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About Revocable Living Trusts

One of the best estate planning alternatives is a Revocable Living Trust, also called the Intervivos (Latin for “while living”) trust. A Revocable Living Trust is a simple way to make certain your estate assets are distributed, as you desire.

  • It is “Revocable” because you can change the terms or cancel it at anytime during your life.
  • It is “Living” because the trust takes effect while you are still alive.
  • It is a “Trust” because it creates a place where assets are available for your normal use now and will be available for distribution at your death.

The individual who creates a trust is called the Grantor or Trustor. The individual who manages the assets placed in the trust is called the Trustee. The individual who receive benefit or enjoyment from the assets inside the trust is called the Beneficiary. The trust you create will name you (and your spouse, if applicable) as Trustor, Trustee and Beneficiary.

In other words, even though you transfer legal ownership of your assets to the trust, by naming yourself as trustee of the trust, you keep complete control over your property. You can manage, sell, borrow against, or give away the assets in your trust as you please.

Beneficiary: YOU

Trustor: YOU

Trustee: YOU

Apart from avoiding probate, there are other advantages to using a Revocable Living Trust:

  • If an illness or accident leaves you incapacitated, your successor trustee can handle your financial affairs without the need of court appointed guardian or conservator.
  • If the beneficiaries of your trust are minor children or others who might not use an inheritance as you intend, the trust can continue to hold the assets until they reach a more mature age.
  • If you own real property in more than one state, you avoid the expense, time and hassle of multiple probate proceedings.
  • By using the “A-B” provisions in your trust, a husband and wife can pass up to 2 million tax-free dollars to heirs.
  • Trusts are generally more difficult to contest than a traditional will. To invalidate a will you must prove either it was signed under duress or that the maker was incompetent on the day it was signed. To invalidate a living trust you would have to prove it was invalid on not only the day it was signed but also each and every day it was in existence thereafter.

When a will is contested, the assets are frozen and they cannot be distributed until the claim is resolved. Assets placed in a living trust are not frozen pending the outcome of a legal challenge. Anyone wishing to contest the trust must file suit against each of the beneficiaries; in the meantime, the assets in the trust can be distributed.

Limitations of Revocable Living Trusts

Limitations of Revocable Living Trusts are relatively few, but there are some:

  • For your living trust to work properly, you must transfer everything you own into the name of the trust.
  • Living Trusts provide no income tax benefits. Any income generated by the assets in the trust during your lifetime are taxed as if they were still held in your personal name and reported on your personal 1040 income tax form.
  • A living trust provides no protection from your creditors.
  • If a trust sells an asset to a beneficiary at a price less than the assets cost basis, the loss is not deductible. Whereas the same asset sold through probate can deduct the difference between the cost basis and price sold as a loss.
  • Upon death, trusts are required to make quarterly estimated income tax payments, whereas a probate estate need only pay annually.
  • Fees for creating a trust have traditionally been more than for preparing a simple will.

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