What is a Revocable Living Trust?

by Miguel Torres

Partner at Miles & Torres Associates

A revocable living trust is essentially a document creating a legal entity to hold your assets for your benefit, and under your control, during your lifetime. If you are ever temporarily or permanently incapacitated, the document would empower a trusted individual of your choosing to step into your shoes for the purposes of managing and distributing the assets in your trust according to the direction you provide in the trust. When you die, the trustee distributes the assets in your trust to your beneficiaries without need of state involvement.  It is one of the cornerstones of estate planning because it allows for a faster and less costly way of transferring property by avoiding court supervised wealth distribution, also known as probate.   

Let’s discuss some of the basic concepts in a revocable living trust.  The person who creates the trust is variously referred to as the trustor, grantor, and/or the settlor.  Usually, the same person is also the initial trustee, the person who manages and distributes the assets.  In other words, you retain control of your assets in the trust to manage as you see fit during your lifetime or until incapacity. The successor trustee is the person who succeeds you upon incapacity or death.  The trust assets or trust estate is the property transferred to the trust.  Funding the trust means to change the title of your property, both financial (account names) and real property (by deed) to the trust. A revocable living trust is most effective as an estate management tool if it is properly funded, meaning most of the assets are transferred to the trust so as to avoid probate.

A revocable living trust by definition is revocable during your lifetime and can be amended or terminated at any time by the trustor.  A trustor can modify the trust however he or she wishes, thus the Internal Revenue Service treats those assets as if the trustor still owned them.   The trustor reports any income generated by the trust assets on his or her personal income tax returns.

Perhaps the single most important benefit of a revocable living trust is the avoidance of probate.  Probate is the court-supervised process to settle all your financial matters after you die.  Why do you want to avoid it? Because it can be a costly and lengthy affair, often taking more than a year and usually costing tens of thousands of dollars in fees and costs. It is especially costly if you have to go through multiple probate proceedings, as is the case if you own real estate in multiple states.  Probate is also public, so anyone can see how your assets were divided and to whom.  All of your assets passing through a living trust bypass probate, thus passing to your beneficiaries sooner, privately, and with less expense. 

A living trust starts working for you the moment it is created.  If you become physically or mentally incapacitated, your successor trustee takes over the management of the assets in your trust, for your benefit.  A trust is not a substitute for a Durable Power of Attorney; it works in tandem to protect you in case of incapacity.  Your agent, under a durable power of attorney, manages your assets and affairs outside of the trust and assists in the transfer of property to the trust, when necessary.

Another benefit of a revocable living trust is privacy; you do not have to file the trust with the court.  A living trust is not a public document.  The only person (or people) privy to such information is the trustee (and often the successor trustee and beneficiaries.) 

Finally, a trust may continue past your death and go on protecting your children’s inheritance until they are well into adulthood.  A trust is an excellent tool for people with minor children or young adults who are potentially not mature enough to handle large sums of money outright.  You can transfer your children’s inheritance through the trust, and it can guide the spending habits of your children’s guardian and be distributed to your children over time. A trust can provide some protection over the trust’s assets from creditors, irresponsible spending and failed marriages. 

Do I Need One? 

Not everyone needs a living trust. We usually recommend a trust for clients who own real estate, have minor children, have dependents with special needs, or have significant assets.  A revocable living trust is not a universal estate planning solution, but it is a formidable tool.  In conjunction with other estate planning tools, it can protect you in the event of incapacity, and it can provide for the orderly distribution of your assets when you die.

If you would like to learn more about revocable living trusts and whether one is right for you, call Miles & Torres Associates for a free consultation at 415-496-9396.