By: Stephen Berardino
When properly funded a Revocable Living Trust can be an amazing estate planning tool that provides cost and time savings, in addition to the ability to control assets after an individual’s passing, that cannot be accomplished through a will or joint tenancy. A Revocable Living Trust allows an individual to transfer ownership of an asset from their name to a Trust, while maintaining complete control over the asset. Assets that can be transferred into a Revocable Living Trust include cash, stocks, bonds, and real estate. The Trust terms state who receives any income produced by Trust assets, designates when those assets can and will be removed from the Trust, and dictates when the Trust will be dissolved.
There are three significant roles in every Trust: (1) the Grantor; (2) the Trustee; and (3) the Beneficiary. The Grantor is the individual that creates the Trust and funds it. The Trustee is the individual who administers the assets held by the Trust in accordance with the guidelines of the Trust agreement. The Beneficiary is the individual or entity that derives benefit from the Trust.
At the onset, the Grantor acts in all three roles — Grantor, Initial Trustee, and Lifetime Beneficiary. By doing this the Grantor gives up ownership of an asset, but retains ability to sell, transfer, spend, etc. that asset as Initial Trustee. Further, as the Lifetime Beneficiary of the Trust, the Grantor is entitled to any income produced by Trust assets. Upon the death or incapacitation of the Grantor, a Successor Trustee takes over and manages the Trust assets for the Remainder Beneficiaries.
The Grantor of a Revocable Living Trust retains the ability during their lifetime to alter, amend or revoke the Trust in whole or in part, including the ability to change the beneficiaries and Successor Trustees. This power to amend and “revoke” is where the Trust gets its name. Further, due to the fact the Trust is created during the life of the Grantor, as opposed to at their passing through provisions of their Will, the Trust is considered to be a “living” trust. Although a Revocable Living Trust becomes irrevocable or unchangeable at the passing of the Grantor, the Successor Trustee is usually granted broad powers to make discretionary distributions to the Beneficiaries.
Most Revocable Living Trusts are constructed to provide for the health, education, maintenance, and support of spouses and children. However, these same estate planning tools can also be used by the Grantor to control assets held by the Trust for a certain period of time after their passing. For instance, the Grantor can construct the Trust to provide for delayed distributions to beneficiaries, ensuring Beneficiaries do not inherit at young ages. Additionally, the Grantor may put requirements on what distributions can be made, such as for the education of Beneficiaries or for the purchase of real property.
One significant features of a Revocable Living Trust is the ability to avoid the cost and time of probate. Only those assets in an individual’s name at the time of their passing go through the probate process. A properly funded Revocable Living Trust transfers ownership of an asset from the Grantor’s name to the Trust. Therefore, any assets owned by the Trust and not by the Grantor at their passing are transferred to their Beneficiaries outside of probate. Further, assets transferred to the Trust may no longer be susceptible to creditors, liens, judgments, or bankruptcy.
Most Revocable Living Trusts provide preferential tax advantages to married couples with regards to estate tax. Depending on what the current Federal and State law are at the passing of the Grantor these advantages can vary, however a Revocable Living Trust is designed to take full advantage of the current law. However, any tax advantages only go into effect at the passing of the grantor. During the Grantor’s life, the transfer of ownership to the Trust does not diminish the income tax liability of the grantor. All income produced from assets owned by the Revocable Living Trust is reported on the Grantor’s tax return just as it was before the transfer.
Some people are under the impression that Revocable Living Trust are only for wealthy people with large estates. However, these estate planning tools can also benefit persons with modest estates in a variety of ways. A Revocable Living Trust is an easy way to help your family avoid the cost of probate and taxes, while also giving you the peace of mind that your estate will pass to your family in accordance with your wishes.