A properly drafted Revocable living trust (RLT) is a powerful estate planning tool that allows you to remain in control of your assets during your lifetime, have them managed appropriately during you incapacity, and efficiently and privately transfer them to your loved ones at death according to your wishes.
Sometimes referred to simply as a Living Trust, an RLT holds legal title to your assets and provides a mechanism to manage them. You would serve as both the trustee and the beneficiary of your trust during your lifetime. You also designate successor trustee(s) to carry out your instructions for how you want your assets managed and distributed in case of your death or incapacity.
In order for the Living Trust to function properly, you need to transfer many of your assets to your Living Trust during your lifetime. The fact that it is “revocable” means that you can make changes to it or even terminate it at any time. During your lifetime, you have the same control over your assets held in the trust as you did prior to creation of the trust because you are the grantor of the trust, the trustee of the trust, and the primary beneficiary of the trust. Thus, you do not lose any control over how your assets are used, spent, invested, or transferred.
Like a will, a Living Trust is a legal document that provides for the management and distribution of your assets after you pass away. However, a Living Trust has certain advantages when compared to a will. First, a Living Trust can provide for the management of your assets and care of yourself while you are alive but incapacitated. This allows for the management of your affairs while you are disabled without the need for an expensive and time-consuming court process to appoint a guardian or conservator for you. Second, upon your death, a Living Trust allows for the prompt transfer of assets in the trust without court interference. With a properly funded Living Trust, there is no need to undergo a potentially expensive and time consuming public probate process. Third, a Living Trust allows you to provide protections for the assets you leave to your beneficiaries from creditors (existing or future) of your beneficiaries, such as judgment creditors, tort creditors, and divorcing spouses. In short, a well thought out estate plan using a Living Trust can provide your loved ones with the ability to administer your estate privately, with more flexibility and in an efficient and low-cost manner.
Creating a Revocable Living Trust and transferring your assets to the name of that trust will generally not affect your ability to control such assets. During your lifetime when you are mentally competent, you have complete control over all of your assets. As the trustee of your trust, you may engage in any transaction that you could before you had a Living Trust. There are no changes in your income taxes. If you filed a 1040 before you had a trust, you can continue to file a 1040 when you have a Living Trust. There are no new Tax Identification Numbers to obtain. Because a Living Trust is revocable, it can be modified at any time or it can be completely revoked if you so desire. Upon your incapacity, the individuals you designate will be able to conduct transactions on your behalf according to the instructions you have laid out in the Living Trust. Upon your passing, the Living Trust can no longer be modified and the successor trustee(s) you have designated will then proceed to implement your wishes as directed.
Assets with beneficiary designations such as a life insurance policy or annuity payable directly to a named beneficiary need not be transferred to your Living Trust. Furthermore, money from IRAs, Keoghs, 401(k) accounts and most other retirement accounts transfer automatically, outside probate, to the persons named as beneficiaries. In some instances, however, clients may be able, and wish, to make their trust the beneficiary of such accounts. Bank accounts that are set up as payable-on-death account (POD for short) or an “in trust for” account (a “Totten Trust”) with a named beneficiary also pass to that beneficiary without having to be titled into your trust. It is important, however, to seek the counsel of an experienced estate planning attorney who can advise on and assist with transferring necessary assets to your trust.
Federal law prohibits financial institutions from calling or accelerating your loan when you transfer property to your living trust as long as you continue to live in that home. The only exception to the federal law, enacted as part of the 1982 Garn-St. Germain Act is that it does not provide for such protection for residential real estate with more than five dwelling units.