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EVERYTHING YOU NEED TO KNOW ABOUT A REVOCABLE LIVING TRUST


Revocable trusts, often called living trusts, have been extensively discussed in California. However, whether people should choose a revocable trust over alternatives has always been a topic of discussion and worry. The first question which arises is that what exactly is a revocable trust.


Revocable trusts are trusts that a person establish during their lifetime, which relate to a specific property or properties – most common is all of a person’s property - and that identifies what should happen to that property in the event of your death. A revocable trust is one of the most flexible estate planning instruments and is the backbone of most US estate planning. There are a large varieties of such trusts that are usually defined by their effect or tax treatment. They are the preferred instrument for estate planning because of their flexibility, they can be changed by the creator during their lifetime, and the fact that the transfer of the assets in the trust avoids probate court after death, a costly and expensive process.


A "revocable trust" is created during a person’s lifetime. That person is often called the “settlor” as they settle the property in the trust. It names a trustee who is still alive who can also be the settlor so that control over the assets is retained. If the settlor is also the trustee then the trust identifies a trustee to act in the event of the settlors death – which is when the trust also may become irrevocable.


A co-trustee may also be nominated who can provide support or added security in administering the property as specified in the trust agreement. A trust where a settlor and another party is a co-trustee is often used with older adults to ensure protection of the property and good decision-making.


During the settlors lifetime the trust property is used for their benefit. Taxes continue to be paid for by the settlor, so if for example, a residential income property that was owned by the settlor is placed in the trust there will be no tax consequences and any income or loss will be on the settlors taxes.


Upon the settlors passing, the trustee will often be instructed to either deliver the trust assets to the specified beneficiaries or keep the assets in trust and manage such property for the benefit of the identified beneficiaries, the latter often occurring where a child inherits the property and it is not distributed until they reach a certain age or a series of ages.


WHAT IS A REVOCABLE TRUST USED FOR?


Revocable trusts don't assist you in avoiding estate tax since the assets are still included in your estate. You can avoid probate with the use of such trusts and ensure that the beneficiaries are properly identified. Without either a will or a trust the statutes of intestacy govern inheritance and the outcome may be undesirable. Probate is also quite expensive, though a small estate process that avoids probate can be used in California for those with total assets under $155,000 and real property where the value is below $55,000.


A revocable trust enables one to enjoy all of the advantages of the trust assets: the income from the trust, and the freedom to utilize or dispose of the trust assets as you deem appropriate throughout your lifetime.


Now you must be wondering that isn’t it the same as a will? We are here to clarify!


HOW EXACTLY IS A REVOCABLE TRUST DIFFERENT FROM A WILL?


You can choose beneficiaries and organize the distribution of your assets using either a living trust or a last will and testament. Both of these provide the option to make changes to the document if circumstances or preferences change. A living trust, on the other hand, can cover multiple phases of a persons life: while they are alive and healthy, while alive but incapable, and after death. Only when you pass away will the terms of a revocable trust become irrevocable and be put into effect. Additionally, revocable trusts keep your assets and records secret from the public, avoid probate court which is costly and expensive, and decrease the likelihood of a legal conflict among family members and beneficiaries. Wills become public documents that are available to everyone and are more often litigated.


Wills are documents that only take effect when a person dies and that identifies the beneficiaries of a person’s property upon their death. Unlike revocable trusts the will and the property owned by the deceased is included or listed in the probate procedure in publicly available court documents. Additionally, the probate court process generally costs a substantial amount of money and takes between nine and twenty four months depending on the complexity and the focus of the estate executor.


BENEFITS OF SETTING UP A REVOCABLE TRUST


Creating a revocable trust has a number of benefits. A revocable trust enables the grantor's designated manager to assume management of the principal if the grantor develops health issues as they age. The ancillary probate of the grantor's real estate is avoided if the real estate is incorporated in the trust and the grantor owns property outside of the state of the grantor's residence.


The following are some other advantages of a revocable trust:


1. Revocable trusts are less expensive and time-consuming in the long run - Because a living trust is a more complicated legal instrument than a simple trust or will, it often costs more money and time to draft one. This implies that in order to effectively establish and keep your trust, you will need to invest some time and money. However, by doing so you can avoid the probate process' headaches on family members and the much higher costs. A basic estate plan is usually between $2,000 and $4,000 for a one million dollar estate where the cost of probate for that same estate is approximately $60,000. Additionally, living trusts can be designed to fare better in legal challenges, possibly saving more money and time.


2. Revocable living trusts enable you to make changes at your discretion and are therefore flexible and adaptable - That may come in handy if your situation changes or if you're unsure about the beneficiaries you want to identify. These trusts are a popular choice if you are just beginning your estate planning because of their flexibility.


3. Asset confidentiality - The public typically has access to both your will and the list of your assets that are currently in probate. You can disclose the assets in your estate and the beneficiaries who will receive them to anybody who is curious about your estate or interested in it for business, creditor protection, or other reasons. Because the assets stored in your trust pass without going through the probate procedure, revocable trusts provide a privacy benefit.


Revocable trusts, nevertheless, can have certain drawbacks. A revocable trust must be set up carefully and takes some initial work. To avoid probate, property, particularly real estate, must be retitled in the trust's name. To make sure the goals of the trust are being followed, the grantor's complete estate plan should be reviewed every year. The grantor does not receive any tax benefits from a revocable trust.


A grantor should also draft a will to name beneficiaries for the assets that will not be covered by the revocable trust to avoid probate – generally we use what is referred to as a pour over will to distribute any property not purposely excluded from the trust to be distributed back to the trust. Using this device can avoid the issue of missed assets, for example if a person purchases a new real estate property and forgets to re-title it into the trust, and all beneficiaries are identified and managed through the trust. Finally, in a revocable trust, the assets are still subject to the grantor's creditors during his or her lifetime. Said another way, it is not an asset protection trust or device, such trusts are substantially more expensive and often irrevocable.


Regardless, a revocable living trust is one of the most powerful tools and often forms the basis for most estate plans. It provides flexibility that is not available from all trusts or wills. This is especially helpful for those who are just starting their estate planning and are unsure about precisely who to identify as beneficiaries or changes to their estate, need for funds, or family dynamics over time.


If you would like to discuss your estate plan you may contact us for a free consultation by filling out this form.





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