What is a Living Revocable Trust?
A living revocable trust is a trust created during the lifetime of the grantor. Under this instrument, the grantor acts as the trustee during their lifetime and retains complete control over the corpus of the trust. While alive, the grantor may revoke the trust, change its terms, and add or remove property to/from the trust.
How does a living trust work?
A living trust involves three parties: (1) the grantor, (2) the trustee, and (3) the beneficiaries. The grantor creates the trust, and sets up the terms of the trust. The trustee refers to the individual or institution that the grantor chooses to carry out the terms of the trust. In living revocable trusts, the initial trustee is almost always the grantor. The future trustees are often referred to as the successor trustees. The beneficiaries are the parties that will benefit from the creation of the trust. In order to create a living trust, the grantor must be legally competent.
After a grantor executes the trust, he/she must fund the trust and retitle assets in the trust’s name. A living trust may be thought of as an empty shopping cart; it is up to the grantor to take each asset they want in the trust and place it in the trust himself or herself.
When does the successor trustee take over?
Generally, the successor trustee takes over when the grantor dies or becomes incapacitated.
When does the trust become irrevocable?
Usually, a living revocable trust does not become irrevocable until the grantor passes away. Although the trust cannot be revoked while the grantor is incapacitated, it is possible that the grantor will regain capacity before they die. Therefore, a rule allowing a revocable living trust to become irrevocable upon the incapacity of the grantor would be ill-advised.
What are the advantages to a living revocable trust?
The most commonly cited benefit to a living revocable trust is avoiding probate. Generally, the assets transferred to a living revocable trust during the grantor’s lifetime will not be subject to the probate process. Most people, if given the choice, want to avoid the probate process. The probate system is subject to delays and greater third-party interference. Probate is also subject to greater publicity since wills are a matter of public record. The greatest benefit, however, is the amount of time necessary to settle the estate of a deceased relative with a revocable living trust. While the probate process can take months or even years, a revocable living trust may allow the grantor’s estate to be settled within days or weeks of death.
Living revocable trusts also allow grantors to protect their assets for future generations. Under a living revocable trust, beneficiaries can be labeled as income beneficiaries or remainder person beneficiaries. Income beneficiaries receive the income of the trust corpus according to the terms set up by the grantor, and remainder person beneficiaries are the ones who ultimately benefit from the trust property. For example, a spouse may leave income to their spouse for life, and the remainder to their children. This may be more attractive to the grantor then an outright disbursement of the trust corpus to the wife. If the grantor’s wife becomes ill and needs to go into a nursing home, the money from the corpus could not be disbursed to pay for the home. This prevents the children from being divested of their inheritance. Similarly, a living trust is often used to protect individuals from creditors and immaturity.
A living revocable trust offers several other benefits. As highlighted in the preceding paragraph, this type of instrument allows the grantor to retain control of how the money is disbursed after they die. It is important to discuss with an experienced estate planning attorney how a living revocable trust may benefit your unique situation.
What are the disadvantages to a living revocable trust?
One of the disadvantages to a living revocable trust is that it is usually more expensive than a will. Generally, trusts are more complex documents to draft than wills. Also, there are costs associated with retitling assets in the name of the trust. For example, if a grantor owns land they will need to transfer the ownership of the house to their trust. Retitling assets may involve both legal fees and administrative expenses, depending on how complex your estate is.
Another disadvantage is that your property will not be protected from creditors since you still retain ownership over the assets in the trust.
What are the gift tax consequences of creating a revocable trust?
Generally, a gift must meet three conditions to be considered complete: (1) delivery, (2) donative intent, and (3) acceptance. Since this type of trust is completely revocable, the gift is considered incomplete and there is no gift tax consequence for assets placed into the trust.
What are the income tax consequences of creating a living revocable trust?
The grantor retains ownership of property placed within a living revocable trust. Therefore, all income earned by the trust will still be taxed to the grantor.
What are the estate tax consequences of creating a living revocable trust?
The entire fair market value of the living revocable trust will be included in the owner’s estate under Section 2038 of the Internal Revenue Code. This provision mandates that all revocable transfers be included in the decedent’s gross estate, despite the fact that the transfer of property became irrevocable upon the decedent’s death.
What is the difference between a testamentary trust and a living revocable trust?
There are two key differences between a testamentary trust and a living revocable trust. First, as discussed above, a testamentary trust does not come into existence until after the testator passes away. A living trust, on the other hand, comes into existence when the t
The second difference deals with whether probate proceedings are required. Generally, a testamentary trust requires probate proceedings in the local court. This trust will not exist until the probate court recognizes its existence. Conversely, a living revocable trust seeks to avoid probate. If done correctly, a living revocable trust can completely eliminate the need for probate. Probate may not be avoided despite the existence of a living revocable trust if some assets were not transferred into the trust during the testator’s lifetime.
There are other differences between testamentary trusts and living revocable trusts. Since the terms of testamentary trusts are located within the testator’s will, they are part of the public record. Living trusts, generally, are not. Testamentary trusts are usually subject to the continuing jurisdiction of the probate court, making it easy for an interested party to bring a claim against the trustee. Under a living revocable trust, an individual seeking to bring a claim against a trustee often has to file a new lawsuit in the local court. Generally, contesting the actions of a trustee under a revocable living trust will take much longer.