A revocable living trust is an essential aspect of any estate plan. Also known as a living trust, it is a legal entity created to hold personal and family assets. There are two parties involved in a living trust. They are the grantor, or trustmaker, and the trustee. Often, they end up being the same person. A revocable living trust goes through three phases which are outlined below.
Phase I: Grantor is alive and thriving.
When formed, a living trust will contain documents with detailed provisions enabling the grantor to do as he or she pleases with the assets under trust ownership. They may even revoke the trust if necessary, hence the name revocable living trust. The trust has the same social security number as the trustmaker, so the owner files taxes under their own form 1040. In the eyes of the IRS, the ownership of trust assets have not technically been relinquished. Therefore, the assets do not avoid estate taxation.
Phase II: Incapacitation
Should the grantor become incapacitated and no longer able to make decisions, the trust agreement will provide direction for how manage the assets and care for the trustmaker. A successor trustee who can step in and make decisions should also be found within trust documents.
Phase III: Grantors’ Death
Upon the grantors’ death, a living trust automatically becomes an irrevocable trust since he or she can no longer alter it. The successor trustee now steps in to pay the final bills and taxes in the same way if the grantor had become incapacitated prior to death. However, in the event of death, the successor will also distribute the remaining assets to the beneficiaries in accordance with the instructions laid out in the trust documents.
Other Myths Surrounding a Living Trust:
As vital as a living trust is, there are still several lingering misconceptions to address. First, revocable living trusts do not reduce ones’ estate tax obligations. The primary functions of a living trust are protection of privacy, planning for disability, and avoiding probate. Second, revocable trusts do not always avoid probate. Probate laws vary from state to state, so, depending on where you live, certain nuances may require probate whether you have a revocable living trust or not. Furthermore, the grantor must fully fund the trust for it to avoid probate. Fully funding a trust means the grantor has retitled assets like real estate and major accounts. He or she has also updated the beneficiaries of life insurance policies and retirement accounts.
There are an excessive number of legal documents necessary and considerations to be made when drafting a complete estate plan, but the time and energy spent is well worth it. Death is inevitable. Nevertheless, adequate planning can give peace of mind in an unpeaceful world. Sign up for one of our seminars here.