Revocable Living Trusts

     Revocable Living Trusts (RLTs) are popular estate planning tools. The purpose of this article is not to provide a legal treatise on the subject of RLTs, but rather to introduce how they work, some of their benefits and drawbacks, and some important considerations when creating an RLT.

RLT Basics

     RLTs are written legal agreements involving three parties: the Trustmaker (also known as a Grantor, Trustor or Settlor), the Trustee and the Beneficiary. Initially, upon creation of the RLT, the Trustmaker, Trustee and Beneficiary are one in the same person. There can be, and often are, more than one Trustmaker, Trustee and Beneficiary at any given time. [Note: Depending on the law of their jurisdiction and their unique circumstances, a married couple may share one joint RLT or each may have a separate RLT.]
     After the Trustmaker and Trustee sign the RLT legal agreement, the Trustmaker funds the trust (i.e., retitles assets into the name of the RLT). This is a critical step, much like putting fuel into a brand new automobile. Once the RLT is signed and funded, the Trustee manages and distributes the trust assets for the Beneficiary according to the instructions in the written legal agreement.
     Later, if the Trustmaker/Trustee becomes incapacitated (as defined in the RLT agreement), then a successor Trustee steps in to seamlessly manage and distribute the trust assets as provided in the RLT's instructions. Since the Trustee holds legal title to the RLT assets for the Beneficiary, no Probate Court need interfere.
     Finally, upon the death of the Trustmaker/Trustee, the RLT becomes irrevocable and the successor Trustee manages and distributes the RLT assets for the Beneficiary(ies) according to the RLT's instructions. In most jurisdictions, no Probate Court need interfere in this process of transferring assets from the deceased Trustmaker to their Beneficiary(ies).

RLT Benefits

     While the benefits of RLT-based planning vary from jurisdiction to jurisdiction, the most commonly cited benefit is Probate Court avoidance. The three most commonly cited drawbacks to Probate Court are the potential for long delays, unnecessary costs and, because the court process is open to the public, unwanted publicity. Given the choice, most people would rather avoid any court process.

RLT Drawbacks

     As noted above, for an RLT to operate as designed it must be funded. If you are not meticulous about ensuring that your RLT has either present title to your assets or will have future title to them (e.g., life insurance proceeds), then your estate may not avoid Probate Court.
     Also, legal fees to create RLTs often are higher than the fees to create Will-based estate plans. Accordingly, in some jurisdictions the benefits of avoiding Probate Court are greater than in other jurisdictions.

RLT Considerations

     The selection of your successor Trustee is one of the key decisions you must make when creating your RLT. Common options include appointing a trusted family member or friend, a professional fiduciary, or even a combination of the two. There is no right answer, just the one that is right for you.
     Make sure your RLT incorporates flexible estate tax planning. Even if the federal estate tax is repealed, it could be easily reinstated. Note, too, that many states have imposed their own estate tax separate from the federal estate tax.
     Finally, only you know the strengths and weaknesses of your loved ones. Ensure that your RLT contains planning to protect the inheritance both for and from your loved ones. If you are divorced, then you will have special considerations regarding your ex-spouse and any mutual children.
     RLT planning can be a complex but worthwhile process to protect you, your loved ones and your hard-earned assets.

Trust Funding

     Trust Funding is the process of placing your assets under the ownership and control of your Revocable Living Trust (RLT), and is a vital component of any RLT-based estate planning process. Only those assets that are titled in the name of your RLT (or that designate your RLT as beneficiary, where appropriate) will be controlled by the terms of your RLT. Otherwise your assets may be subject to probate, may lose valuable protection from estate taxes and may not pass to your beneficiaries as specified in your estate plan.

     There three fundamental steps in the Trust Funding process:
     #1 Identify your assets by:
     Type: For example, is this asset a bond certificate, a certificate of deposit, or a publicly-traded stock certificate?
     Value: How much is it worth and is it encumbered by debt?
     Ownership: Do you own it individually or jointly with a spouse or others?
     #2 Transfer ownership to your RLT: Once you have identified your assets, you can begin transferring ownership to your RLT by sending written notice to the various institutions. In that notice you will identify the asset, the name of your RLT and then request the change of ownership or beneficiary designation. Note: Do not be surprised if the institutions respond with a request for you to complete their own in-house forms.
     #3 Maintain your Trust Funding: As you acquire additional assets, be sure to take title to them in the name of your RLT or use the appropriate beneficiary designation from the outset.
     When funding your trust, some assets, such as real estate, life insurance and qualified retirement plans, require special attention.

Real Estate

     Your Personal Residence: Even if there is a mortgage against your residence, federal law (The Garn-St. Germain Depository Institutions Act of 1982) allows you to transfer your residence to your RLT if the loan is federally-backed.
     Other Real Estate: If you have debt against any other type of real estate, first contact the lender to obtain permission to transfer ownership to your RLT. The federal law protecting transfer of your personal residence does not extend to your investment real estate. Failure to obtain prior approval could result in an acceleration of payments.

Beneficiary Designations

     Life Insurance: If you name your RLT as the beneficiary of all of your existing and future life insurance policies, then the proceeds will be administered and distributed according to the terms of your trust. [Note: Because the death proceeds will be included in your estate for estate tax purposes, consideration should be given to establishing an Irrevocable Trust as owner and beneficiary to remove the proceeds from your estate, subject to certain rules.]
     Qualified Retirement Plans: There are many complex tax and non-tax consequences attending any beneficiary designation option you may select. Bottom line: Make decisions about these assets very carefully, and only after consulting qualified counsel.