Revocable Living Trusts
As an estate planner, I see a lot of revocable living trusts. Either because I draft them for clients, assist clients with making changes to them or help with administration after a death. So what is a revocable living trust? What are the advantages and pitfalls of such a trust? And, when is it a good idea to use a revocable living trust?
Revocable living trusts go by a number of different names. Generally, they are referred to as Living Trusts or Family Trusts or some variation of those names. I’ll use the name “Living Trust.” A Living Trust is a trust that you create while you are alive. You are the maker of the trust, or grantor, you are frequently the trustee of the trust, so you maintain control over the assets of the trust, and you are the primary beneficiary of the trust. Thus you can use the assets or income of the trust while you are alive.
The key aspect of a Living Trust is that it is “revocable.” This means you can terminate or change the trust any time you desire. You can also add or remove property from the trust at any time. This can be a very handy tool to have at your disposal. For instance, most Living Trusts say that all trust assets will be used for the makers of the trust while either are alive then pass to children equally. However, if you have a falling out with a child, you can change the terms or the property of the trust to reduce or eliminate that child’s inheritance.
There can be many benefits to a living trust depending on your situation. The most universal benefit is that, if planned correctly, you can avoid probate and its costs and hassles. In Washington State, however, this may or may not be a big deal. Unlike some other states, probate in Washington is often a fairly streamlined process. Also, if you desire privacy, a Living Trust can be quite valuable. While probate is a public process, administration of a Living Trust is generally a private matter.
However, there are some pitfalls to Living Trusts. First, you generally cannot protect assets in a Living Trust from the IRS or other creditors. Second, this type of trust has no present income, gift or estate tax benefits because the IRS generally doesn’t even recognize the trust (that can change once one spouse dies). Additionally, at least in Washington, a Living Trust will not help you or your spouse qualify for Medicaid if that is something that needs to be done.
While there may be other reasons, a Living Trust is useful where you have real property in multiple states, as it can eliminate the need for a probate in two or more states. This will reduce cost and hassle. If you want privacy, the Living Trust is also very effective, and if you want to avoid probate in the state where you live the Living Trust may do that as well.
