A revocable living trust is a legal document you create that names a trustee to manage and administer your property. If you’re a competent adult, you can establish an RLT. As the grantor, or creator of the trust, you can name any competent adult as your trustee, or you can use a bank or a trust company for this role. The grantor can also act as trustee throughout his lifetime.
Investopedia’s article from last fall entitled “Should You Set up a Revocable Living Trust?” explains that after it’s created, you must retitled assets—like investments, bank accounts, and real estate—into the trust. You no longer “own” those assets directly. Instead, they belong to the trust and don’t have to go through probate at your death. However, with a revocable living trust, you retain control of the assets while you’re alive, even though they no longer belong to you directly. A revocable living trust can be changed, and any income earned by the trust’s assets passes to you and is taxable. However, the assets themselves don’t transfer from the trust to your beneficiaries until your death.
Avoiding probate is a major benefit of a living trust, but other benefits like privacy protection and flexibility make it a good choice. A living trust can be used to help control a guardian’s spending habits for the benefit of minor children. It can also instruct another individual to act on your behalf, if you become incapacitated and need someone to make decisions for you. Should you become impaired or disabled, the trust can automatically appoint your trustee to oversee it and your financial affairs without a durable power of attorney.
Although there are several advantages to establishing a revocable living trust, there also some potential drawbacks:
Expense. Establishing a trust requires legal assistance, which is certainly an expense.
Maintaining Records. Over time, you will need to monitor the trust and make adjustments as needed (they don’t automatically adapt to changed circumstances, like a divorce or a new grandchild). There’s the trouble of ensuring that future assets are continuously registered to the trust.
Re-titling Property. When your RLT is established, property must generally be re-titled in the name of the trust, requiring additional time. Fees can apply to processing title changes.
Minimal Asset Protection. Despite the myth, a revocable living trust offers little asset protection beyond avoiding probate if you retain an ownership interest, such as naming yourself as trustee. (Please note, though, that an estate planning lawyer may recommend a different type of living trust that can provide you with asset protection.)
Administrative Expenses. There can also be additional professional fees, such as investment advisory and trustee fees, but that’s normally true only if you decide to appoint a bank or trust company as the trustee.
There’s No Tax Break. Your assets in the RLT will continue to incur taxes on their gains or income just as they do now, and be subject to creditors and legal action, just as you are now.
Compared to wills, revocable trusts provide much greater privacy, more control and flexibility over asset distribution; not just what you leave, but how you leave it. With a revocable living trust, you and your attorney do most of the work up front, making the disposition of your estate easier and faster –and less stressul — after your death. However, an RLT requires more effort, and there is an expense in creating and maintaining it. Typically, the overall cost of trust-based planning is substantially less that planning by will and probate.
Work with an experienced estate planning attorney, if you are considering a revocable living trust.
Reference: Investopedia (Oct. 31, 2019) “Should You Set up a Revocable Living Trust?”