Trustworthy Trusts

     Revocable Living Trusts (RLTs) are popular estate planning tools. The purpose of this article is not to provide a legal treatise on the subject of RLTs, but rather to introduce you to how they work, some of their benefits and drawbacks, and some important considerations when creating an RLT.

RLT Basics

     An RLT is a written legal agreement involving three parties: the Trustmaker (also known as a Grantor, Trustor or Settlor), the Trustee and the Beneficiary. Initially, upon its creation, the Trustmaker, Trustee and Beneficiary are one in the same person. Moreover, there can be, and often are, more than one Trustmaker, Trustee and Beneficiary at any given time. [Note: Depending on the law of their jurisdicition and their unique circumstances, a married couple may share one joint RLT or each may have separate RLTs.]
     After the Trustmaker and Trustee sign the RLT legal agreement, the Trustmaker funds the RLT (i.e., retitles assets into the name of the RLT). This is a critical step, much like putting fuel into a brand new automobile. Once the RLT is signed and funded, the Trustee manages and distributes the RLT assets for the Beneficiary according to the instructions in the written legal agreement.
     Later, if the Trustmaker/Trustee becomes incapacitated, as defined in the RLT agreement, then the successor Trustee appointed in the RLT seamlessly manages and distributes RLT assets for the Trustmaker/Beneficiary based on instructions in the RLT agreement itself. Since the Trustee holds legal title to the RLT assets for the Beneficiary, no Probate Court need interfere in the financial affairs of the incapacitated Trustmaker/Beneficiary.
     Finally, upon the death of the Trustmaker/Trustee/Beneficiary the RLT becomes irrevocable and the successor Trustee seamlessly manages and distributes RLT assets for the successor Beneficiary according to the instructions in the written legal agreement. In most jurisdictions, no Probate Court need interfere in this process of transferring assets to the RLT successor Beneficiary.

RLT Benefits

     While the benefits of RLT-based planning vary from jurisdiction to jurisdiction, the most commonly cited RLT benefit is Probate Court avoidance. And the three most commonly cited drawbacks to Probate Court are the potential for unnecessary delays, costs and publicity. Given the choice, most people would rather avoid any court process.

RLT Drawbacks

     As previously noted, for an RLT to operate as designed it must be funded. If you are not meticulous in ensuring that your RLT has either present title to your assets or will have future title to them (e.g., life insurance proceeds), then your estate may not avoid Probate Court. Also, legal fees to create RLTs often are higher than the fees to create Will-based estate plans. Accordingly, in some jurisdictions the benefits of avoiding Probate Court are greater than in other jurisdictions.

RLT Considerations

     The selection of your successor Trustee is one of the key decisions you must make when creating your RLT. Common options include appointing a trusted family member/friend, a professional fiduciary, or even a combination of the two. There is no right answer, just the one that is right for you.
     Make sure your RLT incorporates flexible federal estate tax planning. Your RLT should be drafted to provide maximum protection from this form of taxation. Even if the estate tax is repealed, it can always be reinstated. Warning: Some states may impose their own inheritance or estate taxes, too!
     Finally, only you know the strengths and weaknesses of your loved ones. Ensure that your RLT contains special planning to protect the inheritance both for and from your loved ones, as may be necessary. If you are divorced, then you might wish to ensure that your ex-spouse does not inherit through your mutual children, too.