What are revocable living trusts?
A revocable living trust, also simply called a living trust or revocable trust, is a legal relationship whereby the trustor (trust creator) gives a trustee the responsibility of managing the trustor’s assets for the benefit of a beneficiary or beneficiaries.
The trust creator who owns the assets is called the grantor, trustor or settlor.
How does a living trust work?
A living trust is a legal document and a type of trust. Generally, when you transfer (or fund) assets into a trust, the trust becomes the owner of the assets. And when you pass away, your appointed trustee will manage the assets on behalf of your named beneficiary, and transfer them according to your instructions.
However, the revocable living trust gives you full allowance to name yourself as the trustee of your own trust while you yet live. This allows you to use the assets for your own benefits until you pass away.
Living trusts are classified as asset transfer documents but are very different from wills. While a will goes into effect at death, a living trust becomes effective the moment the trustor funds it with asset(s).
A living trust is called revocable because you can revoke (terminate or change the terms and assets) it anytime while you’re still alive.
The probate process
Probate is a legal process carried out when someone dies. It involves the court checking their will to see if it is valid, and then granting the executor approval to settle the estate.
From the moment the executor files the will in court to the moment the estate is closed (all assets disbursed), it may take months and even more than a year. In addition, there are so many expenses incurred during probate. In the end, what the beneficiaries will receive will be just a fraction of the entire estate.
Steps involved in the probate process
The steps involved in the probate process are the same as the responsibilities of the executor. They include the following:
- The executor files a probate petition in the probate court in the county of the deceased
- If the court approves the will as valid, court schedules a date for a court hearing. The executor then notifies the public for all concerned parties to be present.
- The executor settles estate debts and taxes, funeral expenses, probate fees, and attorney charges.
- Distributing what’s left of the estate.
Revocable living trusts and probate process
One major reason people choose revocable living trusts instead of wills is because living trusts avoid the probate process.
How it works
When you fund an asset into a trust, it takes the name if your trust. And only assets which are in your name alone can pass through the probate process. Hence, assets in your revocable living trust become non-probate assets.
However, it is worthy to note that revocable living trusts do not make you free from estate tax. Since revocable living trusts can be revoked (you can still remove assets from the trust and back into your estate), the assets are still counted as part of your taxable estate. So if the total of your estate is taxable, having a revocable living trust does not avoid that.
But the cost of probate that they avoid is so worth it.
Other benefits of revocable living trust
It is used for incapacity planning. With a living trust, your trustee will step into shoes in the event you become incapacitated. He becomes responsible for your estate, and will make financial, personal, and/or healthcare decisions on your behalf. He is bound by his fiduciary obligations to always act in your best interest. If you instruct it, he can also bequeath trust assets to beneficiaries during your lifetime.
Speedy asset transfer. Since revocable living trusts avoid probate, they enable your beneficiaries to inherit quickly without waiting months if not years.
They are cost-effective. While executing a trust is more expensive than drafting a will, it is more cost-effective in that it helps your estate to escape the high cost of probate.
Get help from an estate planning lawyer
A revocable living trust has several benefits over a will. However, it is more complicated, and you would require professional guidance in creating and finding a trust. A typical estate planning attorney is knowledgeable in this area, and can help to execute your trust for you.
They will advise you on what assets to fund into your trust and how to reap the most benefits.
Talk to an estate planning lawyer near you.