Using Revocable Living Trusts
1. WHAT IS A REVOCABLE LIVING TRUST?
A revocable living trust is like a bucket into which you place your property. During your lifetime, you maintain full control as the “trustee” or manager. If you become incapacitated, the successor trustee you name can manage your property without having to set up a court conservatorship. Upon your death, the property in your living trust will be distributed by your successor trustee according to the instructions contained in your living trust without having to go through probate.
2. HOW IS PROPERTY RETITLED TO A REVOCABLE LIVING TRUST?
Normally the lawyer’s office assists you in doing the initial transfers. Land is transferred using a deed, and brokerage accounts are changed by notifying the brokerage company to change the title on your account to you as trustee of your trust. Personal property in your house is transferred using an assignment that refers generally to household goods, furnishings, and personal effects that you own now and in the future. You are not required to list each item of personal property. Cars do not have to be titled in the trust name because there is a special statute that allows cars to pass outside of probate. Your regular checking account is often kept in your name, but made payable on death to your trust.
It is important to remember that when you buy new property to title it in the name of your trust. If you forget to do this, a probate may be necessary to transfer any asset not in your trust at the time of your death. We provide you with instructions on how to title new property in the name of your trust.
3. HOW ARE LIFE INSURANCE AND RETIREMENT BENEFITS HANDLED WITH A REVOCABLE LIVING TRUST?
Although life insurance benefits pass directly to the named beneficiary outside of probate, the beneficiary on your policies is generally changed to the name of your living trust. This way, the proceeds can pass through the trust in accordance with your instructions in the trust. It may also be necessary to have the life insurance proceeds pass through the trust to help reduce or eliminate death taxes at the second death.
Retirement benefits (including IRA’s) are subject to special income tax rules. The surviving spouse can sometimes roll the benefits to an IRA and continue the income tax deferral. For this reason, the spouse is often left as the primary beneficiary on retirement benefits, with either adult children, or a trust for minor children named as the alternate beneficiary if the spouse is deceased.
4. IF I HAVE A LIVING TRUST, DO I STILL NEED A WILL?
Yes. A special type of will called a “Pourover Will” is used with the living trust. This will simply pours over to the trust anything that you forget to put in the name of your trust. This property will have to go through probate, but it will pass according to the instructions in your trust.
5. ARE THERE ANY ADVERSE INCOME TAX CONSEQUENCES OF CREATING A LIVING TRUST?
As long as you are the Trustee or Co-Trustee of the trust, no separate tax return will need to be filed for the trust. Your social security number will still be used with your bank and brokerage accounts for reporting income. Thus, the income, deductions, and credits on property in the trust will still be reported on your personal tax return. The transfer of assets to your revocable living trust are also not considered taxable gifts.
6. DOES SETTING UP A REVOCABLE LIVING TRUST SHIELD MY ASSETS FROM CREDITORS?
No. With a revocable living trust, since you can reach your assets at any time, so can your creditors. Property is generally protected from creditors only if it is irrevocably transferred to another person or to an irrevocable trust.
Note: This memorandum is intended as a summary of estate planning issues. It is not intended as specific legal advice applicable to all fact situations. You should consult a competent advisor to determine which estate planning techniques are best suited to your needs. The legal rules set forth in this outline are those that exist as of the date of this outline, (2000), and may change at any time.