What is a Revocable Living Trust?
A Revocable Living Trust is a document that specifies how you want your property to be distributed after your death. It's also called an "inter vivos" trust because it's created while you're still alive and living, so it can be changed anytime during your lifetime.
Revocable Living Trusts are well suited to many types of families. Some people use them when establishing a new family estate, while others want to separate their assets into different parts of the estate for each child or adult child. Others use them when a minor needs their money in an emergency but doesn't yet qualify for a conservatorship. (For example, an 18-year-old student suddenly drops out of school.
How Does It Work?
The Revocable Living Trust sets up the structure for your estate, but the document doesn't transfer assets to it. Instead, you set up a separate document called a "pour-over will" to transfer assets into the Revocable Living Trust after your death—and perhaps after you're incapacitated. The pour-over will name a trustee who handles the trust's money, property and investments. This trustee can be a family member or professional and can be changed if necessary. (Some people choose to add a successor trustee to take over in case the initial trustee cannot fulfill the role.)
With a Revocable Living Trust, your property is held separately from your spouse's. If you die before your spouse, their creditors can't go after your assets. It also means that if you're incapacitated when you die and need someone else to manage your money and property, it will still be yours for them to manage.
Revocable Living Trusts are great for families because parents can leave their assets to their children without fear that their child's creditors will get the money. They can decide whether and when to change their wills and trusts, but they don't have to do it at an inconvenient time, like just before death.
A Revocable Living Trust lets you distribute your assets in any way you want without making a final decision, so it's better than a will in terms of flexibility and changeability. About half of Americans don't have wills in place, which means that if they unexpectedly die or become incapacitated, they could lose everything or be stuck with someone else's debts.
Revocable Living Trusts are also great for people who want to avoid taxes. In a will, you transfer assets to your beneficiaries and then gift them the money (the executor executes the will). In a Revocable Living Trust, you decide how to pass your assets without transferring them. Some states allow you to determine how much is distributed annually without claiming it as a taxable gift.
A few states do not allow Revocable Living Trusts because they don't think they're flexible enough or don't have enough safeguards against abuse or fraud; if that's the case in your state, you can use a Lasting Power of Attorney instead.
You should be careful about the type of Revocable Living Trust you use, especially if you want to leave money and property to your children. Many people use a full asset protection trust, which means it's designed for people with lots of assets who want to avoid estate taxes.
Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.