Revocable Living Trusts
A Revocable Living Trust does many of the same things as a will, but it doesn’t eliminate the need for a will. A Living Trust avoids the probate process for all assets that are transferred to the trust before you die. It has the advantage of making assets available to the beneficiaries more quickly than a will which must pass through and be approved by the probate courts. That can take a considerable amount of time – from several months to more than a year. Needless to say, most beneficiaries would prefer to receive their inheritances more quickly than that. Since Living Trusts also avoid probate costs which vary by state but can be expensive (most estimates put those costs at between 2-4% of the assets going through probate depending on the size and complexity of the estate).
A Living Trust allows you to
- Assign a trustee to manage the trust and carry out the grantor’s (your) wishes as spelled out in the trust document. You can appoint yourself as Trustee, as well as an alternate (like your spouse or another trusted adviser) that will assume the Trustee’s duties upon the death of the grantor.
- Name beneficiaries and spell out who inherits what assets and when they will receive those assets – among other things, provisions may be added to the trust to delay distribution of the assets as the grantor sees fit (for example, if you have minor children their assets can be retained in the trust until they reach a certain age and are more likely to handle their inheritance responsibly – this contrasts with a court appointed financial guardian that you selected in your will which generally must distribute assets to minor children in accordance with the timing specified by state law (which varies by state but is generally 18 or 21 years old).
- Assign guardians for your minor children and/or dependent adult children.
*You still need a will to deal with any assets that don’t become property of the Trust before the Grantor’s death (and there are almost always assets that slip through the cracks and need to be addressed). Those straggling assets will need to be governed by a will as they pass through probate. Absent a will (often structured/referred to as a pour over will), the probate court would decide how to pass those assets to beneficiaries in accordance with your state’s intestate laws. Those laws usually pass the assets to the nearest living relatives including your spouse, children, parents, etc., which may not align with your wishes. Costs for probating an estate without a will are usually higher as the court tends to be more involved in such a process. Also, it’s more likely that family will be unhappy with the outcome and litigation can occur.
Advantages of a Revocable Living Trust vs. Wills and Other types of Trusts
- A Revocable Living Trust, as the name conveys, is fully revocable by the Grantor of the trust up until the Grantor’s death. That means the trust’s assets may be used by the Grantor for day to day living or pulled out of the Trust at their discretion. Non-revocable trusts do not offer this type of flexibility. Non-Revocable Trusts have attributes and benefits that Revocable Trusts don’t have to compensate for their lack of flexibility (namely, tax planning benefits and creditor protection benefits, but those will be addressed in a separate section.
- The Grantor may also change the terms of a Revocable Living Trust up until their death. This includes changing the beneficiaries or the allocation of assets to the beneficiaries.
- Another benefit of a Revocable Living Trust is that it is not treated as a separate entity for tax purposes. Any income that the Trust earns on its assets are taxed on the Grantor’s personal tax return. This simplifies the administration of the Trust as separate tax returns for the Trust are not required.
Disadvantages of a Revocable Living Trust
- Transferring assets to a Trust can be time consuming as assets may have to be retitled and that may incur some additional costs (for example real estate, vehicles, etc).