A revocable living trust (RLT) is a commonly used estate planning tool. But what exactly are RLTs, and what do they accomplish? Who do they impact, and how can they be changed?
What Are Revocable Living Trusts?
Trusts are legal entities that hold title to property for the benefit of a living person, and a trust is often used as an alternative or supplement to a will. A revocable living trust (sometimes called a revocable trust, an inter vivos trust, or a living trust) is a trust that you create during your lifetime and can change, or revoke (unlikely you’ll want to do this but worth noting you can if you want to) whenever you like. RLTs differ from irrevocable trusts, which are difficult to alter after their creation (doing so may require making limited changes permitted by the terms of the trust, asking a court to order changes, or shifting the trust’s assets into a new trust via a process known as decanting).
Who Is Affected by RLTs?
The living person or charity benefited by the trust is called a beneficiary. The individual who creates the trust, decides how it will operate, and determines what property to place into it is called the grantor (or the settlor or trustor). The trust is administered by a trustee, who manages or invests the funds or property in the trust and distributes them to the trust beneficiary according to the grantor’s instructions, which are memorialized in a trust agreement. The grantor typically names a successor trustee in the trust agreement who will manage the trust if the original trustee becomes incapacitated, passes away, or is otherwise unable to serve.
Often, the grantor of the RLT is both the initial trustee and primary beneficiary. So, you create the trust and provide the funds or property for it, then you manage, invest and control the property and money owned by the trust, and you distribute the trust funds to yourself as desired. While the grantor is alive and well, the tax identification number of an RLT is the grantor’s social security number. Any income earned by the trust is taxed as the grantor’s personal income.
How Can RLTs Be Changed?
If circumstances change, you can alter an RLT through amendment, restatement, or revocation. Typically, a trust amendment can be made by attaching a properly drafted amendment to the original trust document. An amendment may be appropriate for minor changes or deletions, such as replacing a successor trustee. If more significant changes are needed, such as changing beneficiaries of the trust, or if the trust has already been amended multiple times, a document called a restatement of trust should be created. This document allows you to rewrite the entire original trust agreement with all necessary changes instead of revoking the original trust and creating and transferring assets to a completely new trust. Sometimes neither an amendment nor a restatement are appropriate, in which case you can revoke the trust. A revocation may be warranted by a divorce or the death of a beneficiary and this action involves dissolving the trust entirely and transferring the assets owned by the trust back to yourself or into another trust.
By law in most states, changes should be made according to instructions provided in the trust document. If there are no instructions, your intention with the changes should be made clear. For example, if you amend your trust, create a written document, signed by the grantor and trustee, with a title that shows it is an amendment to the specific trust you have in mind. The document should clarify the trust’s name, the date, and the name of the trustee. It should also mention the portion of the trust document that allows amendments to be made and it should identify the part of the trust that will be changed, deleted, or added. If there is more than one grantor and the changes are made by only some of them, notice should be provided to the grantors who did not participate in the changes.
Warning: If the trust has grantors who are spouses or domestic partners, and the trust document does not provide otherwise, most states have special rules regarding changes:
- If the trust includes community property—which, according to the law of some states, consists of all the money earned, property acquired, and debts incurred during a marriage, the trust can be revoked by either spouse or partner, but can only be amended by both of them.
- If the trust consists of separate property—defined as property owned by one spouse and not the other, regardless of whether it was acquired during the marriage, either partner can amend or revoke the trust without the other’s approval with regard to the portion of the property attributable to their contribution.
- In most states, the attribution as community or separate property is not altered when the property is transferred to or from a revocable trust.
Joint property, which is property you own with another person, can also be placed in an RLT. You can put your own interest in jointly owned property in a revocable trust without affecting the rights of other joint owners. Spouses can create a living trust to hold both joint, community, and individually owned property, and in these living trusts, both can be grantors and trustees, and either can amend or revoke the trust during their lifetime. Each spouse can be given the power to withdraw his or her separate property at any time without the consent of the other spouse to avoid possible gift tax liability.
What Goals Can an RLT Accomplish?
Avoiding probate. When you pass away, the assets properly titled in the trust will not need to go through a long and expensive probate process that could delay a beneficiary’s access for months or years. In addition, the trust assets will be distributed privately, and do not become part of the public record, as is the case when a will must go through the probate process, which is overseen by a court. All probate files, including wills, asset inventories, and distribution reports, are open for any member of the public to review, but your family’s privacy is preserved, and the process is accelerated, when assets are distributed with an RLT
Protecting inheritances. You can include provisions in your RLT that will help ensure that, after you die, the trust assets intended to benefit the next generation will not be spent too quickly, handed to creditors, lost in a divorce, or wiped out as a result of other unexpected events.
Planning for your own incapacity. Although an RLT allows you to retain control over your assets, you’ll need to plan ahead in case you are unable to do so in the future. With an RLT, you can authorize a co-trustee or a successor trustee to manage the trust property if you become incapacitated. Otherwise, your family member will have to rely on a financial power of attorney or go to court to ask for legal authority to manage your finances.
What to Do Next
An RLT has many benefits, and it can allow you to manage your assets while also providing protections for your beneficiaries. Our experienced team can help you plan for the future by establishing a new RLT or changing the terms of an existing one. Call us today to discuss this or any of your other estate planning needs.