What Is a Revocable Living Trust?

If heaven forbid, you get sick and can’t take of yourself financially, how will your loved ones take care of you financially?  If you die, how will your survivors know what to do with your estate?   The answer to both questions is in the title of this post – a living trust – that’s how.

A revocable living trust (or living trust for short), if done correctly, gives other the people the right to manage and/or split up your assets if and only if certain things happen to you.

So, if you get ill and can’t manage your own financial affairs, the trust allows someone you have named to step in (assuming your trust is set up to do this).  Again, assuming your trust is set up to allow this, when you die, the trust appoints someone you have specified to execute the instructions you made when you were alive as to who gets what and when.

The person who steps in, in case of death or disability, is known as the trustee.   And the trustee can only act if the qualifying event happens.

Can the trustee step in any time they want and just take over your financial affairs?

No.  If you become incapacitated, they have to prove it with medical and legal documentation before any bank or financial institution allows them to do anything.  If you die, they need a death certificate before they can get to work.

Can the trustee do whatever they want with the money?

No.  The trustee has to do what you spelled out in the trust.  If they don’t, they can be liable in a court of law.  Usually, smart trustees work with estate attorneys in splitting up assets specifically because they don’t want this liability.

As you can see, a revocable living trust is a document that helps you protect your assets and your family after you are gone.

How do you set up a revocable living trust?

You set up your revocable living trust while you still have capacity, usually with an attorney. But if your situation is simple enough, you can set up your living trust yourself.  Then, you go to your banks and financial institutions and change the title on your accounts or the beneficiaries to the trust.  This is important.  If you don’t go and change the title on the accounts at each institution, the trust will have no effect on that asset.   This is why most people are well served to work with an attorney.  Typically, they help you identify which asset should be re-titled, which should have different beneficiaries and (in some cases) they actually draw up the documents that you take to the banks and other places to get this done.

Why do they call it “revocable”?

Because you can change anything and everything about your trust up until the moment you can’t make decisions or communicate. Think of your living trust just like your life insurance beneficiary form. You can make a change anytime you want.  All you need is a signature and poof…everything changes. That’s a really nice feature and a wonderful threat to hold over your children’s heads to make sure they treat you well. 🙂

Neal’s Notes:  Once you create your trust, don’t forget to update it every three to five years.  That’s important because your life changes as do estate laws. Set a reminder know so you don’t have to even think about it.  And another thing, once you’ve gone to the trouble of creating the trust, make sure you fund it correctly.

Why might you set up a trust?

The main benefit of using a trust is that it provides direction on what to do with your assets once you’re gone as I said. If you have accounts in joint tenancy or have named beneficiaries for your accounts, you may not need a trust. That’s because these forms of ownership direct where the money is supposed to go once you are no longer with us.  Of course, once you talk to your attorney, you may decide to put those accounts in trust anyway.

And remember, even if you have your money in joint name with your spouse now, at some point, somebody is going to pass away.  At that point, if you don’t have a trust, your money might be in your name alone (you don’t have any named beneficiaries). And when you die, the court system will decide what to do with your money through probate.

What is probate? This is the system that appoints the courts to interpret your will, if you left one, or use their own rules if you left us without a will. Probate is expensive and takes a great deal of time. Lawyers love it. The rest of us don’t.

My advice is to avoid forcing your family to use probate when you go. One way to do that is to make sure you have a trust or name beneficiaries on your accounts.  Again, this is a very good reason to consult a legal professional.

What about estate taxes?

Currently, most people don’t have to worry about estate taxes.  Non-issue for most of us.  This changes all the time so again, ask your attorney to be sure.

Does the trust go beyond finances?

It could. The trust may contain health power directives to give us instructions on what to do with you if you are still living but ready to stop. That’s another handy feature.

Who doesn’t need a trust?

Sorry to be repetitive, but I am not an attorney of course, and I recommend you speak with your legal advisor before making any decisions about this. But there are some people who really really might not need a trust.

If you have modest assets, you may not need a trust. Estate taxes aside, if everything you have has either a joint owner (joint tenant) or has a beneficiary (retirement account or TOD account), your money will flow to your beneficiary without probate.

That being the case, the only thing you might have to worry about is a health power of attorney. You can get this done very inexpensively as a stand-alone document without going through the expense of setting up a revocable living trust.

If you decide to go this route, I’d do two things:

1. Make sure that everything – and I mean everything – has a beneficiary named.
2. Have a will just in case.

Even if you have a large estate, the trust may not work if you live in certain states.  Check it out Pilgrim.

All in all, with so much to potentially gain, it’s smart to consider setting up a living trust.  The people who don’t usually are tight-wads, procrastinators or people who have no heirs.   But if you have heirs you care about and if this idea makes sense now that you’ve studied it, it makes sense to investigate further.

Have you set up a living trust? Why or why not?