You may have heard of a revocable living trust (RLT), which is a commonly used estate planning solution. But what exactly are they, who is affected by them, how can they be changed, and what do they accomplish?
What Are They?
Trusts, which are legal entities that hold title to property for the benefit of a living person, are 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 at any time prior to your incapacity or death. RLTs are distinguishable from irrevocable living trusts, which are difficult to alter after their creation.
Who Is Affected by Them?
A few key definitions will be helpful to have when discussing trusts:
- The living person or charity benefited by the trust, but who does not have legal title to the money or property in the trust, is called a beneficiary.
- The individual who creates the trust, decides how it will operate, and determines what property or funds to include in it is called the grantor (but may also be called the settlor or trustor).
- The trust is administered by a trustee, who is in charge of managing and investing the funds or property in the trust and distributing them to the trust beneficiary according to the grantor’s instructions, memorialized in a trust agreement.
Typically, the grantor 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, though not always, the grantor of the RLT is both the initial trustee and primary beneficiary. So, you create the trust and transfer the funds or property to it, 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, and any income earned by the trust is taxed as the grantor’s personal income.
How Can They Be Changed?
If circumstances change, as they often do, you can alter the RLT through amendment, restatement, or revocation. Typically, a trust amendment can be made by attaching a properly drafted and executed 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 “restate” or rewrite the entire original trust agreement incorporating any necessary changes instead of revoking the original trust and creating and transferring assets to a completely new trust. There are circumstances when neither an amendment nor a restatement are appropriate, in which case you can revoke the trust. A revocation may be warranted if a major change such as a divorce or death of a beneficiary occurs and involves dissolving the trust entirely and transferring the assets owned by the trust back to yourself or into another trust.
The law of most states provides that changes should be made according to instructions provided in the trust document, or if there are no instructions, in a way that clearly evidences your intention to make the changes. For example, if you amend the trust, you should create a written document, signed by the grantor and trustee, with a title that shows it is an amendment to the specific trust you are amending. The document should set forth the trust’s name, the date, and the name of the trustee. It should also state the section of the trust document that allows amendments to be made and should identify the part of the trust that will be changed, deleted, or added to. If there is more than one grantor and the changes are made by fewer than all 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 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 spouse or partner can amend or revoke the trust without any action or approval of the other one with regard to the portion of the property attributable to their contribution.
- If the trust owns community
property—which, according to the law of some states (but not
Massachusetts), 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.
- In most states, the character of the property interest as community or separate property is not altered when it is transferred to or from a revocable trust.
- Joint property, that 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 separate/individually owned property, in which both are grantors and trustees, and which either of them can amend or revoke during their lifetime. In fact, each spouse should 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 Help Accomplish?
Plan for your own incapacity. Although an RLT allows you to retain control over your assets, it is important to plan ahead in case you are unable to do so in the future. In an RLT, you can authorize a co-trustee or a successor trustee to manage the trust property if you become incapacitated as a result of an illness or accident. Otherwise, your family member will have to rely on a financial power of attorney or go to probate court to ask for legal authority to manage your finances.
Avoid probate. When you pass away, none of the assets properly titled in the trust will need to go through a long and potentially expensive probate process that could delay a beneficiary’s access to those assets for months or even 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 when assets are distributed according to an RLT.
Protect the surviving spouse. If you are married, an RLT provide the inheritance going to the surviving spouse is protected from a remarriage or lawsuits. It can also provide certainty that if you predecease your spouse, that the inheritance will ultimately go to your intended beneficiaries. The RLT can also help reduce any potential Massachusetts estate tax when the surviving spouse passes away.
Protect 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, vulnerable to creditors, lost in a divorce, or wiped out as a result of other life events your beneficiaries may experience.
What to Do Next
An RLT has many benefits, including enabling you to continue to manage your assets while also providing protections for your beneficiaries. As experienced estate planning attorneys, we can help you plan for the future by establishing a new RLT or changing the terms of an existing one. Call us today to schedule an appointment to discuss this or any of your other estate planning needs.
This post is for informational purposes only and is not intended to be construed as legal, financial, tax or written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.