A Revocable Living Trust is a document that specifies how you want your property to be distributed after your death. It’s also called an “inter vivos” trust because it’s created while you’re still alive and living, so it can be changed anytime during your lifetime.
Revocable Living Trusts are well suited to many types of families. Some people use them when establishing a new family estate, while others want to separate their assets into different parts of the estate for each child or adult child. Others use them when a minor needs their money in an emergency but doesn’t yet qualify for a conservatorship. (For example, an 18-year-old student suddenly drops out of school.
How Does It Work?
The Revocable Living Trust sets up the structure for your estate, but the document doesn’t transfer assets to it. Instead, you set up a separate document called a “pour-over will” to transfer assets into the Revocable Living Trust after your death—and perhaps after you’re incapacitated. The pour-over will name a trustee who handles the trust’s money, property and investments. This trustee can be a family member or professional and can be changed if necessary. (Some people choose to add a successor trustee to take over in case the initial trustee cannot fulfill the role.)
A Revocable Living Trust can be used as part of an estate plan to manage and distribute assets during your lifetime and after your death. Depending on how the trust is structured and applicable state law, a trust may provide for the management of trust assets if you become incapacitated and may allow assets to pass to beneficiaries without going through the probate process. A revocable trust generally does not, by itself, protect assets from the grantor’s creditors or from other claims against the grantor.
Revocable Living Trusts can provide flexibility for families who want to establish how and when assets will be distributed to beneficiaries. For example, a trust may include provisions governing the timing or conditions under which children or other beneficiaries receive assets. The trust can generally be amended or revoked by the grantor during the grantor’s lifetime, subject to the terms of the trust and applicable state law.
A Revocable Living Trust may offer greater flexibility than a will in certain circumstances, particularly when it comes to managing assets during incapacity and establishing instructions for the distribution of assets after death. A will and a revocable trust serve different purposes, and the appropriate estate-planning documents depend on an individual’s circumstances, assets, family situation, and state law. Without appropriate estate-planning documents, the distribution and management of assets may be determined by applicable state law and court proceedings.
A Revocable Living Trust is generally not established primarily to avoid income or estate taxes. Assets in a revocable trust are generally treated as belonging to the grantor for federal income tax purposes during the grantor’s lifetime. Depending on the circumstances, however, certain trust structures may have tax-planning implications. Estate and gift tax treatment can vary based on the type of trust, the assets involved, applicable federal and state law, and the individual’s circumstances. Consult with an appropriately qualified estate-planning attorney or tax professional regarding the potential legal and tax consequences of establishing or modifying a trust.
A few states do not allow Revocable Living Trusts because they don’t think they’re flexible enough or don’t have enough safeguards against abuse or fraud; if that’s the case in your state, you can use a Lasting Power of Attorney instead.
You should be careful about the type of Revocable Living Trust you use, especially if you want to leave money and property to your children. Many people use a full asset protection trust, which means it’s designed for people with lots of assets who want to avoid estate taxes.
Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.