Pros and Cons of a Revocable Living Trust

Posted by on Aug 9, 2011 in Articles, Trusts and Estates | Comments Off on Pros and Cons of a Revocable Living Trust

Pros and Cons of a Revocable Living Trust

What is a Revocable Living Trust?

A Revocable Living Trust is an arrangement that allows you to control how your assets are managed and distributed during your lifetime and also upon death.

A Revocable Living Trust normally involves three parties:

The Grantor (also called Trustor or Settlor): The Grantor creates the trust and usually funds the trust. More than one person can create the trust, such as when a husband and wife create a joint family trust.

The Trustee: The Trustee holds title to the trust property and manages it according to the terms of the trust. The Grantors often serve as trustees during their lifetimes, and another person or a corporate trust company (for high value trusts) is named to serve as successor trustee after the Grantors’ death or if the Grantors are unable to continue serving for any reason.

The Beneficiary: The Beneficiary is a person or an entity that will receive the income or principal from the trust. This is usually the Grantors during their lifetimes and the Grantors’ children (or anyone else the Grantors choose) after the Grantors’ death.

FAQ

  • Q: Can the Revocable Living Trust Act as a Substitute for a Will?
  • A: In most situations, the Revocable Living Trust can be used as a substitute for a will by providing for the distribution of assets upon the Grantor’s death. The Grantor needs to ensure that all of the Grantor’s assets have been transferred to the Revocable Living Trust prior to death. Generally, it’s recommended that the Grantor implement a simple pour-over will, which includes a provision to “pour over” any remaining assets into the Revocable Living Trust.
  • Q: Is Distributing Assets Via a Revocable Trust a Faster and Less Costly Method of Transferring Assets than a Will?
  • A: This depends on the situation. Probate is the legal process of administering the estate of a deceased person under a valid will. A competent and knowledgeable trustee can transfer assets quickly and less costly than opening a probate with the court. Please note that corporate trustees are reluctant to act as trustees except in multi-million dollar trusts. Usually, the successor trustees are the Grantor’s children, relative, or family friend. At the time of death, the successor trustee may be overwhelmed and not necessarily know what to do. Probate, which necessarily includes a probate attorney, can help family members and relatives transfer assets. In addition, if you have a simple estate, probate costs in Washington are not high.
  • Q: Can you Revoke or Amend the Trust?
  • A: If the trust is designated as a “revocable” trust, the Grantor has reserved the right to amend or revoke the trust during his or her lifetime.
  • Q: Can you Add or Remove Assets?
  • A: The Grantor may remove assets from or transfer assets to the Revocable Living Trust at any time while the Grantor is competent.
  • Q: How Should you Report the Assets of the Revocable Living Trust on Your Tax Return?
  • A: All income or losses generated by assets in your Revocable Living Trust should be reported on your individual federal and state income tax returns (if applicable).
  • Q: How should you Sign on Behalf of the Revocable Living Trust?
  • A: Whenever you are acting on behalf of your Revocable Living Trust, always sign your name as “Trustee.”
  • Q: Does Transferring Assets to a Revocable Living Trust Reduce or Eliminate Federal Estate Taxes?
  • A: No. Federal estate tax cannot be avoided by simply transferring property to the trustee of a Revocable Living Trust. The value of the trust estate is included in the decedent Grantor’s gross estate and is subject to federal estate tax. The value of such property may be determined as of the Grantor’s death or the alternate valuation date. For 2010, the current unified credit exemption is $1,000,000, meaning if your estate is less than this amount, you will not be subject to federal estate tax. This amount could change in later years.
  • Q: If Transferring Assets to a Revocable Living Trust does not Reduce or Eliminate Federal Estate Taxes, Why Set up a Revocable Living Trust?
  • A: A Revocable Living Trust may not be the best arrangement for all situations. The primary reasons why people choose to set up a Revocable Living Trust are as follows:
    1. Privacy. Opening a probate means that the beneficiaries and Last Will and Testament are public record.
    2. Restrictions. A Revocable Living Trust allows the Grantor to implement restrictions over how assets are managed before and after death and even for adult beneficiaries.
    3. Real Property Held by Non-Resident Aliens. Non-Resident Aliens, whose primary residence is outside of the United States, may want to transfer real property to a Revocable Living Trust to ensure a smooth title transfer after death.
    4. Avoid Ancillary Probate. If you reside in another state and own real property in Washington, transferring property to a Revocable Living Trust will avoid an ancillary probate in Washington (meaning a second probate in another state

The following articles are published for informational purposes and not for the purposes of providing legal advice. Please contact Galvin Realty Law Group at 425.248.2163 for a consultation about your specific needs and circumstances.