Revocable Living Trust Overview - Definition, Why It Is Different than a Will & Eight Surprising Facts About It
One of the most common types of trusts that are used is a revocable living trust. These trusts have many potential benefits over traditional wills and are not that difficult to set up. This article is going to explain what a revocable living trust is and how it differs from a traditional will. It will also cover eight surprising facts that you may not know about them.
What Is a Revocable Living Trust?
A revocable living trust, otherwise known as a living trust, is a legal entity that a person creates to hold their assets. These assets can include a wide variety of things like personal property, cash, and a variety of investments like stocks and bonds.
The purpose of a revocable living trust is to establish a set of rules for how you want to have your assets divided after death. The four main components associated with a trust are the grantor, the trustee, trust assets, and the beneficiaries.
The grantor is the person who originally creates the trust. They typically maintain full ownership and control of the trust for its duration until their death.
The trustee is the person or company that distributes and manages the assets that are stored in the revocable living trust. While alive, the grantor typically acts as their own trustee and manages the trust accordingly. In the event they become mentally incapacitated, control is transferred to the successor trustee.
The trust assets are all of the things like property, cash holdings, as well as investment instruments that the grantor decided to include in their trust. Not all assets are automatically included in a trust since it is based on the grantor’s preferences.
The beneficiary is the group of people who are selected to receive disbursements from the revocable living trust once the grantor has passed away. It is not limited to family and is personally selected by the grantor when the trust is set up.
Why Is It Different Than a Will?
The main way that a revocable living trust differs from a will is that you are effectively transferring ownership of your assets over to the trust while you are alive. You still maintain control of your assets and property as long as you are in proper mental health.
With a will, all of your assets stay in your name. Another difference between trusts and wills is that trusts take effect as soon as you create them. With wills, they only take effect after you have passed on.
Eight Surprising Facts About A Revocable Living Trust
1. Avoid Probate
One of the most surprising facts and biggest benefits about trusts is that they are a great way to avoid probate. This is especially useful for people who own property in several different states since probate can be a very time consuming and expensive process. Trusts typically take precedence over assets that you may have also named in your will.
2. Opt for a Private Solution
Another potential pitfall with traditional wills is that probate proceedings often expose your assets to the general public. This is due to the fact that court proceedings are public record. By avoiding probate with a living trust, you can ensure your financial affairs remain as private as possible.
3. Eliminate Potential Disputes
With traditional wills, they can be challenged by family members who seek to alter the agreement. This can delay distributing your assets and often results in significant legal fees for your loved ones. With trusts, you can specify which family members need to be omitted and avoid the hassle of delaying the distribution of your assets.
4. Establish a Long-term Plan
One of the most useful things that you can do with trusts that you can’t do with wills is establish a long-term income source for your loved ones. Trusts can be modified to only disburse certain amounts of money during a predefined period. Your additional assets are continually managed by a third-party investment group that you selected when you created the trust. This helps guarantee that your assets continue to help your beneficiaries throughout their life.
5. Increase Your FDIC Protection
The FDIC protects bank account holdings by insuring them for up to $250,000 for each participating bank and qualifying account type that you have. Instead of spreading your assets out across multiple banks to get adequate protection, you can use a trust instead. The $250,000 protection limit is applied for up to five beneficiaries increasing your total protection to $1,250,000 for a single account.
6. You Will Still Need A Pour-over Will
A revocable living trust is not meant to fully replace a will. This is why people who use a trust often create a pour-over will. These documents typically contain details for basic items that typically transfer directly to an heir without much effort. For individuals with children, wills are crucial because they allow you to name a guardian which cannot be done with a trust.
7. Assets Are Still Taxed
It is important to note that assets are still always taxed with trusts. For tangible assets like property, the taxes are levied by the taxing authority where the asset is located. For investment instruments like stocks and bonds, the taxes are assessed based on the location of the person who created the trust.
8. Tax Reduction Strategies Exist
While trusts are still taxed just like regular accounts, there are certain strategies that can be applied to the account to help reduce tax penalties. These strategies are particularly useful for especially large estate holdings. Consult with your tax professional or accountant to see what options are available for your home state.
You should now have a sound understanding of what a revocable living trust is and how it differs from a will. Using the eight facts you have learned about them, you should now be able to use them much more effectively. Be sure to discuss any questions you may have with your legal counsel and financial advisors.