A GUIDE TO THE REVOCABLE LIVING TRUST

The Revocable Living Trust is touted as one of the best strategies for estate planning. It offers several unique advantages—you can keep your estate private, provide for the next generation, and reduce legal hassles for your beneficiaries. Some of the things you can do with a Revocable Living Trust are:

• Lower or eliminate taxes
• Avoid the probate process
• Easily pass on assets to your children
• Keep your estate and estate information private
• Retain control of your assets without the legal obligations
• Protect yourself and your estate in case of illness, injury or death

What is a Revocable Living Trust?

A Revocable Living Trust, or simply living trust, is an entity created to hold one’s property and assets for protection, privacy or transfer purposes. The trust itself is a document bearing the ownership or title, making it the legal owner of the assets although the previous owner (called the trustee) retains full control. That means the trust’s ownership of the asset is simply for legal purposes, and the trustee can still buy, sell, borrow, or transfer property to the trust as he likes. The process of transferring titles of assets to a living trust is called “funding,” or funding your trust.

The living trust works much like a will, as it provides details on how the estate will be handled after the owner’s death. However, there are a few differences, such as the following:

• The trust does not undergo probate
• The courts cannot control assets in the trust if you are incapacitated
• You maintain control over the assets you intend to leave to minors or grandchildren

For many, the main advantage of the Revocable Living Trust is that the trustee can freely access his assets during his lifetime, with the trust serving as a representative to take care of all legal procedures. It also makes transferring assets much easier than with a will, since the probate process will be avoided.

What is probate?

Probate is a court-administered process used to identify heirs to an estate whose owner is deceased and transfer it accordingly. The state of having no heirs is known as “intestacy,” and a person who dies without leaving a will or trust is said to have died “in testate.”

Many people believe that drawing up a will can avoid intestacy, and thus avoid probate, but it only takes care of the first step: identifying the heirs. Probate is still needed to divide the estate among them. The process tends to be costly and dragging; it is not uncommon for probate to cost as much as 10% of the asset’s value and drag on for several years. Joint tenancy, in which the children’s names are filed on the property, can only shorten the process but not avoid it altogether. A living trust, on the other hand, can fully bypass probate.

Not all estates have to undergo probate. Usually, it only applies to real property valued at over $20,000 or to a total estate exceeding $20,000 to $100,000 (depending on the state).  If the estate does not meet these criteria, title transfer can be as simple as an affidavit procedure. But since most homes are worth more than the minimum, virtually all estates are subject to probate.

Likewise, not all individual assets qualify for probate. A jointly owned asset automatically goes to the surviving spouse if the other passes away, although it will go through probate when the surviving spouse dies. Assets with beneficiaries are also spared from probate. Examples are annuities, IRAs, and insurance policies.

The probate process

When the owner of an estate dies, the family will be instructed to attend a probate meeting when they try to settle claims or arrange other affairs. The process varies from one state to another, but most courts include the following steps:

• Reading of the will: The court reads the will to the family attending the meeting, and determines if the owner was competent when the will was made (i.e. it was made in good faith and knowledge). If there is no will, the state’s inheritance laws apply.
• Hiring an attorney: The owner usually appoints an attorney in the will; otherwise, the family can hire another.  Fees can be a fixed rate, ($75 to $250 per hour) , or a percentage of the estate. (.005% to .04%)
• Petitioning for probate: A petition is necessary to identify an executor to represent the estate, usually a child of the deceased owner. You may need to provide proof of heirship, find witnesses, and file oaths.
• Preparing inventory and appraisal: The court will inform all banks, insurance companies, business interests, and other institutions that a probate is under way. Assets usually cannot be sold during probate. 
• Administration of the will: This is where the instructions in the will are carried out.
• Tax return filing 
• Settling of the claims 
• Distribution of the estate

Other disadvantages of probate

Cost: Studies show that an average of 4% to 10% of one’s gross estate can be lost during probate, not to mention liabilities such as debts and mortgage. There are usually two types of fees involved: statutory and extraordinary. Statutory fees are established by state legislature, such as property and estate taxes. Extraordinary fees are those paid during the probate itself, particularly the attorney’s fees.

Time: A probate can last between six months to two years, often dragging on up to four years in difficult cases.

Lack of privacy: Probate transactions are kept on public record, so your estate details – size, assets, beneficiaries, etc – is available to the public. Often, this leads to family disputes and makes you vulnerable to dodgy solicitors.

Lack of control: Children will have no choice but to go through probate if their parents did not leave a will. They have no say on the meeting schedules and venues, as the probate is held wherever the deceased owns property. The court also decides who gets a share of the estate, how much they get, and when they get it.

How does a Revocable Living Trust work?

A trust avoids probate by putting the estate in the name of the trust before the owner dies. It works like a bridge over the chasm of intestacy, allowing your beneficiaries to access your estate without going through the courts. With the assets in the name of the trust, passing them on is as simple as transferring ownership from the trust to the beneficiary.

If a trust is set up by a husband and wife, both spouses can be primary trustees. This way, if one of them dies, the remaining spouse gets full control of the assets for the rest of his or her life. After both spouses pass away, a successor trustee appointed in the trust will manage all the assets as stated by the primary trustees.

Who are involved in the living trust?

The following are the people commonly involved in a Revocable Living Trust and their respective roles.

Grantor: The person/s who set up the living trust, also called the trustor, settlor, or creator. The grantor can do as he likes with the trust, such as change its terms, add or remove assets, or terminate the agreement.

Trustee: The trustee manages the assets placed in the trust. The grantor and trustee are usually the same person until he or she passes away, in which case the successor trustee takes over. Married couples are usually referred to as co-trustees.

Successor trustee: This is the person assigned to manage the trust if the primary trustee dies or becomes incapacitated—the trust equivalent of the probate court. He or she immediately gets the same powers as the primary trustee, particularly in distributing the assets as per the grantor’s instructions. However, they do not have the right to change anything in the trust; it becomes irrevocable after the grantor dies.

Beneficiaries: These are the recipients of the trust’s assets. Usually, the estate automatically goes to the surviving spouse, or if there is none, to the people named in the trust. A grantor can name any person or organization as a beneficiary; it does not have to be a relative or family member.

What is included in a Revocable Living Trust?

• Declaration of the trust, including the main powers and listing of assets included
• Trust amendments: These are amendment forms that you can use to change the terms of the trust. You can make amendments whenever necessary.
• Certificate of Revocable Living Trust: This is basically a shorter version of the trust. It serves as proof of the trust’s existence and discusses the roles of the trustees. Banks and financial institutions usually require this during title transfers or changes.
• Last Will and Testament: Also called the Pour-over Will, this is a brief will declaring that assets not included in the trust will be transferred or ‘”poured over” to it after your death.  The pour-over usually involves a probate process.
• Financial Durable Power of Attorney: This document allows your successor trustee to manage assets within the trust, and sign on your behalf in case you are incapacitated. Your successor trustee receives Financial Powers of Attorney to the trust’s assets. Note that you must own assets outside of the trust, such as annuities, IRAs and pension plans, purely for tax reasons. The successor trustee has no authority over these assets; these are managed by an Attorney-in-Fact appointed in the document.
• Health Care Durable Power of Attorney: This document authorizes someone else to make health-care decisions for you in case you are unable to do so. Even your family members need this document to act on your behalf. Also, unless you state otherwise, it gives your attorney-in-fact authority to approve an autopsy, donate body parts, or direct the disposition of your remains. It only takes effect once you are incapacitated. If you did not appoint an Attorney-in-Fact, the court will make all necessary decisions for you.
• Directive to Physicians: This is also called the Living Will. It tells the doctors that you do not want to be sustained by life support or other artificial means if you are terminally ill.
• Funding Instruction Guide: This consists of several parts, which include the following:
  • Personal property – for objects that do not have written ownership, such as jewelry, books, appliances, furniture, and clothing.
  • Jointly owned assets – reassigns your rights and interests to you as co-owners to you as co-trustees. There are individual assignment forms for each asset.
  • Separate Property of Husband and/or Wife – for assets individually owned by each spouse, such as those acquired before marriage. You can transfer these assets to a joint trust but still retain separate ownership, just so you can avoid probate on those assets.
  • Assets with Named Beneficiaries – these cash flow notes such as annuities, insurance, 401K plans, pensions, and employee benefits. They are not subject to probate and may be excluded from the trust, but you should make it clear that the trust is a  contingent beneficiary. That means they will automatically be included in your trust upon your death.

• Distribution of Personal Property – this is a personal letter addressed to your loved ones, where you can include burial instructions, details on distribution of property, and other personal wishes. It also includes a Certificate of Personal Property Distribution, which is meant for specific items not mentioned in the other forms.
• Information for Survivors – instructions for either your spouse or successor trustee to manage your affairs after you die.
• Planning for Catastrophic Illness/Incompetency – Catastrophic illnesses are those that are too expensive in relation to your estate. This document helps you avoid draining your assets in such events.
• What to do When Someone Dies – tells the surviving spouse of successor trustee how to settle the estate in case one of them dies. Note that this gives the person absolute control of the trust’s assets without requiring an attorney, although they may choose to hire one to help them in important decisions.