The ABCs of Revocable Living Trusts
You may have heard of revocable living trusts (RLT), which are commonly used estate planning solutions. But what exactly are they, who is affected by them, how can they be changed, and what do they accomplish? Can an RLT be a good option for estate planning in Tennessee?
What Are Revocable Living Trusts?
Trusts, which are legal entities that hold title to property for the benefit of a living person, are often used as an alternative or supplement to a will. A revocable living trust (sometimes called a revocable trust, an inter vivos trust, or a living trust) is a trust that you create during your lifetime and can change at any time prior to your incapacity or death. RLTs are distinguishable from irrevocable living trusts, which are difficult to alter after their creation.
Who Is Affected by RLTs?
The living person or charity benefited by the trust is called a beneficiary, but the beneficiary does not have legal title to the money or property in the trust at the time of its creation. The individual who creates the trust, decides how it will operate, and determines what property or funds to include in it is called the grantor (but may also be called the settlor or trustor). The trust is administered by a trustee, who is in charge of managing and investing the funds or property in the trust and distributing them to the trust beneficiary according to the grantor's instructions, as memorialized in the trust agreement. Typically, the grantor names a successor trustee in the trust agreement who will manage the trust if the original trustee becomes incapacitated, passes away, or is otherwise unable to serve.
Often, though not always, the grantor of the RLT is both the initial trustee and primary beneficiary. For example, you—as grantor—create the trust and provide the funds or property for it, you—as trustee—manage, invest and control the property and money owned by the trust, and as desired, distribute the trust funds to yourself as primary beneficiary. At the time an RLT is formed, its tax identification number is typically the grantor's social security number, and any income earned by the trust is taxed as the grantor's personal income.
How Can A Revocable Living Trust Be Changed?
If circumstances change, as they often do, you can alter the RLT through amendment, restatement, or revocation. Typically, a trust amendment can be made by attaching a properly drafted and executed amendment to the original trust document. An amendment may be appropriate for minor changes or deletions, such as replacing a successor trustee. If more significant changes are needed, such as changing beneficiaries of the trust, or if the trust has already been amended multiple times, a document called a restatement of trust should be created. This document allows you to “restate” or rewrite the entire original trust agreement incorporating any necessary changes instead of revoking the original trust and creating and transferring assets to a completely new trust. There are circumstances that neither an amendment nor a restatement are appropriate, in which case you can revoke the trust. A revocation may be warranted if a major change such as a divorce or death of a beneficiary occurs and involves dissolving the trust entirely and transferring the assets owned by the trust back to yourself or into another trust.
What Goals Can an RLT Help Accomplish?
Avoid Probate
When you pass away, none of the assets properly titled in the trust will need to go through a long and potentially expensive probate process that could delay a beneficiary's access to those assets for months or even years. In addition, the trust assets will be distributed privately, and do not become part of the public record, as is the case when a will must go through the probate process, which is overseen by a court. All probate files, including wills, asset inventories, and distribution reports, are open for any member of the public to review, but your family's privacy is preserved when assets are distributed according to an RLT.
Protect Inheritances
You can include provisions in your RLT that will help ensure that, after you die, the trust assets intended to benefit the next generation will not be spent too quickly, be vulnerable to creditors, lost in a divorce, or wiped out as a result of other life events your beneficiaries may experience.
Plan for Your Own Incapacity
Although an RLT allows you to retain control over your assets, it is important to plan ahead in case you are unable to do so in the future. In an RLT, you can authorize a co-trustee or a successor trustee to manage the trust property if you become incapacitated as a result of an illness, accident, or incapacity. Otherwise, your family member will have to rely on a financial power of attorney or go to court to ask for legal authority to manage your finances.
What to Do Next
An RLT has many benefits, including enabling you to continue to manage your assets while also providing protections for your beneficiaries and can be a great solution for estate planning in Tennessee. As an experienced estate planning firm, we can help you plan for the future by establishing a new RLT or changing the terms of an existing one. Contact us today to schedule an appointment to discuss this or any of your other estate planning needs.
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Read More:
What is Estate Planning? An Estate Planning Overview
Estate Planning Basics & Benefits
Wills Versus Trusts: How do I know What I Need?
