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The Revocable Living Trust
Estate Protections Series: Part 7
Inevitably, watching television shows or a movies about a millionaire families, you probably hear about a “Trust." But what exactly is a trust, and do you need one?
The most common form of trust is a Revocable Living Trust. Although there are other types, they usually involve planning for specific tax issues (e.g. those mega-millionaire families) or specific asset protection (e.g. a physician who is often sued). But most Americans use Living Trusts for organization and to avoid probate. Trusts allow us to control assets while we are alive, ensure they avoid probate, and then manage and protect them after we pass.
How does a trust work?
If you think of a trust like a business, it is something you create during your lifetime. You, or you and your spouse/partner, are the owners of it, also called the “Grantors.” While you are alive, it is your money and property and you can do with it what you please. Until you, or both of you, have passed away, you can change the terms of the trust at any time.
Separately, a Trust has “Trustees,” individuals or professionals who manage the trust. Trustees transact business, manage assets, and carry out any instructions you leave them. Usually, the Grantor is the first Trustee, but if they cannot serve, Successor Trustees step in. By its name, this position requires a lot of trust, so consider who is best to manage inheritance after you are gone.
Finally, a Trust involves “Beneficiaries,” those people and/or charities who receive the inheritance. A Trust is unique because, even though people die, the Trust does not. This allows you to continue controlling as much or little of the inheritance as you choose. For example, if with young children, you can plan for how money is managed until they become adults (and even afterwards). Or for beneficiaries with financial problems, substance abuse issues, etc., you can install a third party to manage it for them. One of the most important issues a trust solves is blended families, which we will cover in a later blog.
As process, a person creates a living trust while they are alive, hence the name. After signing it, they “fund” the trust with their assets. This involves retitling things like your home into the entity. During your lifetime, you use and enjoy your assets like usual, but after passing away, the Trustee steps in to carry out your instructions. A Trust can be as simple or intricate as you like, extending out decades after death if needed.
Who needs a trust?
Again, most people use the Revocable Living Trust for their estate planning. Every adult can create one, and most choose to because they understand the benefits. There are, however, a few reasons when a Trust is necessary:
· Minors: A child under age 18 cannot manage assets like a house, so if you try to leave them inheritance, it triggers complicated proceedings in probate. Through a Trust, though, you can leave inheritance to minors without court proceedings.
· Disabilities & Special Needs: Many people with disabilities rely in government benefits. But these benefits have restrictions about what people can own and income they can receive. A Trust allows you to leave inheritance to disabled beneficiaries without causing them to lose benefits.
· Blended Families: We will address this topic in a later blog, but blended families (e.g. step-parents and step-children) can cause “unintended disinheritance.” This is where money you intended for your children ends up with a spouse’s family instead. Around 50% of families are blended, so Trusts are invaluable to avoid this outcome.
· Financial Management: Beneficiaries come in all walks of life, and unfortunately that can include substance abuse, gambling problems, significant debt, and so many others. When you simply cannot give all the inheritance to someone at once, a Trust is a great solution to install a third-party manager, stretch out distributions, and ensure certain conditions are met (e.g. drug testing) before money is distributed.
How can an estate attorney help?
Beyond any other estate planning tools, Trusts are the most intricate. How you set up the trust can impact beneficiaries for decades, so it is critical to speak with knowledgeable, experienced estate attorneys. Rest assured, the process sounds difficult but with a good attorney’s help, it should be fast and painless. Contact our office today for a no-cost, no-obligation consultation. We will provide you resources and an action plan to help you understand if a Revocable Living Trust is right for you!
