Table of Contents
- Download a Revocable Living Trust Template
- The Basics: What is a Revocable Living Trust?
- The Difference Between an Irrevocable and Revocable Living Trust
- When Do I Need One?
- The Consequences of Not Having One
- The Most Common Uses
- What Should be Included in a Revocable Living Trust?
1. Download a Revocable Living Trust Template
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2. The Basics: What is a Revocable Living Trust?
A revocable living trust is an entity created to hold the person’s assets. The grantor, or the person creating the trust, usually controls the money and assets placed in the trust. The living trust is tied to that person’s social security number and the financial income generated in the trust needs to be filed with their personal taxes.
In some scenarios, the person creating the trust can appoint a separate person or institution as the trustee of a living trust — the trustee in that scenario controls the assets for the trust. A trust is created to manage assets during the grantor’s life span and as a way to organize where their estate will go in the event of their death. This can be an alternative or in conjunction with a will, which does not always protect your assets from probate.
As the name implies, this type of living trust is revocable. The person who created it has the right to undo the trust at any time. This type of trust protects your interests in every stage of your life — when you’re young and healthy and if you’re ever rendered mentally incapacitated. It also protects your assets from probate upon your death.
In many states, a common method to protect property and assets from life circumstances is a revocable living trust. California, for example, includes any estate worth over $150,000 in full probate unless alternate legal arrangements have been made prior to death. This may sound like a large number, but it impacts virtually any homeowner whose property value exceeds that. Estates worth less money in California may still be subject to a simpler probate process. Usually upon death, assets go into probate. Probate can be time consuming, costly, and the legal beneficiary (according to the law) might not match the person’s wishes.
How is a revocable living trust different? It saves your heirs the process of probate and allows you control of your funds, in sickness and health. In essence, a revocable living trust is a commonly used method to secure your assets during your lifetime and to protect them in the event that you fall ill or pass away.
3. The Difference Between an Irrevocable and Revocable Living Trust
A revocable living trust and an irrevocable living trust offer distinct legal differences to be aware of before making a firm decision. The main difference between these two types of trusts is in the amount of control you have after the trust is created. An irrevocable living trust cannot be undone. The assets in this type of trust are moved outside of the estate to a separate entity.
When you’re considering ways to protect your assets today and in the future, a revocable living trust is a smart choice for the following reasons:
With a Revocable Living Trust:
- You (or your appointed trustee) retain control of your assets.
- You can revoke the trust at any time, if you decide you no longer want your assets in trust.
- You can make changes to the trust during the course of your lifetime, including adding or removing assets or changing beneficiaries.
- It allows you to name a trustee to oversee your interests if you become ill and unable to manage your finances.
- It protects your assets from probate to make the process easier for your beneficiaries after your death.
An irrevocable living trust is much more complicated, but does offer the grantor additional tax benefits:
With an Irrevocable Living Trust:
- All assets are moved outside the estate so you no longer have any control over the funds.
- You cannot undo an irrevocable living trust. You will not be able to access those funds in an emergency.
- It offers extended asset protection because it is not part of the estate. The assets in an irrevocable trust cannot be touched to pay for debts or lawsuits. A revocable trust is still subject to lawsuits because the assets technically still belong to you.
- An irrevocable trust may help you avoid taxes, such as the capital gains tax and estate tax.
An irrevocable trust does offer some extended protection for those who would benefit from these provisions. However, there are further considerations in an irrevocable trust because the assets are permanently transferred out of your estate. If, for example, you needed extended nursing care and you underestimated the amount of money you’d need to access for the remainder of your life, even as the grantor you would not be allowed to access the irrevocable trust. For that reason, it’s highly recommended that you consult with an attorney before choosing this type of trust.
4. When Do I Need One?
A revocable living trust can be established at any time. Most people who hold any property can benefit from this legal document because there’s no way to know when or if you might be incapacitated. This legal document protects your assets from probate and allows you to make choices for how your property is handled if you can no longer manage.
It’s optimal to create a living trust when you don’t need one – if you’ve been mentally incapacitated it will be too late to enlist any legal protections for your assets. If you’re young and healthy and have assets to protect and pass down, you can set up a revocable living trust and, if life situations change, you can undo the trust or make adjustments, such as naming new beneficiaries if you get married and/or have children. You can also control when beneficiaries receive assets, such as an age or milestone in your children’s subtrust.
5. The Consequences of Not Having One
One major consequence of not having a living trust is the lack of protection for yourself and your family in the event of your death – but another consideration is if your own health declines. Many people mistakenly think that they can create a simple will and their final wishes will be honored. Unfortunately, a will can only help determine what your wishes are with regard to your heirs. In most states, a will alone does not protect your assets from probate.
Creating a properly crafted living trust allows you to define where your assets go and how they’re handled during your lifetime. It also allows your heirs a smooth transition after your death, without needing to argue over assets or hire attorneys to guide them through probate court in order to finalize your estate.
It takes time and money to go through probate. A living trust protects your beneficiaries from lengthy delays and cost. A living trust is not public record (probate court is public and easily searchable). This offers a good method to allow your beneficiaries privacy.
6. The Most Common Uses
There are three phases that are covered in your typical revocable living trust. When the grantor is healthy, if the grantor falls ill, and after the grantor has passed away. This legal document should include provisions for all of these phases of life.
- During your lifetime: A revocable living trust should be set up while you’re healthy. Like a will or any other end of life arrangements you make, this document should be set in place while you are of sound mind. Because you may experience life and family dynamic changes, you should also pay attention to your trust on a scheduled basis. Any newly acquired properties or assets should be added to the trust as you purchase them. Any property outside of the trust at the time of your death may still be subject to probate. During your lifetime, you’ll be able to control the trust or you will appoint a trustee who can control the assets on your behalf.
- In the event of illness: If you fall ill and can no longer manage your assets, this provision of the living trust agreement should include a named trustee to take over on your behalf. The trustee will take over the bills and any of the responsibilities associated with managing these assets. This successor trustee has the power to manage the assets but they do not have the power to revoke the trust or amend it.
- After your death: After your death, the trust becomes an irrevocable trust and the person you named as your successor trustee will take over in the distribution of your assets according to your wishes. This person will be in charge of paying out final bills and settling the estate. He or she will also be responsible for disbursing the remaining assets to heirs as detailed in the trust.
7. What Should Be Included?
Your living trust should include all of the specific arrangements for your assets in health, illness, and death, as mentioned above. Many people wonder what types of assets belong in a trust.
Here are a few of the most common assets types that may be included:
- Cash / bank accounts: Most people don’t have a mattress full of money, but you likely have more than one checking or savings account. All of the assets in your accounts should be included in the trust so that the trustee can manage these accounts in your absence.
- Certificates of Deposit (CDs): If you have your assets tied up in CDs, these should be included in your living trust. You may need to wait to retitle any CDs until they “roll over” to avoid early withdrawal penalties.
- Business interests: If you own a sole proprietorship or have a personal interest in any company, you can add these to your trust. In the case of interest in a business, this is subject to the provisions of any partnership or shareholder’s agreements. In many cases, business agreements stipulate the way that shares must be sold or managed in the event of the death of a holder. In the case that shares must be sold to a remaining partner, the assets from that sale can be added to the trust.
- Personal property: Personal property includes furnishings, automobiles, jewelry, and artwork.
- Real estate: Your home and any other property you own for personal use or as a rental property can be included in the trust.
- Brokerage accounts and stocks: Any stock holdings or retirement accounts can be added to the trust.
What should be included in the actual trust document:
- Property being transferred into the trust
- Trustee’s name and any backup trustees
- Trustee’s powers and duties
- Any specific gifts of property to certain people
- Beneficiaries who will receive the assets upon your death
- A children’s subtrust or pet trust
You may also wish to add your life insurance policy to the trust, though that depends on the laws in your state with regard to trust protection from lawsuits and debts.