Revocable Living Trust: How To Setup and What Assets To Include and Not Include in It

Do you want to ensure your loved ones are taken care of after you’re gone? You’ve probably heard of a revocable living trust, and you know that it’s something essential to have, but you’re not sure what it is or why you need one. Let us cover the basics of a Revocable Living Trust in this guest post by Lyle Solomon, a member of the California State Bar.

What Is a Revocable Living Trust?

A living trust can help you manage your assets if you become ill, disabled, or incapacitated. It also allows you to set details on asset distribution after your death.

A “living trust” is a trust that you set up while you are living.

“Revocable” means you can revoke or amend the trust whenever you wish to do so. 

What Are Revocable Living Trusts Used For?

Revocable Living Trusts are valuable tools to have in your estate planning arsenal. 

If you decide to include a last Will in your estate planning, your estate will be distributed by your wishes as outlined in your Will. If you die without a trust or a last will, your assets will be distributed by your state’s intestate succession laws. 

This procedure, known as probate, can be time-consuming. 

You could avoid the public probate process by using a Revocable Living Trust. And your assets are distributed to your beneficiaries much faster.

A Revocable Living Trust, like a Power of Attorney, provides incapacity protection. This method places particular assets under a Revocable Living Trust to ensure that a chosen family member or friend, known as your successor trustee, may handle them if you become incapacitated without going through the courts.

Example of a Revocable Living Trust for a Couple

For example, a couple establishes a revocable living trust so that they each serve as joint Trustees and Beneficiaries. Either party has the right to revoke the trust in whole or in part at any time, and each has the right to put assets into the trust or take them out. The Trusts do not exist in terms of taxation. 

All income generated by the assets is distributed to the beneficiaries, who also serve as trustees and trustors. Either party can withdraw any assets at any time.

When the first spouse dies, the trust remains in effect. Half of the assets, representing the deceased spouse’s community property portion, become irrevocable, with the income paid to the surviving spouse and going to the children or grandchildren upon the surviving spouse’s death. 

The surviving spouse’s half is revocable until the surviving spouse’s death.

The Benefits of a Revocable Living Trust

There are several pros of establishing a revocable living trust. 

Flexibility To Change

Considering the ability to change your asset list or beneficiaries is critical to ensuring that your property is distributed as you intended. You’ll likely have items and beneficiaries to add as you age, especially if you start your estate planning when you’re young. 

Can Avoid Probate

Probate is a court-supervised legal proceeding used to verify your Will and ensure that your assets are appropriately distributed after your death. 

Probate can be time-consuming and costly, especially if you lack proper documentation and have many assets. 

Any asset listed in your trust, on the other hand, will pass directly to your beneficiaries without the need for court approval. The successor trustee is in charge of this. 

Privacy

Revocable Living Trust provides privacy. Your trust is private, and no one has access to its information. This privacy protects you from the public learning about your assets and beneficiaries.

Coverage During Incapacitation

This type of trust also protects you if you become incapacitated or unable to care for yourself. Your successor trustee can manage your trust on your behalf. They will have a fiduciary duty to make decisions in your best interests. 

Guardianship Provisions

A revocable living trust also includes guardianship provisions. 

You’ll be able to lay out plans for your minor children, such as where they’ll live and how your money will be distributed to them. 

Save Probate Costs

The costs of formal probate are not insignificant. The executor and the executor’s attorney are paid statutory fees based on a percentage of the estate’s assets. Fees for a typical one million dollar estate can exceed thirty thousand dollars each. The cost of establishing trust and transferring assets to the next generation through a trust is a small fraction of that.

Children’s security

A trust ensures that a portion of the estate is distributed to the children or grandchildren. A spouse’s unspoken but genuine fear is that the surviving spouse will marry someone new and that the new spouse will inherit the entire estate. 

Most people want some of their assets to go to their children or their issue if the surviving spouse is not truly in need. 

A trust can do this with the deceased spouse’s share of the community property while also ensuring that the entire estate is available to the surviving spouse in real need.

Time

A trust passes to the next generation in months at most. 

FDIC protection

The Federal Deposit Insurance Corporation (FDIC) insures each beneficiary up to $250,000, for a total of $1,250,000 for the trust. 

Tax Obligations

Even though these benefits are significant, there are a few things to consider regarding trusts. Most notably, estates do not avoid tax obligations. There is a federal estate tax limit. Your estate will only have to pay taxes once it reaches a particular net worth. However, each state may have its laws regarding state tax on certain estates.

Who Are Involved in a Revocable Living Trust?

The following persons are involved in a Revocable Living Trust:

Grantor

The person who establishes and puts assets in a Revocable Living Trust is the Grantor. The trust creator may also be referred to as the donor, trustor, or settlor.

Trustee

The trustee is the individual who manages and controls the assets within a Revocable Living Trust. Most grantors choose to be the trustee of their Revocable Living Trust to retain control of their property during their life.

Successor Trustee

The successor trustee is the individual who will administer the trust if the original trustee dies or becomes incapacitated.

Beneficiary

The beneficiary is the person or entity that will benefit from the trust’s assets. You may choose individuals, charities, or commercial enterprises as beneficiaries. You can name many beneficiaries in a Revocable Living Trust.

How Can You Set Up a Revocable Living Trust?

Follow these steps to create a Revocable Living Trust:

1. Make a Revocable Living Trust agreement. 
2. You must designate a trustee, establish beneficiaries, and state the assets placed in the trust.
3. Sign and have the document notarized. 
4. If you appoint someone else as trustee, they must also sign.
5. Transfer asset ownership into the name of your trust. This procedure varies as per the type of asset. 
6. You will retain access to and control over your assets.

What Types of Assets Can You Place in a Revocable Living Trust?

Revocable Living Trusts are typically used to hold assets of high monetary value. 

Here are some examples:

• Your primary home and other real estate investments, including rental property or farmland
• Paper assets like REITs, mortgage real estate notes, or real estate crowdfunding
• Investments in cryptocurrency
• Securities such as stocks, bonds, ETFs, and mutual funds held in brokerage accounts
• I-Bonds maintained with the U.S Treasury
• Business interests including company shares and partnership interests.
• Intellectual property such as royalties, trademarks, copyrights, and patents
• All bank accounts, including the ones with your emergency fund
• Collectibles like jewelry, gold, artwork, and antiques
• Safe deposit boxes

Following assets need additional consideration before being placed in a trust and might need discussion with a qualified lawyer.

• IRAs, crypto IRAs, 401(k)s, and other retirement accounts usually can’t be assigned to a trust. You can name a trust as a beneficiary or Transfer on Death (ToD).
• Health Savings Accounts (HSA) cannot be transferred to a living trust. However, you may name the trust as the beneficiary.
• Vehicles are not typically placed in trusts. Explore the possibility of pour-over will.
• Life Insurance might not need to be in a trust. However, if your insurance policy beneficiary is a minor, you need to ensure that someone will handle the money if required. In some states, only policies acquired by “individual” residents of the state are protected. The cash value might become unprotected because the trust isn’t a person. Also, life insurance proceeds are counted as part of your estate’s worth and could create a taxable situation should you reach the IRS threshold for taxable estates. 

When Should a Living Trust Be Updated?

When your life circumstances change, you should consider amending your living trust. Some common scenarios include

• You marry or get divorced.
• You have a child or have adopted a child.
• You relocate to another state.
• Your financial situation has significantly changed.
• One of your trust’s beneficiaries passes away.
• One of your appointed trustees dies or becomes incapacitated.

How Do You Modify a Revocable Living Trust?

You can use either a trust amendment or a trust restatement to change a Revocable Living Trust. 

The original trust is still in effect with both documents.

A trust amendment enables you to change specific provisions in your Revocable Living Trust while keeping all other conditions unchanged. When making minor changes, trust amendments are appropriate. A trust restatement completely redoes a Revocable Living Trust without the need to revoke it and start over. 

The original trust remains in effect, but the provisions of the trust restatement take precedence over its conditions. When making significant changes, trust restatements are appropriate.

Who Needs To Have a Revocable Living Trust?

It’s a common misconception that estate planning documents are only for the wealthy or well-off, but this couldn’t be further from the truth. Even if you do not have generational wealth, it is always a great idea to consider a Revocable Living Trust.

Because establishing a revocable living trust can add a high cost to the formation of your estate planning documents, you may want to avoid doing so unless you have significant assets to account for.

Consider your assets and that you can always amend your revocable living trust as you acquire assets or increase your liquid net worth. 

Once you’ve established your revocable living trust, it’s much easier to change details or provisions.

It would be best if you also considered drafting a pour-over will, which directs any unnamed or unallocated assets to your trust. 

It may be challenging to remember to include every asset in your trust, but this type of Will ensures that you are protected.

A will serves as a virtual backup device for a property you do not transfer to yourself as a trustee. If you acquire property shortly before your death, you may forget to transfer ownership to your trust, which means it will not pass under the trust document’s terms. 

However, you can include a clause naming someone to receive the property you haven’t left to a specific beneficiary.

If you didn’t leave a will, your property not transferred by your living trust or other probate-avoidance devices would be distributed to your closest relatives as per the state law. 

These laws may not distribute property in the manner you would have preferred.

A will also allow to name a guardian for minor children and protect property purposefully left out of the trust.

Difference Between Revocable and Irrevocable Trust

The distinction between irrevocable and revocable trusts extends far beyond the fact that one can be changed during the Grantor’s lifetime while the other cannot. 

When a grantor is a person who creates a trust, the Grantor retains the ability to revoke or terminate the trust and change it in any way. Changes to the beneficiaries, trustee, and distribution terms are all possible. The Grantor is also free to remove assets from the trust.

A revocable trust will keep your assets out of probate court. It gives you more freedom to retain control of the assets while still alive and make changes as you see fit. The Grantor’s ability to control and change a revocable trust makes it appealing in many estate plans.

When a grantor establishes and funds an irrevocable trust, the Grantor is not permitted to take any of those actions. Only in particular and very limited circumstances can an irrevocable trust be changed or terminated. The most common reason for establishing an Irrevocable Trust is to achieve tax or asset protection.

Irrevocable trusts’ restrictions allow them to meet specific legal requirements in both federal and state laws. It can provide significant benefits to the Grantor and beneficiaries that would otherwise be unavailable.

What Are the Tax Implications of Revocable Living Trust?

Transferring assets to a revocable trust removes them from your estate for state probate purposes but not federal (or state) estate tax purposes. 

The amount of estate tax due will be determined by your “gross estate” value for estate tax purposes. 

Because you can change your revocable trust, there are no estate tax planning advantages to using a revocable trust.

Any income generated by a revocable trust is taxable to the trust’s creator, also known as a settlor, trustor, or Grantor. 

This is because the trust’s creator retains complete control over its terms and assets.

The trust’s taxpayer identification number is usually the creator’s Social Security number during the creator’s lifetime. 

All income, deductions, and credits will be reported on the creator’s income tax return, and no return for the trust will be filed. 

For income tax purposes, revocable trusts are considered “grantor” trusts. 

Final Thoughts on Revocable Living Trusts

A revocable living trust can be a great estate planning tool even if you don’t know who your beneficiaries will be or what assets you’ll have during your lifetime. 

Although you can create your revocable living trust on your own, especially if it is simple, it is better to contact an attorney. 

An estate planning attorney can help you based on your specific situation and familial circumstances. Then you’ll have trust that benefits both you and the people or organizations that are important to you. 

Life goes on as it always has. You can put the assets in and take them out whenever you want. You have complete authority. Court intervention is not required to carry on your affairs after disability or death. When a person dies, the trust becomes irreversible.

About The Author: Lyle Solomon has extensive legal experience and in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific’s McGeorge School of Law in Sacramento, California, in 1998 and currently works for the Oak View Law Group in California as a Principal Attorney.