What Is a Revocable Living Trust?
A living trust, also referred to as "inter vivos", is a legal document through which personal assets are placed into a trust during your lifetime then transferred to beneficiaries upon your death. As the trustor, you designate a trustee to manage the assets. While the trustor is living, it is common that he or she serve as trustee then name a successor trustee to take over upon their passing.
The revocable living trust has long been a significant estate-planning tool and is often used as the foundation for estate plans. It provides privacy while avoiding probate and in-fighting amongst family. The revocable living trust also ensure that the right money gets into the right hands at the right time.
The revocable living trust is a written out legal document that outlines the assets included, as well as the beneficiaries and any instructions for disbursement. If you are placing real estate or titled property in the trust, it must be retitled using the name of the trust, Failing to do so could lead to property ending up in probate.
Understanding Revocable vs Irrevocable
If you are interested in establishing a living trust, you have the option of choosing between a revocable trust and an irrevocable trust. Choosing a revocable living trust allows the trustor to designate him or herself as the trustee and therefore maintain control of the trust’s assets. Note, however, that the assets remain in the trustor’s estate and are therefore liable for estate taxes. The trustor also holds the ability to amend the trust at any point, change the beneficiaries, or undo the trust entirely.
Choosing an irrevocable living trust means that the trustor is relinquishing control of the assets to the trust. In the case of an irrevocable trust, the trustee becomes the effective legal owner and the trustor has reduced their taxable estate. Once the irrevocable living trust is created and its beneficiaries named, there is little a trustor can do to amend or undo the agreement.
What Is the Purpose of a Living Trust?
A living trust is a form of revocable trust that is commonly used in estate planning. It allows individuals and families to pass on their property in a way that largely avoids the burdensome path of probate. With this in mind, it is clear to see that a living trust is a very important document that you can construct during your lifetime. Here are a number of things that your living trust can provide:
Efficiently Distribute Asstes. Your living trust can be funded by a variety of assets, such as real estate, stock, bank accounts, and more. WHen you pass, the assets in your trust can be quickly and efficiently distributed to the beneficiaries you previously designate without any court involvement. Were you to not have put these assets in a living trust, there's chance your estate will have to go through probate. The probate process can be a long and expensive one where assets are frozen and nothing can be distributed until the court or executor approves.
Avoid Probate. As was touched on in the last point, probate refers to when the court supervises the estate finalizing process. It is a process that can end up being expensive, complex, and time-consuming. Setting up a living trust allows you to avoid the process altogether. By placing your assets into a revocable living trust, over which you still retain control, you can pass those assets on to your beneficiaries while bypassing probate.
Limit Estate Taxes. If you place your assets in a living trust, you can reduce your federal estate taxes. With the estate tax exemption being subject to change from year to year, a joint living trust can often allow married couples the opportunity to reduce or avoid estate taxes.
Maintain Your Control. A revocable living trust will allow you to execute your exact wishes to be followed once you have passed away. In the event you wish to name children or grandchildren as beneficiaries, you can dictate that the assets remain in the trust until a certain point of your choosing.
Offer Privacy. A revocable living trust offers you a level of privacy that cannot be achieved with a will. Unlike with wills, living trusts are not public record, so any transactions or distributions carried out by the trust are kept private, both leading up to and after your passing.
Comparing Revocable Living Trusts and Wills
Revocable living trusts and wills share a few similarities as both play a role when it comes to estate planning. Both are legal documents that allow you to choose beneficiaries to inherit your assets. Both also allow for changes to be made to the document, so it is not set in stone upon creation. However, there are also a few differences between the two documents that may help you decide which option better fits what you are hoping to achieve. For example, a living trust will help you avoid probate, court disputes, and conservatorships. It will also offer you a level of privacy that cannot be achieved with a will.
On the other hand, wills can provide some benefits that living trusts cannot. For example, a will allows you to choose an executor, a property manager, and a child guardian. It also offers you the ability to provide payment instructions for handling debts or taxes.