You may have heard of a revocable living trust (RLT) or seen the term referenced in one of our prior articles, but what exactly are they, who is affected by them, how can they be changed, and what do they accomplish?
What Are They?
Trusts, which are legal entities that hold title to property for the benefit of a living person, are often used as an alternative or supplement to a will.
A revocable living trust is a trust that you create during your lifetime and can change at any time prior to your incapacity or death. RLTs are distinguishable from irrevocable living trusts, which are difficult to alter after their creation, though there are a few possible ways. For example, by making limited changes permitted by the terms of the trust, asking a court to order changes, or shifting the trust’s assets into a new trust.
Who Is Affected by Them?
The living person or charity benefited by the trust, but who does not have legal title to the money or property in the trust, is called a beneficiary. The individual who creates the trust, decides how it will operate, and determines what property or funds to include in it is called the grantor. The trust is administered by a trustee, who is in charge of managing and investing the funds or property in the trust and distributing them to the trust beneficiary according to the grantor’s instructions, memorialized in a trust agreement. Typically, the grantor names a successor trustee in the trust agreement who will manage the trust if the original trustee becomes incapacitated, passes away, or is otherwise unable to serve.
Often, though not always, you as the grantor of the RLT are also both the initial trustee and primary beneficiary. So, you create the trust and provide the funds or property for it, you manage, invest and control the property and money owned by the trust, and you distribute the trust funds to yourself as desired. While you are alive and well, the tax identification number of an RLT is your social security number, and any income earned by the trust is taxed as your personal income.
How Can They Be Changed?
If circumstances change, as they often do, you can alter the RLT through amendment, restatement, or revocation. Typically, a trust amendment can be made by attaching a properly drafted and executed amendment to the original trust document. An amendment may be appropriate for minor changes or deletions, such as replacing a successor trustee.
If more significant changes are needed, such as changing beneficiaries of the trust, or if the trust has already been amended multiple times, a document called a restatement of trust should be created. This document allows you to “restate” or rewrite the entire original trust agreement incorporating any necessary changes instead of revoking the original trust and creating and transferring assets to a completely new trust. There are circumstances where neither an amendment nor a restatement are appropriate, in which case you can revoke the trust. A revocation may be warranted if a major change such as a divorce or death of a beneficiary occurs and involves dissolving the trust entirely and transferring the assets owned by the trust back to yourself or into another trust.
What Goals Can an RLT Help Accomplish?
Avoid probate. When you pass away, none of the assets properly titled in the trust (this is KEY!) will need to go through probate – a long and potentially expensive process that could delay a beneficiary’s access to those assets for months or even years. In addition, unlike the probate process, which is overseen by the court, the trust assets will be distributed privately and do not become part of the public record. All probate files, including wills, asset inventories, and distribution reports, are open for any member of the public to review. On the other hand, your family’s privacy is preserved when assets are distributed according to an RLT.
Protect inheritances. You can include provisions in your RLT that will help ensure that, after you die, the trust assets intended to benefit the next generation will not be vulnerable to your beneficiaries’ creditors, spent too quickly, lost in a divorce, or wiped out because of other life events your beneficiaries may experience.
Plan for your own incapacity. Although an RLT allows you to retain control over your assets, it is important to plan ahead in case you are unable to do so in the future. In an RLT, you can authorize a co-trustee or a successor trustee to manage the trust property if you become incapacitated because of an illness or accident. Otherwise, your family member will have to rely on a durable power of attorney or go to court to ask for legal authority to manage your finances.
What to Do Next
An RLT has many benefits, including enabling you to continue to manage your assets while also providing protections for your beneficiaries. As experienced estate planning attorneys, we can help you plan for the future by establishing a new RLT or changing the terms of an existing one. Call us today or schedule a no-cost initial consultation to discuss RLTs or any of your other estate planning needs.