When you’re beginning to plan your estate and secure your family’s future, you may have many questions about how you can protect assets and ensure that your loved ones maximize the benefits of your holdings.
Trusts are a vehicle used by many individuals to manage assets and ensure that their wishes are met upon death. Revocable living trusts in particular offer flexible asset distribution while providing a way to reduce taxes and fees, and simplify the process of distribution. Let’s take a look at revocable trusts, what they’re used for and how you can decide whether these arrangements are best for your family.
What Is a Revocable Trust?
A revocable trust, sometimes referred to as a “living trust,” is a legal arrangement used to help determine how your estate should be managed after you die. In this arrangement, a grantor(s) transfers assets into a trust fund while retaining the right to amend or cancel the trust in their lifetime. The grantor names a trustee and possibly a co-trustee, such as a spouse, to administer the trust. In many cases, the grantor themselves is the trustee.
Why Would You Want a Revocable Trust?
In most cases, individuals use trusts as a way to manage assets after they pass on and to help heirs avoid certain taxes. Wealth and assets passed on to children or other non-marital beneficiaries through a will are typically subject to capital gains taxes. In most cases, beneficiaries will not need to pay income tax on disbursements made from the principal value of the trust. Essentially, using a trust allows your family to maintain more of their inherited assets.
Additionally, a revocable trust lets you set conditions under which assets or income from assets in the trust is to be distributed. This is important, since most wealth, particularly cash savings, is spent six months after inheritance. Using a trust, you can manage when assets are distributed to ensure that your estate provides long-lasting benefits for your children and other beneficiaries.
You can also create conditional terms to prioritize how assets should be used. For instance, you might specify that beneficiaries only use funds to pay for education or toward the purchase of a home. In this way, you can make sure that your holdings are being used wisely.
What Are the Benefits of a Revocable Trust?
There are several advantages to a revocable trust, including the tax and asset management benefits described above. But there are also other reasons to choose a revocable living trust as part of estate planning. Specifically, a revocable trust:
- Avoids probate. Assets named in wills, especially for large estates, are often distributed through the probate process. If there is a dispute or a question about assets or inheritance, beneficiaries and/or descendants may even need to take the matter to probate court. Going through probate will incur attorney fees and court costs, which can absorb a percentage of the estate — in some cases, as much as 4 percent of the total value. A revocable trust allows you to more efficiently specify terms and automatically distribute assets upon your death.
- Allows you to benefit from assets in the event that you become disabled. A revocable trust lets you retain access to assets, particularly property, even if you become mentally or physically incapable of managing your affairs. This can help you avoid certain complications that you may face if you rely solely on power of attorney.
- Lets you amend the trust in your lifetime. Life is unpredictable, so it’s entirely possible that your trust will need to be amended in your lifetime. Using a revocable living trust allows you to do so without any legal consequences.
- Enables faster distribution of assets. Because assets in a trust do not need to go through probate, they are usually distributed to beneficiaries faster.
What Are the Disadvantages of a Revocable Living Trust?
It’s important to recognize that a trust is not necessarily a replacement for a will. You cannot designate powers of attorney, establish guardianship or distribute certain assets through a revocable trust.
Additionally, there are some other shortcomings you should consider before you decide to create a revocable trust. Specifically, revocable trusts:
- Are not a good fit for certain assets. It can be expensive to retitle assets. Because of this, certain assets, like a motor vehicle, are not necessarily a good fit for a trust fund.
- Do not adjust automatically to changes in circumstances. If beneficiaries get divorced, die, have a child or experience other life changes, the trust will not be automatically amended. That means you will need to revisit your trust’s terms regularly in order to ensure that they are up to date.
- Do not provide tax avoidance on earned income. Income generated by assets in a revocable trust, such as interest or dividends, is subject to income tax.
How Do I Set Up an Irrevocable Trust?
A trust is a legal document, which means it can be disputed in court. Therefore, it’s imperative that terms are clearly stated and all loose ends are tied up to avoid costly and potentially embarrassing litigation.
That’s why most people choose to hire a revocable trust attorney to help them draft and administer a trust. Estate planning lawyers can also offer advice on which trusts and estate vehicles are right for you and your family and help you prioritize what you want for your spouse, children, grandchildren and/or other beneficiaries.
A revocable trust lawyer can also help you inventory your assets and decide which are right for a trust. Most importantly, they will help you avoid fees, court battles, and unnecessary taxes so your family can maximize the benefits of your estate.
The Law Offices of Kimberly Butler Rainen Is Your Ally in Revocable Trust Planning
At The Law Offices of Kimberly Butler Rainen, we know how confusing and emotionally challenging estate planning can be. That’s why we try to help our clients make informed choices, offering peace of mind that loved ones will be cared for long after they pass.
We’ll work with you to create a plan that works for your specific circumstances while providing you with support as you make these difficult decisions. We invite our neighbors in the Andover, Massachusetts, area to get in touch today for a consultation.