Revocable Living Trust Questions and Answers

The following sample questions and answers may not be relied upon by the reader as legal advice.

 

Q.  What is a revocable living trust?

A.   A trust is a legal document that is funded with assets, and a revocable living trust is one that can be revoked and amended by the person creating the trust, the settlor or trustor.  The settlor keeps all the benefits of the property placed into the trust.  The terms of the revocable living trust are established in a written agreement signed by the settlor and the trustee, and spell out what happens to the trust property both during the settlor's lifetime and following his or her death.  The trustee can manage the trust property without court intervention even if the settlor becomes incapacitated.   

 

Q.  What is the purpose of a revocable living trust

A.  A revocable living trust can have many purposes.  One common goal is to avoid probate, a court process to determine the value of a deceased person's assets and how they will be distributed to heirs.  A revocable trust's assets do not go through probate, but can be transferred by the trustee to intended beneficiaries upon the settlor's death.  If a settlor's purpose in creating a revocable trust is to avoid probate, then the settlor must remember to transfer ownership title of all assets to the revocable trust.  Furthermore, the settlor must continue to place future assets into the revocable trust as they are acquired.  Normally the living trust does not own and is not the beneficiary of retirement plans such as IRAs and 401ks because naming persons results in better income tax treatment.   

 

Q.  Is the use of a revocable living trust the only way to avoid probate?

A.  No.  Assets that are owned jointly with rights of survivorship, such as a house or car, or assets that name beneficiaries, such as life insurance, annuities, POD and TOD accounts will also pass upon death to the surviving beneficiaries and will not be probate assets.

 

Q.  Will I save estate taxes by avoiding probate?

A.  No.  It is a common misconception that avoiding probate avoids estate taxes.  All countable assets of an estate are taxed whether or not they pass through probate, including assets held in a revocable living trust.  Fortunately at this time there is a lifetime combined federal gift and estate tax exemption for each individual (citizen) of over 5 million dollars.  For large estates there are a number of irrevocable trusts that can be created to lower estate and gift taxes.  Life insurance proceeds paid to a beneficiary are usually considered part of the estate.

 

Q. Will a revocable trust save income taxes?

A. No.  The income of the revocable trust will be taxable to the settlor as if the trust did not exist for income tax purposes.  After the death of the settlor (trust owner), the trust could be taxed at rates that are higher than individual rates, but this is usually avoided by transferring income to the beneficiaries during the taxable year.

 

Q.  What are the advantages of a revocable trust compared to probate?

A:  Privacy.  The terms of a revocable trust are contained in a private document, while the terms of a will, including beneficiary designations, become a matter of public record after the settlor's death and after the will has been probated by the court.

    Control.  A trustee of a revocable trust has more independence and control than an executor of a will because unlike an executor, the trustee is not required to file a will or any reports with a court.

    Lower costs.  A revocable trust avoids the costs of the probate process, which typically includes court costs, appraisal fees, executor's commissions and attorney fees.

    Speed of transfer.  A trustee could begin making distributions of assets to beneficiaries soon after the settlor's death.

    Avoidance of multiple probate proceedings.  If homes or other real property are owned in a number of different states, a revocable trust may be used to avoid separate probate proceedings in two or more states.

 

Q.  What are the disadvantages of a revocable trust compared to probate?

A.  Lifetime effort.  Implementing a funded revocable trust is likely to be more time-consuming and tedious than drafting a will.  For example some real estate lenders require the property to be deeded from the trust to the individual to sign the mortgage, and then deeded back to the trust after the closing.

     Lifetime costs.  The cost of making and maintaining a revocable trust during an individual's lifetime is generally more than a will.

     Absence of automatic court review.  The administration of a revocable trust will not normally be supervised by any court, increasing the possibility of incorrect administration by the trustee, whether intentional or unintentional. 

     Longer statute of limitations.  A challenge to a will must be made within three months of its probate as compared to two years to challenge the distributions of a trust.