The Estate Planning Center, LLC -- Estate Planning Articles

Revocable Living Trusts (RLTs) are popular estate planning tools. For some people an RLT is just right for their circumstances, for others it is too much, and for still others it is simply not enough. The purpose of this article is not to provide a legal treatise on the subject of RLTs, but rather to introduce you to how they work, some of their benefits and drawbacks, and some important issues to consider when creating an RLT.

RLT Basics

     An RLT is a written legal agreement involving three parties: the Trustmaker (also known as a Grantor, Trustor or Settlor), the Trustee and the Beneficiary. Initially, upon the trust creation, the Trustmaker, Trustee and Beneficiary are one-in-the same person. Moreover, there can be, and often are, two or more Trustmakers, Trustees or Beneficiaries at any given time. [Note: Depending upon the law of their jurisdiction and their unique circumstances, a married couple may have joint or separate RLTs.]
     After the Trustmaker and Trustee sign the RLT legal agreement, the Trustmaker funds the RLT (i.e. re-titles assets into the name of the RLT). This is a critical step, much like putting fuel into a brand new automobile. Once the RLT is signed and funded, the Trustee manages and distributes the RLT assets according to the instructions in the written legal agreement.
     Later, if the Trustmaker/Trustee becomes incapacitated (as defined in the RLT agreement), then the successor Trustee seamlessly manages and distributes RLT assets for the Trustmaker/Beneficiary according to the instructions in the trust. Since the Trustee holds legal title to the RLT assets for the Beneficiary, the Probate Court need not interfere in the financial affairs of the incapacitated Trustmaker/Beneficiary.
     Finally, upon the death of the Trustmaker/Trustee/Beneficiary the RLT becomes irrevocable and the successor Trustee seamlessly manages and distributes RLT assets for the successor Beneficiary according to the instructions in the trust. In most jurisdictions, the Probate Court need not interfere in this process of transferring assets from the deceased Trustmaker to their Beneficiary.

RLT Benefits

While the benefits of RLT-based planning vary from jurisdiction to jurisdiction, the most commonly cited RLT benefit is Probate Court avoidance. And the most commonly cited three drawbacks to Probate Court are the potential for unnecessary delays, costs and publicity. Given the choice, most people would rather avoid any court process that may tie up their assets, reduce the amount of those assets through court costs and legal fees, and expose otherwise private personal and financial matters to the public record. [Note: If you own real estate in more than one jurisdiction, then you may be subject to the Probate Court in each of those jurisdictions.]

RLT Drawbacks

As noted above, for an RLT to operate as designed it must be funded. If you are not meticulous in ensuring that your RLT has either present title to your assets or will have future title to them (e.g. life insurance proceeds), then your estate may not avoid Probate Court. The fees for establishing an RLT-based estate plan are often higher than the fees for establishing a Will-based estate plan. These fees must be considered in light of the customary probate fees in your jurisdiction. In some jurisdictions the benefits of avoiding Probate Court are greater than in other jurisdictions.

RLT Considerations

     The selection of your successor Trustee is one of the key decisions you must make when creating your RLT. Common options include appointing a trusted family member/friend, a professional fiduciary, or even a combination of the two. There is no right answer, just the one that is right for you.
     Make sure your RLT incorporates flexible estate tax planning. Your RLT should be drafted to provide maximum protection from this form of taxation. Even if the estate tax is repealed, it can always be reinstated. Also, some states have decoupled their estate tax from the federal estate tax.
     Finally, only you know the strengths and weaknesses of your loved ones. Ensure that your RLT contains special planning to protect the inheritance both for and from your loved ones, as may be necessary. If you are divorced, you might wish to ensure that your ex-spouse cannot inherit your assets through your mutual children, as well.
     [Note: Before planning your estate, you should consult with qualified legal counsel to determine the most appropriate approach.]

Funding Your Trust

Trust Funding is the process of placing your assets under the ownership and control of your Revocable Living Trust (RLT). It is a vital component of any RLT-based estate planning process. Only those assets that are titled in the name of your RLT (or that designate your RLT as beneficiary, where appropriate) will be controlled by the terms of your RLT. Otherwise your assets may be subject to probate, may lose valuable protection from estate taxes and may not pass to your beneficiaries as specified in your estate plan.

There are three fundamental steps in the Trust Funding process:

Here are some common assets and general funding instructions for them:

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