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Revocable Living Trust

Revocable Living Trust

The Revocable Living Trust can sometimes sound like a complicated document—certainly, the trust agreement itself may have complicated legal words and phrases in it.  Nevertheless, the concept of a trust is actually simpler than you might think.

Imagine a big cartoon bag of money; you can even imagine that it has a “$” dollar sign on it to help you visualize.  Now, imagine that you hand this bag of money to your best friend.  You tell your best friend that he can spend the money in the bag on your well-being while you are alive, and that he should give the money to your spouse and your children after you die.  You might also tell your best friend that he can only spend the money in the bag on your children for certain reasons, such as college, and to give your children the money in the bag when they turn 30. What is happening in this imaginary scenario is the creation of a trust:  you are the “grantor” or creator of the trust, your friend is the “trustee” who takes care of what is in the trust, the bag of money is the “corpus” or body of the trust, and the instructions you give to your friend are the “trust agreement” or trust document.

Most of the confusion that arises regarding trusts comes from understanding the “bag of money” in our imaginary scenario above.  There are a lot of rules that tell us:

  1. what goes into the bag,
  2. when money can go out of the bag, and
  3. who is considered to own the bag.

It can sometimes be confusing to explain why you put money into the bag and gave it to your friend in the first place.  It can also be confusing to remember that your trustee (the best friend in our scenario) only has control over what is in the trust (bag).

What Assets Belong in Your Revocable Living Trust, and Why

Your assets must be titled in the name of your trust in order to become part of your trust. For example, bank accounts titled in your name (John J. Doe) might be retitled “John J. Doe Revocable Trust dated December 12, 2017”. Almost any kind of asset can be titled into the name of a Revocable Living Trust, but some types of assets are easier to retitle than others.  If you own real estate that is subject to a mortgage, you should get your lender’s permission before putting the real estate into your Revocable Living Trust.  If you own an asset jointly with your spouse, you may not want to put the asset into your Revocable Living Trust while both of you are alive.  In general, you should always discuss the “funding” of assets into your Revocable Living Trust with your attorney and your financial advisor.  The question may end up being “what should go in the trust now” and not “what can go in.”

Why do you want to put assets into a Revocable Living Trust?  You may want to avoid the probate process, or to keep certain assets private.  You may want to provide specific instructions regarding how assets are handled until your children reach a certain age.  You may want to provide for how assets will be spent upon your own incapacity.  A carefully drafted trust agreement can accomplish these goals.

 

When Money (or Assets) Go Out

When you create a trust, you are giving control over money or assets to your trustee, just like handing your best friend a bag of money.  However, in the case of a Revocable Living Trust, you can choose to be your initial trustee—while you are alive and have the capacity to continue to control your assets, you remain in control.  Your trust agreement will say who steps in to take your place whenever you are not able to act.  This person is your “successor trustee.”  Your trust agreement provides the instructions to your successor trustee, telling them when they can make distributions from the trust (when money goes out of the bag).

Most people provide in their trust agreement for their Revocable Living Trust that their successor trustee should pay their medical bills and take care of them if they are incapacitated.  People often provide instructions regarding the care of their spouse after their death, and a specific age at which beneficiaries are to receive money outright.

Remember, your trustee can only distribute what is in the trust.  Your instructions in your trust agreement only control those assets that have been titled into the name of the trust.

Who Owns Your Revocable Living Trust

In most day-to-day transactions, it is easy enough to say who owns something.  However, the legal rights of ownership are more complex in some cases, and a trust is one such case.  In our cartoon bag scenario, the money in the bag is yours, but your friend is holding the bag.

We can look at:

  1. who has “custody” or physical control of an asset,
  2. who has the responsibility to invest or distribute an asset, and
  3. who is ultimately entitled to receive the asset.

Each of these types of ownership right can go to different people involved in a trust:  the trustee could put the money in a bank, while the trustee is responsible for the money, and the beneficiary of the trust will ultimately get the money.  Different bureaucracies and government agencies focus on different ownership rights.

Your local court is concerned with the management of property that is owned by you in your sole name.  If assets are owned by a trust when you die, then the court is not usually concerned with how the assets in the trust are distributed (they did not “belong” to you as a person) and so the assets in the trust avoid the “probate” process.  A “pour-over” Will is usually prepared in connection with the Revocable Living Trust so that any assets that do go through probate will eventually end up in the trust and be subject to the trust agreement.

However, while you are alive, you have the ability to revoke or change your trust agreement.  You are probably the initial trustee of your revocable trust, and you are the beneficiary until after your death.  Therefore, the state and federal tax authorities view your trust as a “pass through” entity, which means you are taxed on income earned by assets in your Revocable Living Trust.  After you die, the trust agreement becomes irrevocable, and your trust becomes its own taxpayer and is a separate entity as far as the IRS is concerned.

Contact Michael Logan at (703) 535-5392 to discuss your particular circumstances and how a Revocable Living Trust might be a beneficial component of your estate plan.