What Are Revocable Living Trusts?

 What Are Revocable Living Trusts?

All trusts are a type of legal contract between three parties:

• The Grantor, also known as settlor, trustmaker, or trustor, is the person who forms the trust.
• The Trustee is the “manager” of the trust, whose job is to carefully follow the terms of the trust.
• The Beneficiaries are the individuals who may receive income or principal from the trust.

When a revocable living trust is formed, one person typically serves in all three roles as grantor, trustee, and beneficiary, during his or her lifetime.

Creating the Trust:

The first step is to create the trust document which provides instructions for the trustee concerning how the assets should be managed and distributed.  This document looks similar to a last will and testament but contains additional provisions concerning the management of property during the grantor’s life and the ultimate distribution of assets over time.  The trust document would answer the questions of what, to whom, how, and when the assets should be distributed.

Revocable:

A revocable living trust can be changed or modified at any time by the grantor of the trust so long as he or she has capacity.  From the grantor’s perspective, the trust assets continue to be completely available for his or her use.

Successor Trustees:

Although the grantor often serves as the initial trustee, successor trustees should be named in the event the grantor dies, becomes incapacitated, or is unable to serve.  This list of trustees allows the trust to pass seamlessly and the terms of the trust to be carried out.

Funding the Trust:

Once the trust is formed, the next step involves the transfer of the grantor’s assets into the trust.  For example, the grantor’s bank accounts are re-titled in the trust, the grantor’s house is deeded into the trust, and the grantor’s life insurance beneficiary is changed to the trust.  By transferring all of the grantor’s assets into the trust, no assets will be held in his or her name alone.  Accordingly, by removing the assets from the grantor’s name, a probate process, along with the consequent delay, hassle, and expense, is avoided.

Pour-Over Will:

A pour-over will serves to transfer into the trust any assets that someone might still own in his or her name alone at the time of death.  The objective is to be sure that this will does not have to be probated.  In other words, the grantor of the trust wants to be sure that all of his or her assets have already been transferred to the trust.  However, it is always possible for someone to pass away without having transferred everything into his or her trust, and it is good practice to have the pour-over will as a back-up or safeguard.

By utilizing and fully funding a trust, the grantor’s estate avoids the various problems associated with probate.  Moreover, the assets can be held and distributed in the exact manner desired by the grantor.  The result is that the grantor’s wishes for his or her estate are given effect more efficiently.

A trust can greatly benefit a client and his or her family, but an in-depth understanding of the trust’s operation and benefits should be understood.  If you believe a trust or other estate plan may benefit you, please contact one of Clark, Mize & Linville, Chartered’s attorneys to discuss your situation.

Written by:     Joshua C. Howard 

Related Practice Area:          Wills, Trusts and Estate Planning 

Protecting Assets Against Your Children’s Creditor’s

Protecting Assets Against Your Children’s Creditors

Assets can be left to beneficiaries in any number of various ways, and the grantors are able to choose the “what, whom, how, and when.”  In discussing the options, it is often best to start by describing the two ends of the spectrum:

1. Outright and Free of Trust – At one end of the spectrum is to leave the entire inheritance all at once, in one fell swoop. This is sometimes referred to as the “cash on the barrelhead” approach.  The beneficiaries are free to do with the assets as they please – spend them, invest them, etc.  The advantages of this approach are, of course, simplicity and accessibility.

2. Held Back in Trust – The other end of the spectrum is to not leave the beneficiaries the entire inheritance all at once, but rather continue the trust, with the assets retained, to be held, managed, and distributed to the beneficiaries, over an extended period of time. The advantage of this approach is reducing the risk of loss of the trust assets due to the following reasons:

1. Mismanagement. More than a few dollars are lost each day via fear, greed, ignorance, inattention, waste, mistrust, bad judgment, and lack of common sense.  A continued trust with professional money management can greatly reduce these risks.

1. Taxes. The IRS takes different bites at different times – income taxes, estate taxes, sales taxes, etc. – but they all add up to a significant amount of a person’s assets.  Income and estate taxes may be reduced, simply because the continued trust is another entity – separate and apart from the beneficiaries.

1. Divorce. Assets acquired during the course of a marriage – including inherited assets – are generally considered to be part of the “marital estate” and are therefore subject to division in a divorce proceeding.  Assets in a continued trust are not reachable by a divorcing spouse.

1. Lawsuits. Lawsuits are increasingly common and can cause someone to lose a substantial part of their net worth.  Ongoing trust assets are similarly not reachable by lawsuit claimants.

1. Bankruptcy. This is the ultimate depletion of wealth – a person losing all of his or her non-exempt assets due to the inability to pay off debts.  Assets held back in a trust are generally not subject to a bankruptcy.

Assuming one opts for the continued trust approach, the next issue is to decide upon the terms and conditions for the continuation.  The trust assets could be held for a period of time or for a beneficiary’s lifetime.  Distributions of income and principal could be either discretionary or mandatory.  Additional rights of a beneficiary to demand a withdrawal, remove a trustee, or re-write the trust can also be structured into a trust.  There are almost limitless options in this arena that should be discussed with knowledgeable estate planning counsel.

Written by:  Joshua C. Howard 

Related Practice Area: Wills, Trusts and Estate Planning