Many people have heard of revocable living trusts, or have been told that they need one, but aren’t exactly sure what such a trust is or does. Is it just for the wealthy? Will it protect my assets? Will it help me avoid estate taxes?
In a nutshell, a revocable living trust holds title to your assets during your lifetime, and provides for the ease of transfer of those assets after your death. It will also allow a successor trustee to step into your shoes and handle your affairs if you become disabled.
If you have a revocable living trust, your family will be able to access your assets without court involvement. Moreover, a trust helps keep the details of your estate administration private since a revocable living trust does not have to go through the probate process.
A revocable living trust is much different than a will, and there is more work upfront with a trust because you need to make sure that all of your assets are transferred into the trust and remain in the trust throughout your lifetime (or assets with a beneficiary designation, such as life insurance, have the trust named as a beneficiary).
The process of transferring ownership to your trust is called “funding your trust.” More on that later.
Let’s get into some more of the details of what a revocable living trust is, and what it can and can’t do.
Components of a Revocable Living Trust
There are several components to a revocable living trust. Each one has: 1) the trust document; 2) a certification of trust; 3) an assignment of personal property; 4) a personal property memorandum; and 5) a pour-over will.
The Trust Document
The trust document contains the substance of your trust plan, including all of your wishes for how and when your property will be managed and/or distributed to others (your beneficiaries) upon your incapacity or death.
Because it’s revocable, this type of trust can be changed at any time. As a result, a revocable living trust provides no asset protection. In other words, a creditor (someone to whom you owe money or has a judgment against you), can go after the assets you transfer into the trust for payment of the debt or judgment.
However, you can make provisions within your revocable living trust to have the assets that you pass on to your beneficiaries held in trust for them.
These types of trusts are irrevocable trusts. Irrevocable trusts can’t be changed by your beneficiaries, and the trust itself owns the assets, not your beneficiaries. So, these trusts will provide asset protection to your heirs.
These types of trusts can also generate income for your beneficiaries over their lifetimes. These irrevocable trusts are called wealth creation trusts or asset protection trusts.
In addition to wealth creation and asset protection trusts, every trust that I draft includes provisions for special needs or supplemental needs trusts. More on these later.
The trust document also names who the trustees of your trust are and who the successor trustees are.
Initially, you will be the trustee of your revocable living trust. You will be the trustee until you decide to give that power to someone else, or until you become incapacitated or upon your death. Then, those persons whom you have identified as successor trustees will take over for you and will be required to carry out your specific wishes pursuant to the terms of your trust.
In addition, your trust document can contain various other provisions, such as provisions for estate tax planning (most people don’t need this – more on that later, too), specific gifts of assets, charitable contributions and more.
Certification of Trust
The certification of trust document is used for transferring your assets to your revocable living trust.
You will provide this document to banks, financial advisors and other institutions that hold assets for you so that they can change ownership of your assets to your trust.
The certification of trust contains the minimum information needed to show that you have created a valid revocable living trust. So, you won’t be required to reveal all of the terms of your trust and can keep the details private (such as who your heirs are, how your assets will be distributed, etc.)
Assignment of Personal Property
To be effective, your revocable living trust must be fully funded with all of your assets. The assignment of personal property assigns (transfers) all of your personal property to the trust which does not have a title. So, this document transfers furniture, collectibles, art, and anything else that does not have a specific title (like your home) or beneficiary designation (like a life insurance policy) into your revocable living trust.
Personal Property Memorandum
Although all of your personal property is transferred into your revocable living trust through your assignment of personal property, you may want to give certain personal property to specific individuals.
The personal property memorandum allows you to do just that.
This document is referenced in your revocable living trust, and can be executed at any time you wish after you have executed your trust. Which means that you don’t have to visit your lawyer every time you decide that you want to give a specific asset to a specific beneficiary upon your death.
For example, suppose, a few months after you execute your revocable living trust, you decide that you want your niece to receive your grandfather clock upon your death. You will record this specific bequest in your personal property memorandum, sign and date the page of the memorandum on which the bequest is made, and put it with the rest of your estate planning documents. When the time comes, your successor trustee will make sure that your niece receives the grandfather clock pursuant to your executed personal property memorandum.
Pour-Over Will
This document creates a lot of confusion.
I get the questions all the time: “I thought I am going to have a trust, why do I need a will?” Or, “will I have to go through probate since I have a pour-over will?”
Think of a pour-over will as a “fail safe.” Your pour-over will is there just in case something doesn’t get transferred into your revocable living trust.
For example, let’s say you forgot about some stock you own. Upon your death, your successor trustee discovers that you own the stock, but it was never transferred into your trust. This is where your pour-over will comes into play.
Your successor trustee will file the pour-over will with the court, and the court will probate any assets that were left out of the trust, such as the stock your successor trustee found.
Through the probate, those assets will be “poured over” into your revocable living trust and distributed according to the provisions of the trust.
Your trust is still effective, and only those assets that were not transferred into the trust (in this case the stock) go through probate.
There are some other technical issues that can come into play, but the main reason you have a pour-over will is for the fail safe. Without it, your revocable living trust-based estate plan is incomplete.
Creating a Revocable Living Trust
So you’ve decided that a revocable living trust is the way to go for your estate plan. What’s the next step?
Before you do anything else, I encourage you to seek legal counsel, whether it’s me or someone else.
I’ve had several people come to see me because they used a form they bought at an office supply store, or used one of the online legal services companies to prepare their revocable living trusts, and what they did wasn’t effective. So they hire me and I fix their estate plans to make sure that they carry out their wishes.
I also find that many people do not fully understand what a trust does and doesn’t do for them. So, please, find a trusted legal advisor that you feel comfortable working with.
Your legal advisor will help you through the entire process of creating and executing a revocable living trust, but I want to go over a few things that you should consider.
First, who will be your successor trustee(s)?
You will initially be the trustee of your revocable living trust, but if you become incapacitated, and upon your death, you will need someone to step into your shoes to take care of your assets and, ultimately, distribute them according to the terms of your trust.
The person or persons you select should have your utmost trust, and they must be willing to carry out the duties of trustee.
Second, what happens to your assets when they are funded into your trust?
After you execute your trust document, it is imperative that you “fund your trust.” I can hear you saying, “Steve, you’ve mentioned ‘funding’ several times now, just what does that mean?” Well, I’m finally going to tell you.
When you fund your trust, you change, or transfer, ownership of your assets from you as an individual, to you as trustee of your revocable living trust.
Funding also includes changing beneficiary designations to your revocable living trust, or assigning other property to your trust (which you do with the assignment of personal property document, and your personal property memorandum).
When you change title to an asset, it can mean executing a deed to real property, or changing the title to your bank account so that it is held by you as trustee of your trust (and no, you won’t have to sign your checks as trustee – you will sign them the way you always have.)
You will also either change your primary or secondary beneficiary designations on retirement accounts and life insurance policies. When you pass, your revocable living trust will receive those benefits and they will be paid out to your heirs according to the terms of your trust.
So, essentially, anything to which you can hold title (e.g. real property and bank accounts) or has a beneficiary designation (e.g. life insurance policies and retirement accounts) will be funded into your trust, along with all of your personal property.
Third, when should I consider creating ongoing trusts for my heirs?
As I mentioned earlier, there is no asset protection with a revocable living trust. By its very nature, you can make changes to a revocable trust, so it will not provide any type of asset protection for you.
However, you can provide asset protection to your heirs through your revocable living trust.
As a general rule, I initially advise my clients to consider having all of your distributions to heirs held in trust for them for their lifetime, unless they have good reasons for not doing so.
This will protect their assets from creditors, divorce, and even themselves if they are not good with money.
In addition, minors must have their inheritances held in trust. If a minor receives an inheritance that exceeds the amount allowed by Florida law, a court must appoint a guardian.
In addition, you may have some heirs who are disabled and receiving government benefits to assist them with their day-to-day living expenses or medical care. If they receive a lump sum inheritance it could disqualify them from receiving further benefits to which they would otherwise be entitled.
That’s why I always include a trust called a special needs or supplemental needs trust in a revocable living trust-based estate plan. This type of trust holds assets for anyone who is receiving government benefits to ensure that they will not be disqualified from receiving those benefits.
Who Should Have a Revocable Living Trust?
Now that you know what a revocable living trust is, and what it can, and can’t do, how do you know if a trust is right for you?
That depends on what your estate planning goals are.
As an initial matter, if you have an estate tax issue, then you should consider a revocable living trust. However, the estate tax exemption is so high now (over $11 million for a single person, and over $23 million for a married couple), that most people don’t have to worry about paying estate taxes.
But if you do have assets in excess of those amounts, then you should consider engaging in some type of estate tax planning, which would involve a trust or trusts.
If you are concerned about probate, then you should consider a revocable living trust.
Probate is the process by which your estate is administered by a court after your death. A common misunderstanding is that if you have a will, your estate will not have to go through probate. This is incorrect.
The only way to completely avoid probate is by having no assets that are subject to probate (such as those that are in a revocable living trust) and if your estate has no creditors.
If you have a will, or don’t have a will (which is called dying intestate), your estate will go through probate.
Probate can be lengthy and expensive depending on the size of your estate and whether any conflicts arise concerning your estate. Depending on how many probates are on a court’s docket, and whether there are any conflicts among heirs or creditors of your estate, a probate could take 6 months to a year-and-a-half or more to complete.
Also, probate is a public process, so most of your information about your estate and your heirs can be public (certain documents including inventories of assets and accountings are not).
With a trust, your estate and your beneficiaries remain private, so you don’t have to worry about anyone finding out what you own, or who will receive what you own, after your death.
I strongly encourage you to speak with a trusted legal advisor about your estate plan, and whether a revocable living trust is right for you. Moreover, even if you have an estate plan in place, it’s important to review your plan on a regular basis – I suggest at least once every 3 years.
