If you’ve reached an age when you really want to start working on your estate plan, one arrangement to consider is a revocable living trust. Perhaps you’ve heard of one, but you’re fuzzy on the details. Here are the basics.
You create one while you’re alive and can cancel it at any time. Generally, you’re both the trustee and the beneficiary, so you control the trust’s assets.
With a revocable living trust, you distribute assets to yourself while you’re alive. At your death, a “successor trustee” distributes the assets in the trust according to your instructions.
Your estate will avoid probate. Upon death, assets held in the revocable living trust bypass probate. What that means is they pass to your heirs without having to put your assets through the probate process with the courts, which can be time-consuming and expensive. A successor trustee, whom you named earlier, takes over without court oversight.
Your estate will also avoid “ancillary” probate in another state. If you move property into a revocable living trust (that is, register the deed to the trust), your heirs will be spared the additional probate hassles that owning property in another state can bring.
Your trust’s assets will be protected in the event you become incapacitated. If you ever reach the point where you’re unable to manage your own affairs, a successor trustee named by you will step in. That trustee has a fiduciary responsibility to manage trust assets for your benefit.
There are no tax benefits. Don’t be lulled into a false sense of security. Shifting assets into a revocable living trust won’t save income or estate taxes. You’ll still need to implement appropriate tax-reduction strategies.
Your assets aren’t protected. Although assets held in an irrevocable trust are generally beyond the reach of creditors, that’s not true with a revocable living trust. Assets are treated as if they belong to you.
If protection is important to you, vulnerable assets might be better off held in an irrevocable trust, a limited liability company or a family limited partnership.
Some administrative work is required. After creating a revocable living trust, you must take the time to re-title assets from individual ownership to the trust. Just having one doesn’t do you any good unless you formally move assets into it by transferring legal title.
Assets not formally held in the trust still have to go through probate and won’t be under the management of a successor trustee in case of incapacity.
You might not need one. A revocable living trust is unnecessary for certain types of assets. Holdings such as retirement plans, insurance policies, annuities and jointly held property don’t go through probate. If most of your wealth is in assets like these, you could be wasting your time creating a trust.
Weigh the advantages and disadvantages before deciding whether a revocable living trust is right for you. To make sure your wishes are carried out, work with trusted professional advisors such as a CPA and attorney. Laws are constantly changing and may differ from state to state.
Contact Deborah May via our online contact form for more information.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.