow for the management of any assets held outside the trust. For example, you are the trustee of your own revocable living trust. If you become the victim of an accident or illness and are unable to make decisions for yourself, your designated successor trustee takes over the management of the trust assets for your benefit. However, the successor trustee has no control over any assets not held in your revocable living trust.
If you do not have a durable power of attorney, the probate court will decide who is granted conservatorship over your assets. If you have a durable power of attorney, the agent specified will have authority over your assets held outside the trust.
If you have any additional questions about revocable living trusts, schedule a complimentary, no-obligation consultation and learn more about how Creative Planning can help you.