Before we discuss what a Revocable Living Trust is, let’s start with discussing what a Trust is.
What is a Trust?
Think of a Trust like a “rule book” that you create. The rule book is attached to a box in which you’ve placed certain items. Within the rule book, you have set forth instructions about how you want the items in the box managed, including who has access to use the items in the box. Within the rule book, you also appointed a referee to enforce the instructions contained in the rule book.
In legal terms, a trust is a legal entity set up by a “Trustmaker” (sometimes referred to as a grantor or settlor). Within the trust document, the Trustmaker designates a “Trustee” to hold and manage assets on behalf of certain “Beneficiaries” specified within the trust document.
What is a Revocable Living Trust?
There are many different types of trusts. One of the most commonly used is the Revocable Living Trust (also known as RLT or Living Trust). A Revocable Living Trust is used to describe a Trust that has certain characteristics—the most obvious being that it’s revocable—meaning that the person that established the trust can change their mind at any time and undo the trust completely. Let's assume that the fancy words "your assets" just mean "your stuff."
A revocable living trust is like a box with an open top. You can put your stuff in the box and take your stuff out at any time. When you set up the trust, you put all of your stuff, such as your home and bank accounts into the trust. Maybe a few months later, you open a new account at the bank. It can go in the trust. Then, the following year, you take out some stock in the latest wonder company—you can put it in the trust. A few years later, you decide to sell your home and buy a new home in another neighborhood. You can take the old home out of the trust and sell it, and then when you find your new dream home, you can purchase it and put it in the trust.
You appoint yourself as the initial trustee of the trust. The trustee is the person that is responsible for managing the trust assets. If you become incapacitated or when you die, the trust document includes your written instructions specifying who takes over as successor trustee and what they are supposed to you with your stuff. The trust holds everything securely so that your family should not have to face the horrible prospect of probate at the time of death.
Other Common Characteristics of a Revocable Living Trust
While each Revocable Living Trust may have different “rules”, here are some common provisions of a Revocable Living Trust:
- You, as the Trustmaker, also appoint yourself as the initial Trustee of the trust so that you can continue to manage and control the trust assets;
- As the Trustmaker, you have the power to change, modify, or terminate the trust at any time in the future.
- As the Trustmaker, you can add new assets to the trust at any time or you can take assets out of the trust at any time.
- A revocable living trust does not require any separate tax filings.
- You name backup Trustees to serve in the event that you become incapacitated or die.
- The revocable living trust specifies what should happen to the trust assets upon your death (this is why many people think of a revocable living trust as a substitute for a Last Will and Testament).
Other things that can be accomplished through a revocable living trust include:
- Provide instructions for how your assets should be managed if you should become incapacitated—including providing that the Trustee can use your assets to provide not only for you but also for your spouse or children.
- Providing instructions for the handling and distribution of sentimental items and family heirlooms.
- Leave assets to a surviving spouse protected in the event that the surviving spouse gets sued or needs long-term care.
- Leave assets to a surviving spouse protected in the event that the surviving spouse gets remarried or divorced.
- Leave assets to children or other beneficiaries protected from future lawsuits, creditors, or divorce.
- Include provisions to fund educational expenses for your children or grandchildren.
- Include substance abuse protections in case a beneficiary is afflicted with a substance abuse problem.
- Appoint a trustee to manage assets on behalf of young or financially irresponsible beneficiaries.
- Include Pet Trust provisions for the care and upkeep of your “furry family members.”
- Provide rewards or incentives for certain behavior such as educational achievements, starting or purchasing a business, buying a first home, or similar.
- Foundational estate tax planning for married couples to ensure that as a couple they pass as much wealth to their beneficiaries free of estate taxes.
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Wills & Trusts-Intermediate:
A Guide to Different Trust Types
Trustee Selection: Individual vs. Bank or Corporate Trustee
Questions to Ask a Bank or Corporate Trustee
Does a Revocable Living Trust Protect My Assets from Lawsuits or Bankruptcy?