On several occasions recently, we have discussed with clients the idea of utilizing a revocable living trust as an effective estate planning tool.  However, there seems to be quite a bit of confusion regarding the purpose and uses of revocable living trusts.  We thought it would be a good idea to provide some insight into this type of trust.

First, it is important to point out that there are many types of trusts—all with varying objectives, benefits and costs.  However, when it comes to revocable living trusts, their primary advantage can be boiled down to the following:

Assets held in a revocable living trust avoid the probate process.  Avoiding probate (a public and potentially costly process) can be desirable by some who prefer privacy regarding their financial affairs. 

Also, for those who own property outside of their state of residence, it may be necessary to go through the probate process in multiple states.  Therefore, those who own out-of-state property may find it beneficial to own property within a revocable living trust in order to avoid probate in numerous states.

Revocable living trusts provide for a means of handling capacity issues.  As people age, their ability to make financial decisions may become diminished.  Revocable living trusts normally name a successor trustee who can make financial decisions regarding trust property when the original grantor (you) become mentally or physically unable to do so. 

From an income tax standpoint, revocable living trusts are considered “tax neutral.”  That is, the person establishing and funding the trust does not derive any income tax costs or benefits. They function similar to a personal brokerage account whereby investment income is taxed to the individual at their tax rate.

Likewise, assets held in a revocable living trust would receive a step-up in their cost basis when the  grantor passes away—just as assets held personally.  So you can see that, while revocable living trusts can serve an important role for some, for others, the benefits could be limited.  Please let us know if you would like to discuss revocable living trusts in the context of your estate planning needs.

Already have a Revocable Living Trust? Don’t forget…

On many occasions, we have discovered that clients already have a signed and executed revocable living trust.  However, just signing the trust document does not mean your work is finished.  In fact, the most important component of utilizing a revocable living trust as a tool in your estate plan is to fund the trust with appropriate assets.  That could include the following:

• Changing the registration of bank accounts and investment accounts

• Re-titling property like your home, vacation home or other real estate in the name of the trust

• Changing beneficiary designations to reflect the presence of a trust in your estate plan

Of course, you need to confirm with your estate planning attorney the appropriateness of making these changes.  There is definitely no one-size-fits-all solution!