Before we talk about Revocable Living Family Trusts (RLFT), we first need to know what is a trust. A trust is nothing more than an arrangement wherein one person agrees to hold property for the benefit of another person. A living trust is a legal document that, like a will, has your instructions for what you want to happen to your assets when you die. However, unlike a will, a living trust can avoid probate at death, control all of your assets, and prevent the court from controlling your assets if you become incapacitated. A trust has to have four basic components:
- Someone must create it. This person is the “grantor.” Other names for grantor are the “donor,” or the “settlor,” or the “trustor.” These terms are used interchangeably.
- Some other person or entity must agree to hold money and/or property for the benefit of someone else. This is the “trustee.” There can be more than one trustee. The trustee need not be a person. A corporation with trust powers, such as a bank, can be a trustee. You might decide to be the trustee of your trust. Some people select a corporate trustee (bank or trust company) to act as trustee or co-trustee now, especially if they don’t have the time, ability or desire to manage their trusts, or if one or both spouses are ill. Corporate trustees are experienced investment managers, they are objective and reliable, and their fees are usually very reasonable. If you and your spouse are co-trustees, either of you may act or have instant control if one becomes incapacitated or dies. If something happens to both of you, or if you are the only trustee, the successor trustee whom you personally selected will step in. If a corporate trustee is already your trustee or co-trustee, then they will continue to manage your trust for you. If you should become incapacitated, then your successor trustee looks after your care and manages your financial affairs for as long as needed, using your assets to pay your expenses. If you recover, you will then resume full control. When you die, your successor trustee pays your debts, files your tax returns and distributes your assets. All can be done quickly and privately, according to instructions in your trust, without court interference.
A successor trustee may be individuals, such as your adult children, other relatives, or trusted friends, and/or a corporate trustee. If you choose an individual, you should also name some additional successors in case your first choice is unable to act.
- Some money and/or property must actually be held by the trustee for the benefit of someone else. This money or other property is the “principal” of the trust. Another term for this money or other property is the “corpus” of the trust. The principal (or corpus) of the trust never stays the same. It is spent by the trustee, some is invested – earning dividends and interest, and some of the principal appreciates and/or depreciates in value. Collectively, all of this money and property is the “trust fund.”
- Someone else must benefit from the trust. This is the “beneficiary” of the trust. Just as with trustees, there may be more than one beneficiary. If that is the case, they are called the “beneficiaries
A qualified attorney should setup your RLFT. You need the right attorney. A local, experienced attorney in living trusts and estate planning will be able to give you valuable guidance and peace of mind that your trust is prepared and properly funded. The reasons for a RLFT are because they are set up to combine assets, protect them from creditors, and reduce tax exposure during a transfer of assets to family heirs. They are setup by a single family member or a couple, to be distributed to selected Beneficiaries as outlined in their Will.
The RLFT’s primary purpose is to progressively transfer significant assets to the Trust, so that legally the Trustor owns no assets personally, but through the Trust, still has some control over and gets the benefit of said assets. When you setup the RLFT, you and your spouse are the Trustors. When a spouse dies, the surviving spouse becomes the Trustor. A living trust avoids probate and prevents court control of the assets at incapacity. When you set up a living trust, you transfer assets from your name to the name of your trust, which is under your control — such as from “John and Martha Smith, husband and wife” to “John and Martha Smith, trustees under trust dated (month/day/year).”
Legally you no longer own anything; everything now belongs to your trust. So there is nothing for the courts to control when you die or become incapacitated. The concept is simple, but this is what keeps you and your family out of the courts.
You maintain full control. As trustee of your trust, you can do anything you could do before — buy and sell assets, change or even cancel your trust. That’s why it’s called a revocable living trust. You even file the same tax returns. Nothing changes but the names on the titles.
The assets are given to a Trustor, who holds the money and other property in a separate account. A Trustee, who can be a family member or an outside holding company, administers the Trust for a set period of time. The Trustee is responsible for collecting the money and distributing it at regular intervals to heirs, regardless of whether the original owner is living or dead.
Transferring assets or funding your trust is not difficult. Your attorney can help. Generally, you will need to change titles on real estate, stocks, CDs, bank accounts, investments, insurance, and other assets with titles to the trust’s name. Most living trusts also include jewelry, clothes, art, furniture, and other assets that do not have titles.
Some beneficiary designations (for example, insurance policies) should also be changed to your trust so the court can’t control them if a beneficiary is incapacitated or no longer living when you die. (IRA, 401(k), etc. can be exceptions.)
Preparing and funding your trust will take some time. However, you should do it now, or you can pay the courts and attorneys to do it for you later. A large benefit of a living trust is that all of your assets are brought together under one plan. Fund your trust as soon as possible because it can only protect assets that have been transferred into it, e.g. are assets funding the trust.
Family Trusts can be set up while one is still alive, with a Declaration of Trust contained in a Trust Deed, or upon death, by the terms of a Will. It should only take a few weeks to prepare the legal documents after you make the basic decisions. Check with your attorney to obtain a timeframe.
Placing assets in a Trust works around the estate tax that would otherwise take a substantial portion of assets during an ordinary inheritance process
Unlike a will, a trust does not have to die with you. The assets remain in your trust, and are managed by the trustee you selected, until your beneficiaries reach the age(s) you want them to inherit. Your trust can continue longer to provide for a loved one with special needs, or to protect the assets from beneficiaries’ creditors, spouses and future death taxes.
Your estate will have to pay federal estate taxes if its net value when you die is more than the “exempt” amount at that time. The state where you reside may also have its own death or inheritance tax. If you are married, your living trust can include a provision that will let you and your spouse use both of your exemptions, saving a substantial amount of money for your loved ones.
A trust in a will does not do the same thing. A will may contain wording to create a testamentary trust to save estate taxes, care for minors, etc. However, because it is part of your will, this trust cannot go into effect until after you die and the will is probated. Therefore, probate is not avoided. It also does not provide protection at incapacity.
The cost of establishing a trust varies depending on the attorney. Your cost will depend primarily on your goals and what you want to accomplish. The cost when compared to all of the costs of court interference at incapacity and death is lower.
When you prepare your trust, you need a “pour-over” will that acts as a safety net if you forget to transfer an asset to your trust. Upon your death, the will “catches” the forgotten asset and sends it into your trust. The asset may have to go through probate first, but it can then be distributed as part of your overall living trust plan. Additionally, if you have minor children, a guardian will need to be named in the will.
Do not confuse a “living will” with a living trust. They are not the same. A living trust is for your financial affairs. A living will is for your medical affairs. It lets others know how you feel about life support in terminal situations.
Some of you might think you don’t need a living trust. Age, marital status and wealth are immaterial. If you own titled assets and want your loved to avoid court interference at your death or incapacity, you need a living trust. You may also want to encourage other family members to have one prepared, so you won’t have to deal with the courts at their incapacity or death.
Remember a living trust:
- Avoids probate at death, including multiple probates if you own property in other states;
- Prevents court control of assets at incapacity;
- Brings all of your assets together under one plan;
- Provides maximum privacy;
- Provides faster distribution of assets to beneficiaries;
- Assets can remain in trust until you want your beneficiaries to inherit;
- Can reduce or eliminate estate taxes;
- Relatively, inexpensive, easy to set up and maintain, when compared to probate;
- Can be changed or cancelled at any time;
- Difficult to contest;
- Prevents court control of minors’ inheritances;
- Can protect dependents with special needs;
- Prevents unintentional disinheriting and other problems of joint ownership;
- Professional management with corporate trustee;
- Peace of mind;