Estate Planning Trusts Later in this article, we will go over a more detailed definition of a Revocable Living Trust. For now, just remember a Trust is a way to protect assets and pass assets to others without the need for Judges and Courts (i.e. no Probate).
A Revocable Living Trust is just one part of your complete Estate Planning.
Revocable means you can change or revoke (do away with) the Trust.
Living means you establish the trust during your lifetime.
Advantages of a Revocable Living Trust
If you understand the advantages of a revocable living trust first, then you don’t need to understand the inner workings.
It’s like a clock. You can either understand how to tell time, or understand how the clock works. Only a watchmaker needs to know both. Like the watchmaker, attorneys need to know how trusts work and what the result is. You should understand what a trust can do for you more than you should know all of the inner workings inside and out.
The advantages of having a trust are many and are presented here in no particular order.
Trusts Prevent Probate
All the assets in a trust are not subject to probate. (Probate is the process of admitting the Will to court and following the instructions in the Will to move your property to other people. Probate is a public process. Your private life is included in the court record, including an inventory and accounting. This means that everybody can find out how much you were worth.)
A Trust makes assets available to other people, your loved ones, quickly and easily without the need to go to court and see a judge. Probate can take years and tie up the money and other property until complete. Probate can be a very expensive and emotionally draining process.
Trusts Protect Children with Special Needs
Trusts can protect children with special needs or people receiving government benefits. A trust can be setup to supplement public benefits while not destroying their eligibility for benefits. (This is outside the scope of revocable living trusts unless they are created specifically for this purpose.)
Trusts Protect Children with Addictions
Trusts protect children with substance abuse problems. You can setup a revocable living trust to pay for their living expenses directly, making sure they have a safe place to live, but not give them enough money to make their habit worse. The same goes for children with chronic debt problems or chronic gambling problems.
Trusts Protect Your Assets
Trusts protect your assets and property now and later. The Trust protects your goods now by providing for a second, or third Trustee to manage the Trust property if you can’t, for any reason. Later, a new Trustee takes over and follows the instructions in the Trust, typically distributing the property in the Trust to other people.
Trusts Help Manage Money
Trusts make sure that your children don’t squander the money. Trusts can provide for higher education while preserving assets. You can setup a trust to pay landlords, schools, and bills directly while providing an entertainment and food allowance to your children.
Trusts Control Assets
Trusts leave you in control now and later. You can continue to manage your money and other assets long after you are gone. You can “attach strings” and conditions to spending the money.
Trusts Protect Against Incapacity
Trusts protect you in case of incapacity. A revocable living trust is a very efficient way to protect your assets. If you become incapacitated, then your successor trustee, whom you have already chosen, steps in and takes over management of the property in the trust. You have handpicked the person you trust to take over management of your property and can rest easy.
Trusts Protect Your Financial Rights.
Trusts leave instructions on how to manage and distribute your assets. That is, how to invest and spend your hard-earned money now and later. For example, you can request the money in a trust be invested with a certain advisor in the way you want it invested (conservative or aggressive). You can delay the passing out of assets until people are a certain age, or other conditions are met. You might say you keep “strings” on the money.
Trusts Protect Joint Assets
Trusts protect jointly owned assets. If something were to happen to you and your spouse at the same time, a revocable living trust will work to protect the assets and provide for your needs during your period of incapacity.
Trusts Avoid 2 Probates
Trusts can avoid 2 probates. If you and your spouse pass together or closely together, then even jointly owned assets would be subject to Probate without a Trust in place. You should go ahead and establish your Trust now, rather than after the passing of the first spouse. If the second spouse no longer has the mental capacity to sign a contract, then they can’t create a Trust.
Trusts Stop Probate for Out of State Property
Protect out of state real estate from Probate. If you own property in more than one state, then you should really consider a trust. If not, Probate must be opened in more than one state, adding to the cost and time. You can create a trust in your home state, then have the out of state property deeded to your home state Trust. Once you do this, the Trust rules take over.
What is a Trust?
The definition of a trust may be one of the most difficult concepts in law to grasp.
What is common to all trusts is that they require an agreement and something to hold in trust for a third person.
In a trust, one person (the grantor or trustor) gives property to another person (the trustee). The other person then is trusted to manage that property for the benefit of a third person or people (the beneficiary).
A trust terminates when certain conditions happen.
The “Treasure Chest” Definition
You can think of a Trust like a treasure chest. On top of the lid is a written set of rules as to who can get into the chest and what is to be done with the stuff in the chest.
During your lifetime, you put stuff, your property, into the chest; you can take stuff out of the chest; and everything in the chest is for your and your spouse’s benefit. You maintain control over everything in the chest. You have the key to the lock and therefore control the Trust property.
However, after a person passes, the lid is shut and locked. Now, only the person you named, the Trustee, can access what is in the chest and must follow the rules written on the lid as to who gets what, when, and how much. Only your Trustee has the key to the lock.
The Legal Definition
A trust is a contract between two people for the benefit of a third person. The two people are called the grantor (or trustor or settlor) and the trustee. The third person is usually called the beneficiary.
The grantor is the person creating the trust. They are one party that must sign the contract. A grantor is a required person for creating a trust.
The trustee is the person that the grantor gives the grantor’s property to. The trustee is trusted (therefore the name trust) to manage the property for the benefit of the beneficiary (or beneficiaries).
The beneficiary is the person who benefits from the property in the trust.
The word “revocable” means in law that you can revoke something.
In the case of a Trust, it means you can “turn off” the trust, if you have the legal capacity to sign a contract. Furthermore, you will probably reserve the right to change the Trust or make amendments
A Living Trust is a trust you create during your lifetime.
Revocable Living Trust
A revocable living trust is a trust created during your lifetime and is revocable during your lifetime.
Typically, during your lifetime, you play all three roles of trustee, grantor, and beneficiary. It is only after your (and your spouse’s) passing that a new trustee comes in and the final beneficiaries become “active.”
What a Revocable Living Trust Can’t Do
While a Trust is a powerful tool, there are some things that a Trust just cannot accomplish for you.
Shield Assets from Medicaid. A revocable living trust is considered an asset for purposes of Medicaid (“Countable”). However, you can revoke the trust and deal with the money in other ways for Medicaid.
Protect Assets from Creditors. Since the assets in your Trust are considered yours, creditors can still reach your assets, at least while you are living. You have reserved the power to transfer the assets back to yourself, so the assets are available to you to pay creditors (and long term care costs).
Preserve your Medical Decisions. You need other documents to protect and preserve your medical decisions. A Trust has nothing to do with telling Doctors and loved ones your wishes for ventilation, hydration, and any other medical decisions. You need to create a Medical Power of Attorney, a HIPAA Waiver (HIPAA: Health Insurance Portability and Accountability Acts restricts third party access to your healthcare information. Third parties include your immediate family and spouse), and a Living Will (Advance Directive). Each of these plays a role in your medical decisions and form a cohesive whole.
Preserve All Your Financial and Legal Decisions. You have some decisions that fall outside a trust. Durable Powers of Attorney are what you need to have somebody you trust make legal and financial decisions for assets and things outside the trust. For example, if you are in a car accident and are sued, your Trustee cannot answer the lawsuit (unless they also name the Trust in the lawsuit).
Take Everything Away from Your Spouse. Your Spouse may still be able to claim their “elective share.” (In Re Estate of Thompson, 2014 Ark. 237 (2014). An elective share is the minimum under law you can leave your spouse. In Arkansas, this is typically 1/3 of all non-real estate outright and a 1/3 life estate in real estate. A life estate means that you spouse has control of the property during their lifetime, then at their passing, ownership automatically passes on to the next person in line.
Setting Up a Revocable Living Trust
Setting up a Revocable Living Trust is not difficult with the proper guidance. However, you should keep in mind that a Trust is a complex legal document, full of little things that can come back to haunt you.
With that said, the first step is to decide you want a Trust. Once that decision is made, most people opt for the revocable living variety.
Before visiting your estate planning attorney, you need to decide who the successor Trustees will be. Successor Trustees are the people that will take over during your periods of incapacity and after you are gone. You can pick different people for different situations. For example, you may pick your spouse and your son that is a financial advisor, then finally your oldest daughter.
You also need to think about what property you want to put into the Trust. You need to weight the pros and cons about each item of property before putting it into the trust. You may opt to keep your cars out, because those are typically short term items. But, you may decide to put your collectible car in because you will keep it for a long time. Your attorney can help you with these decisions.
Once you decide the successor Trustees and what property you want in the Trust, it is time to visit with an attorney that practices almost, if not completely, in the area of Estate Planning. The attorney will draw up the Trust to match your desires, then help you put all of your property into it.
When to Change Your Trust
You need to revisit your Trust anytime you have a major family change or event, or every 5 years, whichever is sooner.
Events after which you should revisit your trust include:
- Birth of a Child
- Graduation of a Child
- Your Graduation
- Spouse’s death
A Revocable Living Trust is classified by the Internal Revenue Service (IRS) as a “grantor” trust. This means that as long as the original grantor is alive, income tax is paid by the grantor and not the trust as a separate entity. This is a good thing because the tax rates on trusts are not as favorable as personal tax rates.