An RLT is a trust that is created by an individual during lifetime to control and distribute assets owned by the individual both during lifetime, and more importantly, following the death of the individual. The main objective of an RLT is to hopefully avoid the necessity of probate following the death of the individual. The avoidance of probate is accomplished because at the death of the individual, all assets that are titled in the name of the RLT will be distributed by the Successor Trustee in accordance with the provisions of the RLT. There is no need for a probate proceeding as there may be for any assets that are owned by the deceased individual.
Who should have a Revocable Living Trust?
In some states (notably California), probate proceedings are unduly complex and expensive. In other states, probate procedures are more sensible. In some cases, the necessity of probate can be avoided by other means, such as joint tenancy or beneficiary designations, or other procedures such as a Community Property Agreement (in states that recognize community property). If probate avoidance is important, then the use of an RLT may be indicated. This is particularly important if assets are located in multiple states, thus risking multiple probate proceedings.
Other benefits would include the use of the RLT to provide for independent management of the assets of an individual. In some cases, the expectation of privacy is a benefit that makes the RLT strategy desirable. The decision whether an RLT is an appropriate choice should be discussed with an estate planning attorney who can provide an assessment of the benefits, as well as the disadvantages, of the RLT strategy.
What are the disadvantages of a Revocable Living Trust?
The principal disadvantages of an RLT are the expense of setting up the trust and the inconvenience of dealing with the RLT during the remainder of your lifetime.
The initial expense of setting up an RLT, including the transfer of assets into the ownership of the RLT, will likely vary greatly between locations. However, it is a significant expense that is made with current funds that might be better used for another purpose during the remainder of your lifetime. The expense will probably be a very significant share of the expense of the probate proceeding that it was intended to avoid.
The inconvenience associated with the initial transfer of ownership of all assets to the RLT, as well as the continued inconvenience that will be incurred in the administration of the RLT during lifetime, ought to be given more consideration.
In some cases, it is necessary to later revoke the RLT because of changes in your circumstances, such as the potential need to qualify for Medicaid.
What assets should be transferred into the ownership of the Revocable Living Trust?
The RLT will hopefully avoid the necessity of probate following the death of the individual because at death, the individual owns nothing. All assets are titled in the ownership of the RLT which continues to exist, and then continues to hold the assets for the benefit of others, or provides for the distribution of the assets, all in accordance with the provisions set forth in the RLT agreement. This requires that all "probate assets" owned by the individual be transferred into the ownership of the RLT in order to achieve the avoidance of the necessity of probate. "Probate assets" are assets that cannot ordinarily be transferred after death without probate. Such assets typically consist of parcels of real estate, bank accounts and seecurities accounts, motor vehicles, and other assets held in the name of the owner, personally, and not in joint tenancy or with another beneficiary arrangement. These assets must be owned by the RLT if probate is to be avoided.
What assets should not be owned by the Revocable Living Trust?
Some assets should not typically be transferred into the ownership of the RLT, such as 401k, IRA and other qualified plan assets because they are controlled by their own beneficiary designation provisions, and because the transfer would constitute a "distribution" which would trigger the recognition of the deferred income tax liability. Also, there is usually no need to transfer the ownership of assets like annuities and life insurance policies because they also have beneficiary designation provisions. If other assets are held in joint tenancy, or with some form of suitable beneficiary designation, then it is likely that probate can be avoided as to those assets, and the necessity of an RLT for that purpose is lessened.
If a Revocable Living Trust will (hopefully) avoid probate, why do I need a "Pour-over Will"?
Good question! Trust mill representatives will insist that the use of an RLT will avoid the necessity of probate. Yet, any competent person will recommend that you sign a special form of a Last Will and Testament known as a "Pour-over Will". If you are assured that you will not need to go through probate, why do you need a Will?
The reason that you need a "Pour-over Will" is because of the possibility that you will need to go through probate because all "probate assets" are not titled in the ownership of the RLT at your death. Despite best efforts, this is too often necessary. This risk is an additional disadvantage to an RLT because you incur the expense to (hopefully) avoid probate, and then end up incurring the expense of the probate anyway. The "Pour-over Will" provides for the distribution of any assets that you, personally, own at your death back into the ownership of the RLT to be distributed in accordance with its provisions. But this requires that the Will be probated!
Can a Revocable Living Trust be amended or revoked?
Typically yes. However, the specific terms of the trust agreement must be reviewed to determine if any limitations have been placed upon amendment or revocation. In most RLTs that are created to minimize estate tax liability, the portion of the trust estate that is owned by the decedent cannot be amended or revoked following the death of the individual.
In many cases, serious restrictions are imposed upon a surviving spouse's ability to amend or revoke the RLT if changes in circumstance should arise.
Can a Revocable Living Trust be used to minimize estate taxes?
The estate tax laws apply with equal force to estates which are governed by RLTs, and those which are administered through probate or other means. Therefore, in general, the same strategies that can be used to minimize estate taxes with an RLT can also be used in a Will. There is no significant tax advantage that can be gained by having an RLT.
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