With Revocable Trusts, the Devil is in the Details
As an advisor, there are five important things to know about living trusts (also known as revocable trusts or inter vivos trusts), especially if clients want to use them to help their loved ones avoid the probate process.
When clients put property into a living trust, the trust becomes its owner, which is why they must transfer property titles from their own name to that of the trust. Revocable living trusts (RLTs) help estate planning attorneys design custom plans for unique client situations.
A three-party agreement: the trust maker, trustee and beneficiary
The “revocable” in RLT means that the trust maker (also known as the grantor, settlor or trustor) reserves the right to change any trust provisions as long as the trust maker is alive and has legal capacity to make decisions. Once he or she passes or no longer has legal capacity, then the RLT becomes irrevocable.
Avoiding “living probate”
One of the major benefits of the RLT is the uninterrupted management of trust assets should the trust maker or beneficiary lose legal capacity. The authority of a trustee over trust assets is greater than that of an agent acting under a durable power of attorney over assets still titled in the name of someone who is incapacitated.
Avoiding “death probate”
Since the estate distribution plan of the trust maker remains private, court costs are eliminated and the delays often associated with probate are avoided. Of course, the degree to which these benefits are realized may vary depending on the state where the trust maker was a legal resident at the time of death. Owning real estate in more than one state could subject clients to probate in each respective state, which is yet another advantage when real estate is titled to the RLT.
Funding fundamentals
The “titling” of assets is truly the “secret sauce” when it comes to estate planning. That’s because the key to the success (or failure) of any estate plan hinges on knowing what is owned, how it is titled, where it is located and its value. That’s true regardless of whether the plan is passing through probate under a last will and testament, or avoiding probate with an RLT. And since the people who know those details best are no longer alive or no longer have legal capacity, up-to-date record-keeping and careful asset titling are essential.
Choosing trustees
Along with asset “titling,” clients must choose the right successor trustees to help ensure the success of their RLT. There are really three basic options when it comes to filling this crucial role:
- Family members or friends, since they likely know the strengths and weaknesses of different beneficiaries. Unfortunately, they may be too busy to fulfill the role.
- Professional trustees
- A combination of family members or friends with professional trustees
- Under a co-trustee approach, clients can appoint a family member (or friend) trustee who understands the strengths and weaknesses of their beneficiaries, while choosing a professional trustee to help reject irresponsible distributions. This can help preserve personal relationships and protect beneficiaries.
Final thoughts
Even basic RLT planning can be complex. Don’t hesitate to reach out to an estate planning attorney who can help you and your clients navigate different trust scenarios.