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Estate Planning 101 - The Revocable Living Trust



More and more individuals are placing their belongings into trusts, which are flexible and adaptable arrangements for the management, protection, and distribution of their assets.  It is created during your lifetime and is funded with most or all of your assets by re-titling the assets to yourself as trustee of your trust, and it takes effect immediately.  During your lifetime and your good health, you continue to enjoy all of the benefits of your assets without any changes in your control over them.  


It is revocable during your lifetime.  This means that its terms may be changed, altered, or modified by you while you are alive and in good health.


A living trust is a private agreement.  The distribution of assets under its terms are private, and not public as in the case of a "will" that must go through probate.


The management of your assets does not need to be complicated.  While protecting your property within a living trust, you can do with them whatever you can do now with your assets and property. You can buy, sell, borrow, make gifts, etc. You retain control over all your property and assets during your lifetime, and you determine distribution of your estate after your death. Since a living trust is revocable, it has no income tax consequences during your lifetime; no separate tax return is even filed, and all trust income is reported under your social security number.


With a living trust, you are also appointing someone else (a professional, a trusted friend, or a family member) to manage the assets in your trust for your benefit in the event of your incapacity (e.g., Alzheimer's, a stroke, an accident, etc.).


A living trust allows you to AVOID PROBATE. Probate is a court procedure that is required if your assets are distributed without a will, under a simple will or under a will with a testamentary trust. In court probate proceedings, the court changes the legal ownership of your property when you die. This process may take six months to a year or longer and is a matter of public record.  Assets that you leave to your heirs by a will goes through probate. With a living trust you can avoid the delay in the distribution of your estate entirely; the assets of your estate can be distributed to your designated beneficiaries immediately upon your death.


With a trust, minor beneficiaries can have a trustee manage and invest the trust funds free of the costs and restrictions that arise when a court must appoint and supervise a guardian of the property until the beneficiary comes of age. Additionally, you can continue the management of a beneficiary's assets to whatever age you desire; certainly beyond age 18 (the age at which ALL guardianships must terminate).


The management of a beneficiary's assets can include disbursement of assets and/or funds in increments, according to the directions you put in the trust (e.g., 1/3 distribution at age 25, 1/3 distribution at age 30, and the balance at age 35). Of course, the trustee can use any or all of the trust principal for the benefit of the beneficiary during this period. Also, if there is any question of management skills or capacity of the beneficiary, or to insure that your estate does not go to a son-in-law or a daughter-in-law, the trust can continue for the child's lifetime and then pass to the child's issue at his or her death. This will also keep your assets in your family rather than having them be subject to attachment by the state for medical treatment. You can protect the assets from any potential of dissipation of the entire estate while providing for the beneficiary's needs, as determined by you. With a living trust these trusts are already in place at the time of your death and will begin immediately for the benefit and protection of your beneficiaries.


When property passes through probate, you incur executor's fees, attorney's fees and court costs, all of which can be quite substantial depending on the size of your estate. These are fees generally set by state law and are usually based entirely on the size of the estate being probated rather than on the amount of time and work involved. There may also be additional extraordinary expenses of probate (i.e., tax returns, life insurance, etc.).  All of these fees and expenses can significantly reduce the estate to be distributed to your beneficiaries. With a living trust these fees and costs can be greatly reduced. Your assets are transferred immediately to your designated beneficiaries outside the court system and in accordance with the directions specified by you in the trust agreement. Costs of administration of a living trust are minimal and are generally based on the actual time and/or services required.


You should have a "pour-over" provision in your will which adds other assets to the trust at your death. Thus, all of your assets will be in one vehicle managed by one trustee under a single trust agreement.


When an estate goes through probate, the court freezes the assets and asks anyone to come forward and contest the will if they please. Creditors are invited to come forward with their claims and heirs may challenge certain bequests under the will if they are disappointed because they received less than they had anticipated.  With a living trust, however, assets are not frozen and can be distributed to your designated beneficiaries immediately without the highly technical requirements of probate disposition.  The disgruntled heir would have to hire an attorney and file a civil suit against each beneficiary. The trust assets can also be protected from judgment creditor's claims and/or lawsuits filed against you or your beneficiaries. In addition, you can protect a distribution to a beneficiary from being reached by the beneficiary's creditors, from alimony attachments, from Medi-Aid spend down requirements, and even from the beneficiary him/herself.


Creating a living trust can furnish needed attention to your assets. A living trust permits you and/or your appointed trustee to take timely advantage of investment opportunities and. conversely, to dispose of investments no longer desirable. With a living trust, you set up the machinery to provide a continuity of management at death and the immediate shift of income from yourself to your beneficiaries at your death.


If you own real property in another state, that property will have to go through probate in that state (know as an "ancillary probate"), in addition to a probate in your state of residency. With a living trust you can avoid these additional probate proceedings and have that property pass to your beneficiaries immediately according to the terms of your trust.