What is a Revocable Living Trust?

​When I tell people that I do estate planning, I often get asked, “Like creating wills?” While a Last Will and Testament is type of estate plan, there is also a Revocable Living Trust. There are some common misconceptions about trusts. Some people may believe that they are only for very wealthy people, or utilized as a method for avoiding estate tax liability, or that they are only available to some people not to the general public.

However, the truth is that a trust can be created for anyone so long as three requirements are met: there is a trust creator (called the settlor), there is a person to manage the trust (called the trustee), and there is some property transferred to the trustee (called the trust property).
 
Once a trust has been created, the terms written into the trust can direct how the trust property is to be managed by the Trustee and there are even ways to protect your beneficiaries and their inheritance against creditors and other life situations.
 
Creating a Trust
 
The most basic method of creating a trust is when a settlor (the person creating the trust) transfers ownership of some property to a trustee to be held in trust for the benefit of somebody, maybe the settlor or another third-party beneficiary.
 
A trust can include specific terms and provisions directing the trustee on how to manage the assets of the trust and how to distribute the trustee assets to the beneficiaries. For example, if you had a concern that one of your children or beneficiaries was not very good at managing money or had a gambling problem, you might direct that your trustee not distribute funds directly to that beneficiary but instead the trustee could be directed to purchase or pay for specific items on behalf of that beneficiary. This would guarantee that your beneficiary’s needs are taken care of without running the risk that they would take their inheritance and blow it all on gambling.
 
Benefits of a Trust over a Will
 
In an earlier blog post, I discussed some of the differences between a will and a trust, including looking at some pros and cons of both. Two of the biggest benefits of a trust are likely the avoidance of probate and the privacy one affords.
 
A will directs how you want your property to be distributed after your death. However, in administering a will, it needs to go through a probate proceeding. During a probate proceeding, certain documents are presented to the court and a copy of the will gets filed on public record. Alternatively, a trust, which essentially provides the same directions as a will, does not have to be probated and therefore does not have to be filed publicly.
 
Protections for your Beneficiaries
 
A revocable trust does not provide the settlor with any protection from creditors. A revocable trust is considered a “disregarded entity” by the IRS and therefore, any trust property while the settlor lives is considered the property of the settlor and the trust is liable for any debts of the settlor.
 
However, a trust can provide the beneficiaries of the settlor some protections on their inheritance once the settlor passes away.

• Creditor Protection: Once the settlor of a trust passes away, the trustee is usually directed to do one of two things. Either he distributes the trust property outright to the named beneficiary, or he manages the trust property for the benefit of the beneficiary. In the first scenario, the trust property becomes the property of the beneficiary and a creditor of the beneficiary would be able to collect on the debt from the distributed trust property. However, in the second scenario, the trust property is not considered to be your beneficiary’s property. Therefore, your beneficiary’s creditors would not be able to look to your trust for payment of your beneficiary’s debts.

 

• Divorce Protection: In a divorce proceeding, all the property of both spouses is gathered together and split between them. However, property within a trust that is managed for your beneficiary is not considered to be your beneficiary’s property. Therefore, your beneficiary’s ex-spouse will not receive any part of your trust property as part of the divorce.

 

• Special Needs Provisions: These are provisions in a revocable trust (or alternatively, there is also a separate type of trust called a Special Needs Trust), which protect a special needs beneficiary from losing any government benefits they may be receiving for their disability or health needs. Since many types of government benefits are based on the individual’s income and assets, such as Medicaid and SSI, a special needs provision can prevent your trust assets from being considered when determining eligibility for such benefits.

 
To explore whether a Revocable Living Trust is an effective estate planning strategy for you and your family, please contact the office today!

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