(1.13.25) In our previous blog post, we explored the importance of the will in estate planning. Today's focus will shift to the living trust, also called a revocable or inter vivos trust. This estate planning instrument addresses various issues that a will may not adequately cover. The decision to establish a living trust should be predicated on the specific needs and desires of the individual. Accordingly, it is imperative to evaluate several factors thoughtfully when considering the implementation of a living trust.
"A living trust is established during one's lifetime and serves to facilitate the management of assets," stated professional fiduciary and certified elder law Attorney RJ Connelly III. "It can protect in instances of illness, disability, or aging-related challenges. Most living trusts permit modifications or revocations at the discretion of the trustor. However, it is important to note that these trusts do not facilitate the avoidance of estate taxes, as their revocable nature keeps them within the estate’s parameters. They may assist in circumventing probate, although the requirements for probate can differ based on individual circumstances."
How a Revocable Trust Works
A Revocable Trust is a flexible financial tool that works in three main stages:
While You’re Alive and Well - As long as you can manage your affairs, you usually act as the main person who benefits from the trust and the person in charge (called the Trustee). At this stage, the trust is like an extension of yourself, allowing you to manage your assets just as you would without a trust.
If You Are Incapacitated - If you get sick or injured and can’t take care of things, your chosen successor Trustee will manage the trust’s assets for you. You will still benefit from the trust, and its assets can still be used to care for you.
After You Pass Away - It allows the distribution of the trust’s assets to those you’ve named to receive them (Beneficiaries).
"As a point of clarification, while a Revocable Trust and a will both help manage your wishes after you pass away, a Revocable Trust doesn't completely replace a will," stated Attorney Connelly. "Not everyone will choose to or be able to move all their belongings into a Revocable Trust. If you create a Revocable Trust, it's still important to have a simple will, known as a pour-over will. This type of will helps transfer any property you didn’t put into your Trust during your lifetime into the Trust after you pass away."
"A will is also necessary because it lets you pick someone to be the Executor," he continued. "This person will settle your estate after you're gone. The person managing your Trust (the Trustee) usually can’t handle everything related to your estate. Additionally, if you have young children, it's especially important to name a guardian in your will. This ensures that someone you trust will look after your children if something happens to you."
Advantages and Disadvantages of a Revocable Trust
Establishing a revocable trust provides several benefits for estate planning. One key advantage is that it allows a designated manager to handle the trust's assets if the grantor experiences health issues, ensuring proper management. If the grantor holds real estate in other states, including it in the trust can help avoid ancillary probate.
A revocable trust can also manage assets for underage beneficiaries, eliminating the need for a court-appointed guardian. Additionally, the trust can control the distribution of funds for beneficiaries who may not be financially responsible.
While revocable trusts are straightforward for tax purposes—income is reported on the grantor's tax return—there are drawbacks. Setting up a trust requires time and effort, and all assets must be retitled to avoid probate. Maintenance can be more expensive than wills, and there are no tax benefits for the grantor. And as stated earlier, assets not included in the trust may require a will for distribution, and creditors can still access trust property during the grantor's lifetime.
A Final Note
"To review, a revocable trust is a legal arrangement established during one's lifetime to manage assets and provide protection in the event of illness or disability," stated Attorney Connelly. "The primary advantage of a revocable trust lies in its flexibility, as it permits modification or revocation as circumstances change. This type of trust also facilitates a more efficient transfer of assets to beneficiaries, allowing them to circumvent the costly and time-consuming probate process; however, it does not assist in avoiding estate taxes. In our next blog, we will discuss the Irrevocable Trust and examine how this type of trust can help mitigate estate tax liabilities."
Please note that the information provided in this blog is not intended to and should not be construed as legal, financial, or medical advice. The content, materials, and information presented in this blog are solely for general informational purposes and may not be the most up-to-date information available regarding legal, financial, or medical matters. This blog may also contain links to other third-party websites that are included for the convenience of the reader or user. Please note that Connelly Law Offices, Ltd. does not necessarily recommend or endorse the contents of such third-party sites. If you have any particular legal matters, financial concerns, or medical issues, we strongly advise you to consult your attorney, professional fiduciary advisor, or medical provider.
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