We get a lot of questions from clients about estate planning. No one wants their hard earned assets to slip into a maze of probate, and certainly no one wants their loved ones to suffer the expense of probate costs, and time required to navigate the system. Enter the “revocable living trust”.
Greg Johnston is a fee only financial planner in Peoria, IL with over 25 years of experience. I’ve asked Greg to guest write for RetireWire on revocable living trust planning.
Greg’s article provides a general introduction to revocable living trusts. Remember, for specific estate planning guidance, be sure to consult your financial, tax, and legal professionals.
What is a Revocable Living Trust?
When planning your estate, you may consider setting up a revocable living trust. A properly managed revocable living trust can provide unique benefits; however, it does not completely replace a will.
In determining whether this type of trust is appropriate for you, it helps to understand the overall benefits and tradeoffs of this estate planning tool.
A revocable living trust is created during your lifetime, and you can alter it in any way, and at any time. One key feature is that it allows you to retain control of the management and distribution of your assets.
The Probate Connection
Many people establish a revocable living trust to avoid probate, which is the legal process of settling your estate. Assets distributed from a trust upon your death do avoid probate.
The probate process itself is not as burdensome for many estates as it was in the past. Many states have adopted the Uniform Probate Code, which greatly simplifies the process for many small- to medium-sized estates.
Even with these improvements, the probated assets (not all assets) in your estate still become a matter of public record. For many people, this raises privacy concerns.
Avoiding probate may also be advantageous if you own properties outside your state of domicile. If you do, you may be involved in multiple probate proceedings.
Once you set up a revocable living trust, you must transfer your assets into the trust. Failing to do so will subject your assets to probate. Simply signing a trust document without retitling assets renders your living trust useless.
Do I Still Need a Will?
The short answer is yes. Generally, a revocable living trust cannot entirely replace the need for a will. There are some assets you may not wish to place in a trust.
For example, it may be impractical to transfer tangible personal property such as automobiles, furniture, and jewelry to a trust. Consequently, some of your assets will remain outside your trust.
This makes a will necessary to name your intended beneficiaries of those particular assets. If you have minor children, a will may also be used to designate a guardian for them.
Other assets may require special consideration. For example, retirement plan accounts (Individual Retirement Accounts (IRAs), 401(k)s, and profit-sharing plans) cannot be retitled to a living trust. You could however change the beneficiary designation to the trust.
Naming someone other than a spouse as beneficiary of a qualified retirement plan often requires spousal consent. In many states, spouses now have rights to retirement plan benefits. In addition, naming your trust, rather than your spouse, as the beneficiary of your qualified retirement plan may have income tax consequences at the time of your death.
Revocable Living Trusts and Taxes
A properly funded living trust may offer (under the right circumstances) a possible reduction in estate taxes. Your legal professional can help you examine all the variables affecting your property—the type of assets (e.g., real estate, life insurance, bank accounts, savings, business interests, and personal property), where they are located, and how they are titled to determine if a revocable living trust can help you meet your short- and long-term estate planning goals.
Choosing a Revocable Living Trust Trustee
A trustee is a person or institution selected to administer a trust. A trustee’s role is to comply with the terms of the trust and fulfill its objectives.
In selecting a trustee, you must weigh the personal, financial, and professional concerns, according to the nature and the purpose of the trust. A living trust is intended to be in effect during your lifetime. This allows you to maintain control over your assets. Because of this, you and your spouse may be ideal candidates for being named as trustees. Grown children may also be appropriate candidates.
On our website, there are links to a variety of investment-related information and articles.
About the Author
Gregory A. Johnston, CFA®, CFP®, CPWA®, QPFC, AIF® has over 25 years of investment and comprehensive finanical planning experience. He started Johnston Investment Counsel in 1997 as an independent, fee-only investment management and comprehensive planning firm located in Peoria, Illinois. His clients include individuals, retirement plans, and endowments / foundations.