Revocable Trusts & Manage Your Assets Now and Later
by Sara Lancaster
Have you considered what would happen to your worldly possessions if you were to become gravely ill, fell into a coma or died? Do your loved ones know how you want your assets distributed?
A revocable trust is a document you create while you are living that states how to manage assets both during your life and upon your death. While a trust isn’t necessary for everyone, it can provide peace of mind for those with a lot of assets.
When a trust is revocable you can change it whenever you want. For example, you can change the document if you want to change the way your assets are distributed after your death. However, once you are deceased a revocable trust becomes irrevocable—it can no longer be changed.
A Living Document
To understand the ins- and outs- of a revocable trust you must first think of it as its own living entity. In fact, revocable trusts are often called living trusts because you create the trust while you are living, but it helps to think of it as its own being too.
A revocable trust has its own name (i.e., The John Smith Revocable Trust), its own taxpayer identification number (just like a social security number from the IRS), and a set of laws that protect it and that it has to abide by. For instance, assets in a revocable trust may be protected from some creditors, and a revocable trust has its own set of tax laws it must follow.
When you create a revocable trust, you will also create a living will with the help of an estate planning attorney. The living will states that your trust is the beneficiary of some or all of your personal assets upon your death. You can choose to fund the trust during your life or after your death. Real property, investments, and bank accounts are examples of assets that can be held in trust.
There are many reasons to set up a revocable trust, including:
1. Assets that are placed in trust during your life may avoid going through the probate process when you are deceased, which can be time consuming and costly.
2. A trust can prove beneficial if during your lifetime you become unable to manage your own assets. With a trust you specifically outline how you want all assets to be managed and distributed both in life and after death. A living will does not provide the same type of instruction.
3. Revocable trusts are private documents, unlike living wills, which are public records.
Trust Participants
There are three individuals or entities named in a trust that play a specific role. The roles include a grantor, the trustee, and the beneficiary. The grantor creates the trust, the trustee manages the trust and the assets in it, and the beneficiary receives the assets and /or the income off of those assets as the grantor directs.
Typically the grantor will serve as the trustee during his or her life until death or incapacitation. In either of these events, a successor trustee will take over that role and manage assets as directed by the trust document.
More on Taxes and Probate
The grantor, trustee, and beneficiary are connected to the trust, but they are not personally responsible for paying income taxes, estate taxes, capital gain tax, etc. The trust is responsible for paying those expenses and for filing its own taxes. For example, if your home is not owned by John Smith, but rather The John Smith Revocable Trust, it is not John that pays the mortgage or the taxes; it is The John Smith Revocable Trust that pays.
An individual is only responsible for paying tax on any income he or she receives from that trust.
Even with a well-constructed trust, you will still need a few other estate planning documents such as a living will and a durable power of attorney. The point is that a revocable trust is not the end-all-be-all of estate planning.
It all depends on your situation both in life and after death. It’s best that you speak with a financial advisor or an estate planning lawyer to determine what estate planning tools you require.
