Should You have a Revocable Living Trust?

By: Mary Anne Cody

A Revocable Trust is a tool used by estate planners which can work very well, if it fits the particular circumstances. A Revocable Trust does not avoid income or estate taxes, and this blog will not cover the asset protection uses for these trusts (see Protecting your Home from the Catastrophic Cost of Long Term Care by Ami S. Longstreet).

A Revocable Trust is a trust agreement (most often) between yourself as Settlor and yourself as trustee. Often time’s people add a spouse as co-trustee or an adult child. You have the ability to make any changes during your lifetime; the Trust does not become irrevocable until your passing.

Because you have right to change your mind regarding the Revocable Trust at any time, the transfer of assets to the Trust is not a taxable transaction (that is, you are not deemed to have made a gift to anyone of the assets so that no gift tax returns are necessary). Also, for income tax purposes, you are considered to still be the owner of the assets in the Trust so that all of the income of the Trust is reported on your individual Federal and state income tax returns just as if you never created the Trust.

Because your financial assets would have been transferred to the Trust, it is necessary that the Trust include provisions as to the disposition of the assets in the event of your death. This means that the Trust Agreement for practical purposes becomes your Last Will and Testament (at least as to the assets in the Trust).

But as you may not you have transferred all of your assets to the Trust, there often are forgotten assets which are still in your name at the time of your death. Therefore, you would also need a Last Will and Testament which spells out who is to get the specific bequests of house hold furnishings, jewelry, etc. and anything not specifically bequeathed to named persons would be left to the Revocable Living Trust.

The advantages of a Revocable Living Trust are:

  • The Trust can often work better than a Power of Attorney in the event of disability since a Co-Trustee is already named on assets transferred to the Trust.
  • Assets transferred to a Trust are not subject to probate at the Trust creator’s (the “Set¬tlor’s”) death. Thus, there is no interruption in the ownership and management of the assets in the Trust when the Settlor dies because the other Trustee continues to act.
  • The terms of the Trust Agreement (unlike a Will) are not a public record at the Set¬tlor’s death. A Will must be probated in Surrogate’s Court in order to be valid and, once probated, it is available online as a public record.
  • The Trust Agreement can be easily modified at any time prior to the Settlor’s death.

The use of a Revocable Living Trust can greatly simplify estate administration in many cases. If the Settlor transfers all their assets to the trust, they have in affect completed a great deal of their own estate administration. At their passing, the co-trustee or successor trustee has the responsibility to pay all creditors and administer the trust according to its provisions, as with a Last Will and Testament.

 

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