Trusts are often incorrectly perceived as an estate planning tool reserved for the very wealthy. For many people, however, a revocable living trust can be an important part of a comprehensive estate plan regardless of the amount or number of assets. This prompts the question: What is a revocable living trust?
A living trust can be revocable or irrevocable. Most living trusts are revocable.
Also known as an inter vivos trust, this type of trust is referred to as “living” because it is created during a person’s lifetime and becomes effective immediately upon creation. By contrast, a testamentary trust is part of an individual’s last will and testament and goes into effect only upon death.
Revocable living trusts are “revocable” because the assets placed in the trust can be removed, amended, managed, and distributed by the trustee as he sees fit. The trustee even has the ability to revoke the trust completely – for any reason at any time. This ability to freely manage assets is what distinguishes a revocable living trust from an Irrevocable Living Trust. The difference is simple: Assets placed in an irrevocable trust can never be taken back out. This key distinction makes revocable living trusts much more popular than their irrevocable counterparts. In fact, when most people refer to a “living trust” they actually mean a “revocable living trust.” See What is a Living Trust?
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The person who creates the revocable living trust agreement is referred to as the maker, settlor, grantor, creator, or trustmaker. These terms all mean the same thing and refer to the trust owner. In the vast majority of cases, the trust owner is also the trustee. Commonly, married couples who create a trust serve as co-trustees and share management of the trust assets.
After the trust is created, it must be funded. Without assets, a trust is meaningless. It is not enough to simply create the trust – you must put something in it. Funding a trust means transferring the assets you own as an individual into the trust itself. This can mean changing titles and designating the trust as the beneficiary for assets like life insurance policies and retirement plan benefits. Funding is an important step that requires careful planning to ensure assets are properly titled in the name of the trust.
A revocable living trust has many benefits. One of the most popular reasons for creating a trust is the desire to avoid probate. The probate process is court-supervised and can be lengthy and expensive. Probated estates also become part of the public record. Trusts allow people to maintain privacy while providing for direct distribution of property to beneficiaries. Because trusts do not pass through the probate court, assets are not diminished by court costs and attorney’s fees.
Revocable living trusts are not without drawbacks. Because trusts are private documents, you must rely upon the successor trustee to properly distribute your assets after your death. A successor trustee’s actions can be challenged in court, but this destroys the privacy element of the trust and can result in costly litigation. A revocable living trust also offers no tax savings. During the trust owner’s lifetime, trust assets are taxed just like assets owned by the individual. After death, trust assets are subject to the same state and federal estate taxes as if the trust never existed. There are several tax saving strategies available under estate tax law, however, it is possible to take advantage of these techniques using a testamentary trust as well.
For further information about revocable living trusts, see "Make Your Own Living Trust" by Attorney Denis Clifford (Nolo 2011).
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