By Lisa Hughes
Attorney and Partner,
Yates Campbell & Hoeg LLP
Once you embark on the estate planning journey, the question of whether to include a Revocable Living Trust in your plan is inevitable. Begin by learning the purpose of this tool and then determine if it makes sense for your plan.
What is a Revocable Living Trust?
In a nutshell, a Revocable Living Trust (RLT) is a stand-alone document (separate from the Will and the Power of Attorney) that creates a trust entity in which the Settlor (the person creating the RLT) benefits during the Settlor’s lifetime, and the trust continues after the Settlor’s death for the benefit of the Settlor’s other beneficiaries.
Because of these dual time periods (before the Settlor’s death and after the Settlor’s death), the way the trust is administered changes as circumstances change.
Scroll down to learn about some of the factors that make using an RLT a good idea — or not.
1. How does a Revocable Living Trust work?
A trust instrument can be likened to a box with an upper and lower chamber, as illustrated here.
The upper chamber is operative while the Settlor is alive. The Settlor is the beneficiary of the trust, and the Settlor is also the trustee during his or her lifetime.
However, if the Settlor resigns or becomes disabled, there are provisions for a successor trustee to take control for the benefit of the Settlor. This means that the RLT can also serve as a disability planning tool. As long as the Settlor is at least a co-trustee of the RLT, it is ignored for income tax purposes. There is no need for a federal taxpayer identification number for the RLT or a separate income tax return. Any accounts owned by the RLT are registered with the financial institutions using the Settlor’s Social Security number.
The lower chamber of the box represents what happens to the trust property once the Settlor dies. This is when the trust becomes the “Will substitute,” and it can have any of the provisions that can otherwise appear in a Will for the administration of trust property.
2. Does it makes sense for you to incorporate a Revocable Living Trust into your estate plan?
The answer to this question is part science and part art: The answer is, “It depends.” To find out if an RLT is right for you, answer the following questions. There are no “right” answers — only answers that are right for you!
Is it important to fund the trust during the Settlor’s lifetime in order to avoid probate in the state in which the Settlor lives and/or in states where the Settlor owns real estate, such as a vacation home?
- If probate (the process of recording the Will and marshaling, cataloging, and distributing a deceased person’s assets) is arduous, time consuming or expensive, then avoiding that process would be possible with the use of an RLT.
Is it important to obtain privacy over the disposition of your property?
- Wills are public record. If you need or desire for the disposition of your estate to remain private, then this factor tends to favor the use of an RLT. Privacy is not only for the famous. If, for example, you want your beneficiaries to pass a drug test in order to receive a distribution, or if you have a disabled beneficiary, you might prefer to use an RLT.
Is it important to allow quick access to your assets in the event of your death or disability?
- If you become incapacitated, it takes time for the agent under your Power of Attorney to obtain access to your assets in order to pay your debts and expenses. If you die, it can take time to obtain access to your assets, either because your state requires publication in a newspaper for several weeks before your executor can gain control of the assets, or because your executor needs an appointment at the court, and your locality has a month or longer wait for an appointment. If rapid access to assets in the event of your death or disability is a concern, the RLT provides for smoother and faster access to those assets by your successor trustee.
3. What concerns generally do not warrant the use of an RLT?
- Plans that address estate taxes, generation-skipping planning, asset protection planning for your children (rarely do clients want their sons-in-law and daughters-in-law to walk away with a portion of their child’s inheritance if the child and in-law divorce), charitable giving, and certain control mechanisms over the family beach house or the family business can all be accomplished in your Will, your RLT, or some other technique.
- Both the Will and RLT allow you to provide for your pets (in most states) and for any disabled beneficiaries.
- A RLT does not take assets out of reach of the Settlor’s creditors. Since the Settlor is the creator of the trust, he/she remains the beneficiary of the trust for the rest of his or her lifetime, and retains the right to revoke or amend the RLT. In essence, the RLT serves as the Settlor’s “alter ego” for asset protection purposes. Therefore, the assets contributed to the RLT to do not enjoy any special protection when Settlors have creditor problems during their life or when their probate estate is insufficient to pay their debts or expenses after they die.
Note that while asset protection planning with trusts does exist in most states, the tools used for such planning differ markedly from the RLTs discussed here.
Questions? Contact Hope Katz Giibbs, publisher of Be Inkandescent magazine by email.
About Lisa Hughes
Attorney Lisa M. Hughes is experienced at preparing Wills and trusts, Powers of Attorney, guardianships, and conservatorships; in administering estates of decedents and incapacitated individuals; and in the related tax and asset-protection planning. Her particular areas of focus include succession planning for closely held businesses, same-sex couples, and incapacitated beneficiaries, as well as certain elder-law challenges and trusts for those with special needs.
A graduate of Georgetown University Law Center, Hughes is licensed in the District of Columbia, Maryland, and Virginia, and has more than two decades of experience in estates, trusts, and wealth-planning.
Additionally, Hughes is a member of the Board of Governors of the Trusts and Estates Section of the Virginia State Bar; she is a Public Safety Trainer with the Commonwealth Autism Service; and she serves as legal counsel to Spectrum Housing Foundation, a tax-exempt organization that facilitates support for disabled adults.