Many financial planners encourage clients to create revocable living trusts to ensure that their assets are distributed in the exact manner that they desire without the bother and expense of probate court. These trusts can also give clients a measure of protection from creditors and lawsuits and provide other ancillary benefits that vary by state and circumstance.
But trusts can be complicated instruments, and grantors and trustees must understand the rules that govern them in order to function effectively.
Here are some of the more complicated issues that grantors and trustees must deal with when a trust is used. (For related reading, see: What's a Trust? and Avoiding 4 Common Causes of Family Estate Fights.)
Funding a Trust
Once a trust has been created, the next step is usually to fund the trust. This is done by re-titling all of the assets that the grantor wishes to place into the trust in the name of the trust. For some assets, such as financial accounts, this can be a simple matter of filling out new account paperwork and submitting them along with a copy of the trust (or at least its declarations page) to the custodian along with a transfer form.
But re-titling tangible assets such as a house or vehicle can be more involved and may incur a tax on the transfer that can be substantial in some cases. There are also some assets, such as IRAs and qualified plans, that cannot be titled in the name of a trust. A trust can be named as the beneficiary for these accounts, but the grantor should thoroughly explore the tax and legal ramifications that come with this election.
Property that was acquired during a marriage is generally considered common or community property in a divorce. But property that was inherited by one spouse and placed inside a revocable living trust will generally be exempted from this division, provided that the assets in the trust were not commingled with other marital assets.
This can be a valuable tool for spouses who don’t wish to sign prenuptial agreements or who are expected to inherit substantial property. Most courts will view assets that are segregated in a revocable living trust as belonging solely to the grantor or trustee. (For related reading, see: Making Spousal IRA Contributions.)
Identity Theft Protection
Identity theft has become a growing problem in America and elsewhere as cyber thieves gather information online from potential victims and attempt to use this data to steal from them. This has been an effective form of crime because Social Security numbers are used for so many things today, from financial accounts to credit cards and other items.
Revocable living trusts can provide a measure of protection in this area because they usually have their own tax ID numbers, even if the trust is designed to function as a pass-through entity. This number is generally used much less often, and beneficiaries who become the victims of ID theft may be able to draw from the assets in the trust while they get their other problems sorted out.
This is an area where trusts can provide very valuable benefits as they can provide protection and income for beneficiaries who are unable to care for themselves. One of the biggest advantages to using this type of trust is that it will still allow the beneficiary to qualify for government benefits or assistance regardless of the amount of money or assets that it holds. (For more, see: Special Trusts for Special Needs.)
These trusts can also make provisions for an alternate caregiver if the primary party becomes unable to continue providing care. In fact, these trusts can make necessary provisions to care for both the beneficiary and the primary caregiver if the latter party also becomes incapacitated.
The laws that govern wills and testamentary trust are always based upon the laws of the locality where those documents are domiciled. This can result in taxes being assessed on the trust or estate property by that locale or difficulty in moving the trust or estate to another jurisdiction. But these problems can be easily avoided with a revocable living trust, because the local courts are not involved in their existence. This can make estate planning and settlement much easier for heirs and executors who need to move around in order to function. (For related reading, see: 7 Reasons to Own Life Insurance in an Irrevocable Trust.)
Help for Older Clients
Grantors who are advanced in years and need to start delegating their responsibilities to their children or heirs may be wise to name one or more of them as co-trustees, so that they can assist with the technical aspects of managing the trust and still obey the grantor’s wishes. A fiduciary known as a trust protector can also be appointed to oversee the actions of all of the trustees to make certain that they are following the grantor’s wishes.
The Bottom Line
Revocable living trusts have many uses and can be employed to accomplish estate planning objectives that are not possible with a will. The instances listed above are just some of the cases where using these instruments can prove advantageous and provide for grantors of all income classes. (For related reading, see: Estate Planning: 16 Things to Do Before You Die.)