A revocable living trust (RLT) is part an estate plan that addresses three basic scenarios:
- While alive and well: The trust makes clear that while the settlor is alive and well, he or she will serve as trustee and manage trust assets for his or her own benefit.
- If incapacitated: If the settlor becomes ill or injured to the extent that he cannot manage his finances, the trust identifies who will take over as trustee, and directs the successor trustee how to manage trust assets.
- After death: The trust directs the successor trustee how to distribute remaining trust assets after the settlor dies. This can mean the trust continues for years after death to fulfill the settlor’s wishes such as paying for children’s education, paying the kids over time instead of all at once, or separating into different divisions based on each beneficiary’s needs.
The idea behind a revocable living trust is that while you are well, you have full access to you property as you would without one, but that if you die or become incapacitated, you have declared someone in charge of the property (the trustee) to use the property as you dictate. While helpful, a power of attorney has no effect after a person passes away and offers less control than a trust. A revocable living trust can allow the estate of a deceased person to avoid the court probate process. Probate creates costs, delay and complexity, which some families prefer to avoid. In addition, if a deceased person owns real property in more than one state, probate may be necessary in each state before the property may be distributed to beneficiaries.
A revocable living trust is not the appropriate estate plan for all people. A revocable living trust is a complex estate plan that will cost more in legal fees than a more basic plan.
Also, a revocable living trust must be properly funded where property is re-titled into the name of the trust. Trust administration can also generate its own costs and delays. In addition, creation of a revocable living trust is not a tax strategy in and of itself. The assets of a revocable living trust are subject to federal and state death taxes in exactly the same way as the assets passing through a probate estate.
Many people hear horror stories about the court probate process and are urged by friends and relatives to execute a trust. A trust is a flexible but complex legal document that can serve various purposes for various people. It is important to determine – on an individual basis – whether a trust is an appropriate estate plan and if it is, how to structure it to achieve the desired results.