A living revocable trust is a trust created during the lifetime of the grantor. Under this instrument, the grantor acts as the trustee during their lifetime and retains complete control over the corpus of the trust. While the grantor is alive and has capacity, they have the authority to revoke the trust, change the terms of the trust, remove property from the trust, and add property to the trust.
A living trust involves three parties: (1) the grantor, (2) the trustee, and (3) the beneficiaries. The grantor creates the trust, and sets up the terms of the trust. The trustee refers to the individual or institution that the grantor chooses to carry out the terms of the trust. In living revocable trusts, the initial trustee is almost always the grantor. The future trustees are often referred to as the successor trustees. The beneficiaries are the parties that will benefit from the creation of the trust. In order to create a living trust, the grantor must be legally competent.
After a living trust agreement is executed, it is up to the grantor to fund the trust, and retitle assets in the name of the trust. A living trust may be thought of as an empty shopping cart; it is up to the grantor to take each asset they want in the trust and place it in the trust himself or herself.
Generally, the successor trustee takes over when the grantor dies or becomes incapacitated.
Usually, a living revocable trust does not become irrevocable until the grantor passes away. Although the trust cannot be revoked while the grantor is incapacitated, it is possible that the grantor will regain capacity before they die. Therefore, a rule allowing a revocable living trust to become irrevocable upon the incapacity of the grantor would be ill-advised.
The most commonly cited benefit to a living revocable trust is avoiding probate. Generally, all of the assets transferred to a living revocable trust during the grantor’s lifetime will not be subject to the probate process. Most people, if given the choice, want to avoid the probate process. The probate system is subject to delays and greater third party interference. It is also subject to greater publicity, since wills are a matter of public record and anyone can go down to the local court and discover who inherited money under recently probated wills. The greatest benefit to clients, however, is usually the amount of time necessary to settle the estate of a deceased relative with a revocable living trust. While the probate process can take months or even years in some cases, a revocable living trust may allow the grantor’s estate to be settled within days or weeks of their death.
Living revocable trusts also allow grantors to protect their assets for future generations. Under a living revocable trust, beneficiaries can be labeled as income beneficiaries or remainder person beneficiaries. Income beneficiaries receive the income of the trust corpus according to the terms set up by the grantor, and remainder person beneficiaries are the ones who ultimately benefit from the trust property. For example, a spouse may leave income to their spouse for life, and the remainder to their children. This may be more attractive to the grantor then an outright disbursement of the trust corpus to the wife. If the grantor’s wife becomes ill and needs to go into a nursing home, the money from the corpus could not be disbursed to pay for the home. Therefore, the children will not be divested of their entire inheritance because the wife has no right to the corpus of the trust. While the grantor could have directly distributed money to their children upon their death, they may feel that the children were too young to prudently enjoy their inheritance. Similarly, a living trust is often used to protect individuals from creditors and immaturity.
A living revocable trust offers several other benefits. As highlighted in the preceding paragraph, this type of instrument allows the grantor to retain control of how the money is disbursed after they die. It is important to discuss with an experienced estate planning attorney how a living revocable trust may benefit your unique situation.
One of the disadvantages to a living revocable trust is that it is usually more expensive to set up than a will. Generally, trusts are more complex documents to draft than wills. Also, there are costs associated with retitling assets in the name of the trust. For example, if a grantor owns land they will need to transfer the ownership of the house to their trust. Retitling assets may involve both legal fees and administrative expenses, depending on how complex your estate is.
Another disadvantage is that your property, generally, will not be protected from creditors since you still retain ownership over the assets in the trust.
Finally, a living revocable trust should not be thought of as a do-it-yourself project. There are many misconceptions about what revocable living trusts do, and you may cost your family time and money by trying to execute one on your own.
Generally, a gift must meet three conditions to be considered complete: (1) delivery, (2) donative intent, and (3) acceptance. Since this type of trust is completely revocable, the gift is considered incomplete and there is no gift tax consequence for assets placed into the trust.
The grantor retains ownership of property placed within a living revocable trust. Therefore, all income earned by the trust will still be taxed to the grantor, as if they owned the property outright.
The entire fair market value of the living revocable trust will be included in the owner’s estate under Section 2038 of the Internal Revenue Code. This provision mandates that all revocable transfers be included in the decedent’s gross estate, despite the fact that the transfer of property became irrevocable upon the decedent’s death.
There are two key differences between a testamentary trust and a living revocable trust. First, as discussed above, a testamentary trust does not come into existence until after the testator passes away. A living trust, on the other hand, comes into existence when the proper documents are executed during the testator’s lifetime.
The second difference deals with whether probate proceedings are required. Generally, a testamentary trust requires probate proceedings in the local court. This trust will not exist until the probate court recognizes its existence. Conversely, a living revocable trust seeks to avoid probate. If done correctly, a living revocable trust can completely eliminate the need for probate. Probate may not be avoided despite the existence of a living revocable trust if some assets were not transferred into the trust during the testator’s lifetime.
There are other differences between testamentary trusts and living revocable trusts. Since the terms of testamentary trusts are located within the testator’s will, they are part of the public record. Living trusts, generally, are not. Testamentary trusts are usually subject to the continuing jurisdiction of the probate court, making it easy for an interested party to bring a claim against the trustee. Under a living revocable trust, an individual seeking to bring a claim against a trustee often has to file a new lawsuit in the local court. Generally, contesting the actions of a trustee under a revocable living trust will take much longer.
Peter D. Antonoplos, Esq. is the managing partner at Antonoplos & Associates, Attorneys at Law. Mr. Antonoplos’ practice focuses on estate planning and real estate matters. Mr. Antonoplos is admitted to practice in the District of Columbia, New York, and Maryland. Mr. Antonoplos routinely lectures on real estate and probate law issues in Washington, DC and New York. Mr. Antonoplos lives in Northwest Washington, D.C. He is an avid chess player and motorcycle enthusiast. He may be reached at 202-803-5676 or Peter@AntonLegal.com.