What is a Revocable Living Trust And Do I Need One?

You might be feeling left out after hearing radio commercials or seeing newspaper ads about living trusts. Or maybe your friends have set up a living trust, and you wonder if you should have one too. It’s important to realize that a living trust isn’t for everyone.

Just like the title says, a revocable living trust is something you set up while you’re living, and you can change it if you like, versus an irrevocable trust, which you can’t change. When you pass away, a revocable trust automatically becomes irrevocable. So if you set up an irrevocable trust at any point, any assets you transfer to the trust have to stay there. You can’t add or remove beneficiaries or change the terms.

With a revocable living trust, you aren’t giving your assets away; you give them to yourself in a trust.

Let’s start by talking about why you might need a revocable living trust.

The main advantages of creating a living trust are avoiding probate upon death, ensuring privacy, and providing flexibility. A will has to go through probate, costing time and money. Probate is the legal process that puts a value on your estate, settles any debts, pays taxes, and pays out the remaining assets to your beneficiaries. Probate doesn’t just happen. The personal representative of your estate follows your state’s legal requirements—notices to beneficiaries, advertisement of the estate, inventory, payment of expenses, etc. If you own assets in your name only, it must go through probate. The process, length of time to settle, and costs of probate vary by state. The bigger the estate, the higher the costs and the longer the time. The burden will be on the person in charge of distributing your estate to your beneficiaries. If you initiate the probate process in Pennsylvania and then determine that it wasn’t required, you still must follow through with the probate process. The type of assets you have and how they are titled determine if probate will be involved.

A key factor is that only assets in your name will go through the probate process. Assets placed in trust bypass the costly court system and usually take priority over property designated in your will. Suppose you have a joint account with a spouse or another person or you leave assets to an heir via a beneficiary designation like a retirement account or an insurance policy. In that case, those assets flow to another person(s) easily with a death certificate. You don’t need a living trust to pay out a beneficiary designation account. You can also set up TOD or POD accounts on your accounts. A TOD is a Transfer on Death and a POD is Payable on Death. If an account is titled Judy Smith TOD to (insert name), that account doesn’t have to go through the probate process as it will transfer directly to the beneficiary or beneficiaries listed.

Ask your financial advisor whether you really need a living trust.

If you’re thinking that your situation falls into the above scenarios, and therefore it might make sense to save yourself the costs of creating a trust and just have a will, as your assets will flow to your beneficiaries with little work, you may be right. It’s a good idea to sit down with a financial advisor to discuss whether it makes sense to avoid creating a trust document based on your situation.

A will is recorded at the courthouse and is available for anyone to view, so it can be easier to scrutinize and contest. Since trust documents aren’t filed with any court, they don't become public record. That makes them private and more difficult to challenge. If you’re worried about family members contesting your will, a living trust may offer peace of mind. As long as your trust document is clear regarding your wishes, your trustee is bound to follow them.

If you’re single and have assets in your name only, you might find the concept of the living trust appealing, as it allows you to set up your estate in a way that’ll make a distribution to your beneficiaries easier. If you set up a revocable living trust, fund it, and then pass away, your executor won’t need to do much to settle the estate. The estate will not have to go through the probate process, but the executor may have to hire an attorney for peace of mind and to work through any estate or inheritance tax implications (if applicable in your state). A revocable living trust doesn’t avoid paying applicable taxes such as the inheritance tax.

The trust document lists a successor trustee who’ll distribute or manage the assets as you’ve instructed. There will still be paperwork involved, but it won’t involve a visit to the courthouse.

Who do you trust more—a website or your attorney?

A living trust starts with a trust document drawn up by an estate attorney. Sure, there are online sites to help you do the trust document yourself at a lower cost, but with all the complexity surrounding laws, it may be best to work with an attorney on this. An attorney will want to know your financial situation and your family situation. It’s best to be forthright and disclose all your assets to cover all nuances that might come up.

Your social security number is used as identification on the accounts while you’re living. Upon your death, the trustee will obtain a tax identification number. The trust will file a tax return and pay taxes until it’s dissolved.

Unlike a will, which comes into play upon your death, a living trust is active during your life. The trust document says what happens to your assets during your lifetime and upon your death. You will name the trust. Most people use their name, like the Jones Family Trust or the Judy Smith Revocable Trust. For privacy, you can choose an obscure name that doesn’t include your last name.

You’re the trustee during your lifetime (aka the person in charge) and you control all of your assets while you’re living. You can buy things, like a new house or investments, or sell things at any time. There are no restrictions on taking money to spend on yourself however you choose. There are no restrictions on adding money or withdrawing funds from the trust. You essentially go about managing your money the same way as before except for one key factor: you must give your assets a new name. If your house was previously titled, “Judy Smith,” it now needs to be “Judy Smith Revocable Trust,” for example.

The thing about a revocable living trust is that you have to fund it.

After you receive your new legal trust document, you have some homework to do. You’ll need to change the registration of your accounts, and you might need some help. Your attorney might help you change the title on your real estate as this is a bit more complicated and involves your local courthouse. Other assets, such as your bank accounts or investments, should be renamed to read the trust document title. This important task must be completed. If you create the trust document and then don’t change the title of your investments, your estate will flow through the probate process. Paying now to have the trust document set up and funded properly is better than paying later to have your heirs hire an attorney to settle an estate.

When you’re setting up the trust, it’s always good to see if your beneficiary designations make sense. Be careful about naming a minor as a beneficiary. Suppose your beneficiary is under the age of majority. In that case, the death benefit will be given to a custodian and then turned over to the minor when they reach the age of majority (18 or 21 depending on state law). You can discuss the merits of setting up a trust for a minor within your revocable living trust with your attorney. A trust for a minor will help control at what age and for what reasons the minor would receive the assets.

A living trust isn’t for everyone. But if you’re single, have many assets, own property in more than one state, or your family situation is a little complicated, it might be right for you. Setting up a revocable living trust requires doing a lot of work up front, but it makes disposition of your estate simpler and faster. If done correctly, it could make things easier for your heirs to manage later.

When you're doing something as important as estate planning, it's important to talk with a legal professional. so you’re sure that you understand the pros and cons of your choices. And be sure to connect with your financial advisor and review your estate plan every so often to ensure your wishes are executed.

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Author: Nancy D. McKee, CFP® | Financial Advisor | Allegheny Financial Group | June 2021

The information included herein was obtained from sources which we believe reliable. Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.