A revocable living trust, the most common form of distributing property and assets before or after death occurs, can be a significant planning tool for those who have sizable assets, want to reduce estate and gift taxes, avoid probate, and safeguard and manage assets when they no longer competent to do so.
Ask your financial advisor, working with a qualified estate planning attorney, to do a thorough examination of your individual situation to ensure that a proper determination is made to address your particular needs. As a reminder: a review of your trust should be done every two to three years to remain current.
One important advantage of owning a revocable living trust is that it basically goes into effect when it is signed. It is a “legal, living, breathing document” that you, as grantor, can make changes to until the day you take your last breath – if deemed mentally competent.
Among the primary advantages of a revocable living trust is you determine how and when your assets are distributed after you die. Your assets are distributed to your heirs privately, efficiently and without the cost, delay and publicity of probate court, thus avoiding the sometimes lengthy probate process and becoming a matter of public record.
Another important advantage is the ability to name a successor trustee, a friend or relative who is appointed to immediately take control of the trust should the grantor become unable to manage the trust for whatever reason.
The grantor is the creator of the trust and funds property into it
As grantor, you typically act as trustee, to protect and manage the assets in the trust, make amendments to the terms, even undo them and move property in and out of the trust’s ownership.
Because taxes are a normal part of the estate, creating a Credit Shelter Trust, also called a bypass or family trust, avoids taxation on a portion of the estate when property passes to beneficiaries after your death.
The first $11.18 million in 2018 of an estate is exempt from federal estate taxes. If a husband and wife’s estate was less than $22.36 million, they might have no estate tax. Despite the high exemption amount, a credit shelter trust can also be used to protect assets from creditors and when a surviving spouse remarries and divorces. Consult your tax attorney for additional information.
Funding the trust is an integral part of the plan
A revocable living trust must be completely funded before you die. Assets you want protected must be retitled in the name of the trust. Anything that is not so titled when you die will have to go through probate and may not go to the heir you intended but to one the probate court chooses.
Basically, you don’t want an unfunded or partially funded trust when you die or you literally defeat the purpose. These assets include major assets – your home, banking, investments, insurance, stock and bond ownership, newly acquired assets as well-established assets, but not retirement accounts.
The what ifs
Another important advantage of owning a revocable living trust is protection if and when the dreadful day comes when physical or mental illness incapacitates you. If it is deemed that you can no longer take care of your financial affairs, a previously named successor trustee – the person responsible for managing the affairs of the trust and distributing assets – will take over after two physicians have certified your incapacity. It is common for the successor trustee to also be one of the beneficiaries.
A taxable estate takes longer to settle. So, in most cases, the successor trustee cannot terminate the trust, or make final distributions, until a closing letter is received from the state department of revenue or Internal Revenue Service. If the trust is non-taxable, the successor trustee settles within a month or two and disperses the assets to the named beneficiaries. Should the successor trustee get paid for his or her efforts? They can be paid an agreed-upon fee based on services rendered and applicable state law. Fees are normally taxed as ordinary income.