What is a Revocable Living Trust?
You may have heard of a trust before now. Most people hear of them the first time in the context of wealthy "trust fund babies." This is a term used to indicate a young person living off beneficiary payments from someone else's trust. You may have also been advised by friends that you need to create a trust, and you are left wondering how they could apply to your situation.
A revocable living trust is a legal document that allows you to transfer ownership of your assets to a trust while you are still alive. The trust will then manage and distribute your assets according to your instructions. The person in charge of distributing the assets is called a "trustee." When you create a trust for your own assets, you can also serve as the trustee during your life!
Why Create a Revocable Living Trust?
There are several reasons why a person might want to create a revocable living trust:
To avoid probate. Probate is the legal process that distributes a person's assets after they die. It can be expensive, time-consuming, and public. A living trust can help loved ones avoid the cost and complication of probate by transferring ownership of assets to the trust before the person dies.
To protect privacy. If a person dies with an estate that needs to be settled, their assets will be distributed according to state law (if there is no will) or their will. That means a court case must be opened. This means that the person's personal information, such as bank account information and property records, may become public record. A living trust can help protect the decedent's (and family's) privacy by keeping personal information private.
To minimize estate taxes. If someone dies with a large estate, that estate (or beneficiaries) may have to pay estate taxes. A living trust can help minimize estate taxes by transferring ownership of assets to the trust before the person dies. Afterward, the trustee manages the change in beneficiaries and the estate does not pay taxes.
To provide for loved ones. If a person becomes incapacitated or dies without a will, their assets will be distributed according to state law. This means that their loved ones may not receive the assets the person wanted them to have. A living trust can help provide for loved ones by giving the person the power to distribute their assets according to their specific wishes.
How Does a Revocable Living Trust Work?
A revocable living trust is a legal document that creates a trust. The trust is a separate legal entity that owns your assets. In a simple living trust scenario, you are the grantor of the trust, and you are also the trustee of the trust. This means that you are responsible for managing the trust and distributing its assets. You can make changes to the trust as long as you are alive and competent.
When you create a revocable living trust, you transfer ownership of your assets to the trust. You can still use your assets as if you owned them outright, but the trust now owns them. When you die, the successor trustee will distribute your assets to your beneficiaries according to the terms you have outlined in the trust documents.
What Are Some Drawbacks of a Revocable Living Trust?
As your attorney or accountant will advise you, there can also be drawbacks to a revocable living trust:
Cost. A living trust can be expensive to create. Depending on the complexity of your assets and your wishes, this may be done at an hourly or flat fee. The documents are long and complex, and they must be explained to you so that you can manage your trust.
Complexity. A living trust can be complex to understand. Even if you choose to have a professional administer the trust after its creation, you need to understand how it impacts your assets and what your trustee is expected to do.
Flexibility. A living trust is not as flexible as a Will. With a Will, if you find your needs and your plans have changed, you can revoke the old Will and write a new one. A trust may involve an attorney each time a change is desired, and some decisions are difficult to unwind.
Control. A living trust gives up some of your control over your assets, particularly if you have chosen to have it managed by a third party. You also have to trust that your successor trustee will follow your wishes, file the taxes as required, and terminate the trust at the appropriate time.
Should You Create a Revocable Living Trust?
Whether or not you should create a revocable living trust is a decision that you should make with the help of an attorney. There are many factors to consider, such as your age, your assets, and your family situation. An attorney can help you understand the benefits and drawbacks of a living trust and make the best decision for you.
This post was created with the assistance of Bard, an AI solution from Google.