What is a Revocable Living Trust?
Though you may be familiar with the concept of a will, you may not be aware that there are actually multiple different ways to give away your property when you die. One such mechanism is called a revocable living trust. Though the term may sound complex, the function of a revocable living trust is simple if you break down the name.
A trust describes a legal arrangement in which property is managed by a person — known as a trustee — for the benefit of another person — known as a beneficiary. When you give property or money to the trust, the trustee must use that property or money for the beneficiary. You may impose any number of restrictions on how the property or money may be used. For instance, one type of trust might instruct your trustee to spend the trust’s money solely on your child’s education. In this way, trusts give you more control over your money and property, and help to ensure that your specific desires are respected after your death.
When we talk about a living trust, it just means that the trust is created during your lifetime. While you are alive, you can be both the trust’s trustee and beneficiary. This means that you are free to use your own property for your own benefit. The trust then names successor trustees and beneficiaries who step in after your death.
That the living trust is revocable means that you may change or revoke any or all of the trust at any point during your lifetime.
Revocable living trusts have some advantages and disadvantages when compared with a will. The biggest advantage is something we have already touched upon: the ability to control the ways in which your property or money can be used after your death. If it is important to you that your children obtain a college education, for instance, you can condition their inheritance on receipt of a diploma. Alternatively, if you would like to ensure that your family home is occupied by the family member most in need of it, you can create guidelines in the trust to tell the trustee how to evaluate your family’s condition to determine who should get the keys. This level of control is desirable if you want the ability to pass your lessons and values onto the next generation.
A second important advantage of a revocable living trust is the ability to avoid probate. Probate is a legal proceeding during which a court determines how to divvy up your property. Even if you have a will, your property must go through this probate procedure, which can sometimes take several months or even over a year. If you opt for a revocable living trust, however, your beneficiaries may be able to avoid the probate process entirely.
One final advantage occurs during your lifetime. If you become sick or disabled and can no longer handle your own finances, a revocable living trust will name a specific individual to handle your financial affairs for you. The document can outline specific expenses that should be paid from the trust’s assets, ensuring that you retain control over your medical and financial decisions even if you are incapacitated.
Of course, revocable living trusts come with their own disadvantages. Trusts tend to be more expensive to administer than simple wills, and courts will often ensure that trustees receive compensation for the work they do for your trust. Additionally, although your assets will avoid probate, your beneficiaries must still pay estate taxes if applicable.
Revocable living trusts are also more complicated to set up, and require more work during your lifetime than a simple will. Individuals with few assets or those who do not wish to exercise control over their gifts may find a will to be preferable for these reasons.
Only you can determine which estate planning document is appropriate for you, but you should enlist the aid of an attorney when making this decision. A revocable living trust is not necessarily better than a will, and each type may be right for different people in different circumstances. Knowing the options available to you will better equip you to evaluate your options in your lawyer’s office.