A Revocable Living Trust is a common estate planning document that is typically used as a substitute for having a Will. It provides a way to manage your assets while you are alive and after you pass away. The primary reason that many people choose to create a Revocable Living Trust is to avoid probate.
Confusion about Revocable Living Trusts
There is probably more misunderstanding about the Revocable Living Trust than any other estate planning technique. Part of the confusion stems from the fact that the Revocable Living Trust goes by many other names. It is also frequently called a Grantor Trust, Revocable Trust, Living Trust, Intervivos Trust, and even a Family Trust.
There are many different types of trusts out there and it is easy to confuse a revocable trust with an irrevocable trust. The most important and distinguishing feature of the Revocable Living Trust is that it can be amended, revoked, or changed by the person creating the trust.
Many people fear that they will lose control of their funds when they put their assets into a trust. This may be true if they fund an irrevocable trust. However, when creating a Revocable Living Trust, the Grantor usually chooses to remain in full control of whatever assets they put into the trust. You can create the trust so that you have complete unfettered access to your own money.
A Revocable Living Trust should NOT be confused with a Living Will. A Living Will is an Advanced Health Care Directive.
Benefits of a Revocable Living Trust
Some attorneys and financial planners claim that the revocable trust is the panacea of all estate planning because it helps avoid probate. Other attorneys refuse to prepare revocable trusts at all, claiming that probate really is not that difficult and the cost of setting up a revocable living trust can far outweigh the benefits.
At The Pollock Firm LLC, we consider each client on an individual basis to determine whether a Revocable Living Trust would be appropriate for such person’s situation.
So when does a Revocable Living Trust make sense? It can be a valuable tool in any of the following situations:
- If you live in a state where it is cost effective to avoid probate.
- If you have real estate in multiple states, especially if one of those states is a state where probate is costly. (If you own real estate in multiple states, your heirs must go through probate in each state to transfer the property.)
- If your family requires immediate access to money and other assets after you pass. If you have to go through the probate process, it may take a while.
- If you want privacy. Wills are public documents.
- For individuals who require help managing their money while alive and a Power of Attorney just doesn’t suffice. (Interestingly, financial institutions will accept copies of a trust but will wish to have an original Power of Attorney.)
- If you are setting up a permanent trust for loved ones after you pass away.
- If you live in another country, but have assets based in the United States.
- If you are cutting out someone who would be considered your next of kin. (It may sound counter-intuitive, but probate for single people without children is typically far more complex than probate when there is a surviving spouse or child.)
- If you have a complex estate plan.
- If you have a complex family dynamic such as a blended family.
- If you have significant wealth.
- If you wish to create a receptacle where funds can be directed to go after you pass away. (For example, if you have a complex formula for how you wish your assets to be divided and your wealth includes retirement funds and/or life insurance, if you filter it through a trust, the trustee can direct where the money should go after you pass away.)
- To provide for a way to manage certain assets in the event of your incapacity.
Cost of a Revocable Living Trust
Typically, the creation of a Revocable Living Trust can cost more than just a Will. If done properly though, the cost will be justified by the savings on administrative costs after you pass away. However, in order to achieve the cost savings upon your death, it is critically important to properly fund your Revocable Living Trust. If you don’t actually transfer your assets to the trust during your life (or have beneficiaries named on your accounts at your death), your heirs will have to go through probate anyway.
Since you must properly fund your trust during your lifetime, you would be aware that there may be additional fees associated with funding it. When transferring real property, a new deed will be required and there may be real estate transfer fees. Additionally, if there is a mortgage on the property, the mortgage company may have an issue with the transfer.
If your sole reason to create a revocable living trust is to avoid probate, be aware that probate isn’t terrible in all jurisdictions. For example, probate in New Jersey is not as expensive or time consuming as in other jurisdictions if you are leaving all of your assets to a spouse or adult children. So if avoiding probate is your only goal, the cost of establishing the trust may not always be justified.
In terms of how much a Revocable Living Trust costs to create, that depends upon how complex you wish to make it. We ask prospective clients to call for a custom quote as so much really does depend upon your family dynamic, wealth, and needs.
Generally, a Revocable Living Trust is completely tax neutral while the Grantor is alive. While the Grantor is alive, this trust will be ignored for tax purposes and taxed to the Grantor. This means that income earned by the trust will be taxed to the Grantor and that if you put appreciated assets into the trust, it will not trigger a capital gains tax.
While some people like to obtain a separate tax ID for the trust for privacy reasons, the trust may also use the Grantor’s social security number. Upon the death of the Grantor, the taxation of the trust will be dependent upon the terms of the trust and a new tax ID number will usually be appropriate.
A revocable living trust can be great part of a tax planning strategy. However, it does not reduce taxes any more than a good Will can. Moreover, a Revocable Living Trust is included in the Grantor’s estate for estate tax purposes. Accordingly, it does NOT alleviate the requirement to file estate and or inheritance tax returns.
If your Revocable Living Trust owns your primary home, you can sell your home and still qualify for a capital gains tax exclusion. Under Revenue Ruling 85-45, the sale of a person’s principal residence held in trust qualified for the I.R.C. §121 capital gains tax exclusion provided the person and trust otherwise qualified for the exclusion.
Other Planning Considerations
Even though you may wish to create a Revocable Living Trust, you should also have a Will, Financial Power of Attorney, and a Health Care Power of Attorney/Living Will. The reason you still need a Will even though a Revocable Trust can act as a Will substitute is to deal with assets that may still be in your name at the time of your death. This type of Will is known as a “Pour Over Will” because it pours any assets remaining in your name into your trust.
We recommend clients work closely with their financial advisors and attorneys to ensure that assets are properly retitled after the trust is created. Titling of assets is critical to ensuring an effective estate plan.
Customizing Your Revocable Living Trust
You can customize your revocable living trust however you like. You can generally call it what you like and fund it with as much as you feel comfortable. You can create one trust for yourself or many. You can create a joint trust for yourself and your spouse, or if you are in a blended family you can do a trust for each of you and a joint trust.
At The Pollock Firm LLC, we help clients choose a custom plan that is right for them. Kindly contact us if you wish to learn more.