- Hits: 208I have been hearing many commercials and seeing articles in newspapers regarding revocable living trusts. This article discusses what a revocable living trust (RLT) is, what it does, why it makes sense in certain situations, and how it operates. Future articles will discuss what happens after the RLT is created and signed, what can be held inside RLT, and how to accomplish “funding” the RLT.
What is a RLT?
The concept is relatively simple one to grasp. The RLT a written instrument designed to hold legal title to most all of your property (home, boat, investments, etc.) while allowing you to retain control over those same assets. You transfer some or all of your property to the RLT as soon as it is created. During your lifetime, you control the trust; you can change the trust terms, or terminate the trust and take the property back. At your death, the trust becomes irrevocable and may continue to exist for many years. The trustee administers and distributes the trust property according to the terms of the trust. If properly drafted and structured, at your death the law deems you to own NOTHING. That is because everything is owned by your trust and not by you. This has several distinct advantages, the most important of which is the avoidance of probate.
Think of the RLT as a corporation for your personal assets. In a corporation, ownership is held by shareholders while the corporation manages day-to-day affairs, operates the business, raises capital, creates products and/or services, signs checks, incurs debts, and so much more. So too a RLT can be created to act as a shareholder of sorts.
Why Do People Create RLTs?
People create RLTs for many different reasons. Most often I hear my clients tell me about a parent or loved one they recently lost and court proceedings were necessary to transfer the deceased’s assets to his or her loved ones. This process is better known as probate and some form of probate is guaranteed if die with only a will. Clients are shocked to learn that probate filings are matters of public record. Anyone can go to the local courthouse, pull the probate file, and see the will of the deceased person. The file will also contain documentation of what assets were a part of the estate, who got those assets, and in what proportions. It is easier to get a copy of a probate file than a library book because the library requires that you have a library card.
All of this can be avoided with a RLT. RLTs allow the trust property to pass by contract law outside the courtroom! This means that your estate can save thousands of dollars in probate lawyer fees and court costs; can expedite the inheritance process for your loved ones; and can remain private. Additional benefits include:
- Controlling the manner and timing of asset distributions to heirs
- Efficiently transferring assets to heirs
- Enabling someone else to manage property
- Protecting property in case of incapacity (thus avoiding costly guardianship proceedings)
- Avoiding probate.
When Can a RLT Be Used?
As previously stated, RLTs can be used to hold title to almost anything. The exceptions to this rule are:
- Qualified stock options or stock acquired under such a plan, at least until the holding period has expired
- An interest in a partnership, if prohibited by state law
- An interest in a cooperative or condominium, if prohibited by your contract with your co-owners
- An interest in a professional corporation (e.g., a law firm) because such an interest generally can only be owned by a professional (e.g., a lawyer)
- An IRA, although you can name your living trust as beneficiary of your IRA
Who Should Utilize a RLT?
RLTs are appropriate for individuals:
- Owning real estate in more than one state (to avoid ancillary probate)
- With concerns about their health or future ability to manage their own financial affairs
- Who want to keep transfers at death private (to avoid family conflicts, for example)
- Who want someone else to manage and invest assets (e.g., persons with special needs, persons who often travel overseas)
- Who want someone with special knowledge or skill to manage and invest assets (e.g., persons who inherit or win large sums of money)
- Who are single or who care for themselves
- Who are unmarried domestic partners
- Who are elderly or ill
- Who are not concerned about transfer taxes
Advantages of RLTs
There are many advantages to using a RLT rather than a plain old will. These advantages include:
- Letting you control your property until your death (giving you flexibility to meet unknown future contingencies and still meet other goals)
- Allowing distribution of your personal property to be customized (you can direct the trustee to distribute property only in certain situations)
- Minimizing delays in the transfer of property
- Circumventing some limits on your power to transfer property
- Letting someone else manage your property for you
- Giving someone the power to manage your property if you become incapacitated
- Avoiding probate
As with anything, there are some tradeoffs that you should be aware of. Creating a RLT may pose the following drawbacks:
- More expensive to create up front (but cheaper in the long run)
- Funding the trust can be burdensome and potentially costly (if there is a great deal of real estate)
- Should not be used to transfer some types of property
- Does not help achieve Medicaid eligibility
- Does not avoid estate taxes (but estate tax savings provisions can be added to RLTs)
- Does not protect your property from creditors
As you can see, there are many aspects to implementing a well-crafted estate plan. Whether you choose to use the traditional model of a Last Will & Testament or you use a RLT, the most appropriate course of action for you cannot be determined until you have had a thorough discussion with an attorney.
At Green Law, PLLC, we have been helping clients just like you draft and implement estate planning strategies for years. Give us a call today at (806) 548-2953 to discuss your option(s) further. If you want to avoid probate, streamline the distribution of your estate, save your heirs headaches and heartbreak, spare your loved ones from having court oversight in the administration of your estate, or simply want your affairs to remain private, you should seriously consider using a RLT for your estate planning needs.