REVOCABLE LIVING TRUST

Revocable Living Trusts are a common alternative to a Will based estate planning. A Revocable Living Trust is similar to a Will, in that it provides how your assets will be distributed when you pass away; however, it can also provide additional benefits that are not afforded with a Will.

Defining a Revocable Living Trust

A revocable living trust is an arrangement you make for management and distribution of your property or assets. Like a will, the trust is “revocable,” meaning that you can modify or revoke it at any time.

These trusts are established by preparing a written agreement which appoints a “trustee” to administer the property, and which gives detailed instructions on how the property is to be managed during your life and eventually distributed when you pass away.

Establishing a Revocable Living Trust

Who can establish a revocable living trust? Any competent adult can establish a revocable living trust. Husbands and wives can establish a joint trust together, or can establish separate trusts.

Selecting a Trustee

Any competent adult can be the trustee. Typically the individual setting up the trust and/or the individual’s spouse will serve as the initial trustee. A family member, bank or trust company is often a good choice as a contingent trustee, in case the primary trustee is no longer able to serve.

You can appoint more than one trustee, can delegate different duties to each trustee, and can retain the power to remove the trustee and appoint a new one. Appointing an alternate trustee is important if you are the first trustee, as the trust will carry on after you pass away or become incapacitated. The alternate trustee will serve in a similar role as an Executor when you pass away.

Establishing a Revocable Living Trust

There are two important steps to establishing a revocable living trust. First, you must sign a written trust agreement. Then, it is important to legally transfer/retitle all trust assets to the trust. Deeds, updating of bank accounts and investment accounts, and other legal documents may be necessary to effectuate the transfers. Assets not formally transferred to the trustee will not be considered part of the trust and may still be subject to probate.

Avoiding Probate

Probate is the legal process for transferring your property to your beneficiaries or heirs when you pass away. It is generally supervised by a court. Probate usually involves validation of your will, appointment of a personal representative, collection of your assets, notification and payment of your creditors, inventorying and accounting of your assets, and ultimately the transfer of your property to the beneficiaries under your will, or heirs at law. This process takes approximately six months to a year to complete.

A revocable living trust avoids the probate process, as you transfer your assets to your trust before you pass away and the trust continues on after you pass away. After you pass away, the trustee of the trust will be in charge of managing and distributing the assets to your beneficiaries, pursuant to the instructions in your trust, with minimal court involvement.

If an individual establishes a trust, but does not transfer all of his or her assets to the trust, such as a car or small bank account, the trustee may be able to record a sworn statement called an Affidavit of Distribution, confirming that the decedent had a Trust and that the property should be transferred to the trust. In Wyoming, an individual can have up to $200,000 in assets held outside of the trust and still avoid the formal probate process through filing an Affidavit of Distribution process, subject to certain restrictions. If the value of the assets held outside of the trust exceed $200,000 and do not have some sort of beneficiary designation, the assets may be subject to the probate court process.

If you pass away owning real estate in more than one state, a court proceeding may be required in each state where real estate is located. A revocable living trust can avoid these extra court proceedings and can substantially reduce probate fees, provided that the real estate is owned by the trust.

There are also other options for avoiding probate of certain assets that may not involve setting up a will or trust. Joint tenancy ownership of specific assets, with the right of survivorship, can be a cost-effective way to avoid probate. Married couples can leave jointly owned real estate to the survivor through a simple designation in the deed, titling the property as “tenants by the entirety” or “joint tenants as right of survivorship,” which means that the entire property automatically passes to the survivor, upon the first co-owner to pass away. There are several ways to pass bank accounts at death without probate, including joint accounts with right of survivorship, “payable on death” accounts, or “transfer on death” accounts. Most pension plans, retirement accounts, and life insurance policies pass under beneficiary designations which avoid the probate process.

Conservatorship

Conservatorship is the legal process for management of your property and providing for your personal needs when you become disabled or “incapacitated.” It is court-supervised and it usually involves a formal, public determination that you can no longer handle your own affairs; the appointment of a conservator of the estate to manage your assets; the listing of your assets in the court file; court-supervised investment of your property; and the preparation and filing of periodic reports and accountings. If your assets are complicated and your family members cannot agree on how they should be managed, a conservatorship can be unnecessarily complicated and expensive.

If you transfer all of your assets to a revocable living trust and give your trustee detailed instructions on how to handle your assets if you become disabled, there should be no need for a conservatorship.

Also, in lieu of establishing a conservatorship, if an individual has a valid Power of Attorney in place, the agent named in the Power of Attorney may be able to manage the individual’s financial affairs, if the individual is incompetent or becomes disabled.

Taxes and a Revocable Living Trust

By itself, a revocable living trust does not avoid income, estate or gift taxes. However, standard provisions for minimizing estate and gift taxes can be included in a revocable living trust or a will.

Components of a Revocable Living Trust based Estate Plan

A standard revocable living trust plan typically includes the drafting the trust document, the transfer of assets to the trust, drafting of a “pour-over” Will to add any other assets to the trust when you pass away that may not be owned by the trust, and preparation of a financial power of attorney and health care documents, such as a living will and health care power of attorney.

Advantages of a Revocable Living Trust

Avoidance of probate and avoidance of multiple probate proceedings when you own real estate or property in several different states.
Avoidance of a conservatorship.
Reduction of delays in distribution of your property after you pass away.
Privacy, because your trust instrument would ordinarily not be filed in court.
Continuity of management of your property after your death or incapacity.