Central Part of Estate Planning
A revocable trust, also known as a “living trust” or a “revocable living trust”, is the central part of your Foundation Estate Planning Documents. Most people need a revocable trust. It’s also one of the most widely used estate planning techniques. A revocable trust allows you to smoothly carry out a customized inheritance plan without the hassles of probate and offers complete control and flexibility.
What does “Revocable Living Trust” Mean?
“Revocable” means that you can revoke or amend your trust anytime during your lifetime (so long as you have mental capacity). “Living trust” simply reflects that you established the trust during your lifetime (as opposed to a testamentary trust which is established upon your death). A trust is a legal agreement between you and a trustee where the trustee holds assets “in trust” for the beneficiaries. You specify how, when, and to whom the trustee may provide benefits, such as how you want assets divided upon your death.
It’s Like a Bucket
Imagine that the trust is a bucket. You create the bucket and put assets into it such as your home, accounts, etc. The trustee is the one holding the bucket and the assets inside “in trust.” With a revocable trust, you create the trust AND you are the trustee, so you have complete control.
How a Revocable Trust Works
Here’s an example of how a revocable trust plays out for a married couple:
- Establish and Fund the Revocable Trust. The couple establishes a joint revocable trust, titles assets in the trust name, and they act as trustees.
- Administration of Trust During Lifetime. As trustees, they control the trust and continue to live in the home and use accounts and assets as always. Pretty much business as usual. If one spouse loses mental capacity, the other continues to act as trustee taking care of both of them. If both lose mental capacity, their chosen successor trustee steps in to administer their trust for their benefit during their lifetimes. The first priority is to take care of themselves during their lifetimes.
- Death of First Spouse. When one spouse passes away the trust continues for the benefit of the surviving spouse. In designing the trust, there are opportunities for unique planning at the death of the first spouse such asset protection and tax efficiencies. Sometimes upon death of the first spouse, the trust becomes irrevocable and in other cases it stays revocable. For example, it’s fairly common for couples to specify that the surviving spouse can only use the trust assets for themselves and descendants (i.e. assets can’t go to a new spouse).
- Death of Second Spouse. When both spouses pass away the successor trustee administers the trust for the beneficiaries (such as children). This plays out however the couple designed their plan. If the children were young, the trust may say that the assets remain in trust to care for the children until they reach a certain age and can only be used for certain types of responsible things. This is where each plan reflects your specific objectives.
Why You Need a Revocable Living Trust
- Control: You control it during your lifetime
- Peace of Mind: Gives you peace of mind knowing that you are taken care of during lifetime, and that your assets go to who you want, when you want, and how you want.
- Simple: Is simple to understand and operate.
- Avoids Probate: It avoids the cost and publicity of court probate proceedings.
- Flexible: You can modify or unwind it during your lifetime
- Protection: you can leave assets to beneficiaries in a timely and protective manner ensuring that they don’t get too much too soon and so your children won’t lose their inheritance to unforeseen issues such as a lawsuit, divorce, bankruptcy, etc.
- Tax Planning: you can design the trust to maximize step-up in income tax basis and minimize estate tax exposure and upon death.
- And many other benefits
It’s no wonder that a revocable trust is one of the most widely used estate planning techniques and is the central part of your Foundation Estate Planning Documents.
If you want to learn about basic Estate Planning Documents, Click HERE.
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