Revocable Living Trust
A revocable living trust, aka inter vivos trust, is a very popular estate planning tool and the centerpiece of many plans. Although you transfer most of your large assets into the trust after it is created (e.g., home, investment real estate and securities), it may be revoked (cancelled) or amended at any time prior to death. All benefits of ownership of the trust assets continue to be enjoyed by you. Husband and wife usually serve as trustees and manage all assets held by the trust. For assets in the trust, it substitutes as a will and they can either be distributed to your spouse or other heirs at death or remain in the trust and be managed pursuant to the terms you chose when it was created.
Living trusts are typically paired with a pour-over will because not all of your assets are suitable for transfer to the trust, you may acquire assets after creating the trust and forget to transfer them to the trust and a living trust cannot be used to nominate a guardian for your children.
People use living trusts for the following purposes:
§ To ensure that their assets go to people or charities of their choice. If you don't have a trust or a will naming beneficiaries, then the court will give your property to people indicated in state laws;
§ To avoid the time and expense incurred when a court probates an estate. If you don't have a trust, the court will gather all your assets, pay your debts and taxes and give any remaining assets to your heirs. This process could take as long as a year or more and eat up 5% or more of your estate in the form of attorney, personal representative, accounting, appraisal, probate referee and court fees. The living trust will avoid many of these fees and get distributions to your heirs much sooner;
§ To maintain financial privacy. Probate is a public court proceeding, so creditors or others may review the court file to obtain information about your assets and other intimate details of your financial life. Since a living trust makes probate unnecessary, your financial privacy is maintained;
§ To manage assets upon mental or physical incapacity. A successor trustee, chosen by you when the trust is created, will take over the management of your assets. No expensive and time consuming court proceedings are necessary to appoint somebody to manage your assets;
§ To reduce or eliminate estate (death) taxes when a credit shelter trust is included in the living trust. Presently, each person has the right to shelter $2,000,000 worth of assets from estate taxes. Everything over that amount is taxed at 45%. This tax credit is wasted when the first of a married couple without a credit shelter trust passes and gives all of his or her assets to the surviving spouse. When the surviving spouse later passes, he or she must pay estate taxes of 45% on all assets over his or her $2,000,000 credit, including the assets received from the deceased spouse. So, a married couple with a $4,000,000 estate would owe $900,000 in death taxes when the second of them passes ($4,000,000 of assets - $2,000,000 tax credit = $2,000,000 x .45). If they had a living trust which included a credit shelter trust, they would take advantage of the tax credits of each spouse and would not owe any taxes when the second spouse dies ($2,000,000 of assets - $2,000,000 tax credit = zero taxes when the first spouse dies and the same calculation when the second spouse dies). The couple with the credit shelter trust would leave an extra $900,000 to their heirs (e.g., children) rather than paying $900,000 in estate taxes to the IRS;
§ To manage assets given to a minor. Giving assets to a minor after your death without a living trust necessitates a court proceeding to appoint a guardianship or custodianship to manage the assets. The court will continue to be involved in all decisions made by the guardian/custodian resulting in a cumbersome and expensive process. The living trust can avoid this expense and time and appoint the person you choose at the time it is created to serve as trustee and manage the assets for the minors;
§ To provide for a current spouse and children of a former marriage. If a living trust includes a QTIP trust, people that have been remarried may give their current spouse a life interest in, and use of, their assets. When the current spouse passes, the assets will go to children of a former marriage (or anybody else you choose). Without the QTIP trust, the current spouse is free to do what he or she wants with your assets.
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