A Revocable Living Trust is an estate planning tool, intended to avoid the time and expense of probate, and to ensure the property transfer wishes of the grantor are carried out as easily as possible. The trust also allows another individual to handle the financial affairs of the grantor in the event of incapacity. The trust may normally be amended, revoked, or changed at any time before the death of the grantor. The property of the grantor is transferred to the trust and while the person is living, the living expenses of the grantor are received from the trust.
Reasons to Use a Revocable Living Trust
For many years, people relied on a will transfer assets after their death, and to provide instructions for their last wishes. After the death of the individual, the Last Will and Testament would be presented to probate court, a fiduciary individual would be appointed, and the property transferred. The problem is that an estate can be very expensive, costing several thousand dollars to administer. Because court permission is needed for many actions, an estate can take six months to several years to completely administer. A living trust is used to avoid the time and cost involved. Property placed in a living trust can often be transferred in a matter of days or weeks. Usually, nothing is filed in court.
Important Living Trust Terms
NOTE: “person” can mean an individual, company or other organization in these definitions.
- Grantor – also referred to as a Settlor, the grantor is the individual creating the trust and transferring property to the trustee.
- Living Trust – the document prepared by the grantor, transferring property to the trustee, and providing the instructions on how the property is to be handled, both before and after the death of the grantor.
- Trustee – the person placed in charge of the trust property as a fiduciary. The trustee will collect the income from the trust and distribute the income and principal to the beneficiaries.
- Beneficiary – the person receiving income or property from the Trust.
- Remainderman – a person receiving property or income after the beneficiaries receive their shares of the trust. This may be during the life of the beneficiaries, or after the death of the beneficiaries, depending on how the trust is written.
How Revocable Living Trusts Work
A grantor creates a document called at Living Trust. The document is prepared in accordance with the grantor’s wishes. A trustee is named, usually the grantor. The trust will make provisions for the beneficiary to receive income and principal of the trust. The grantor is also the first beneficiary. The property of the grantor is transferred to the trustee of the trust, through deed for real estate, title transfer for vehicles and change of ownership documents for financial accounts.
While the grantor is living, The grantor/beneficiary will have an unlimited right to income and principal of the trust. Like changing a will, the trust can be changed in writing by the grantor. It may also be revoked or cancelled at any time before the death of the grantor. After the death or incapacity of the grantor, the trust will have provided specific instructions for the transfer of remaining principal and interest to the remaindermen. The trust will also name a successor trustee to act for the grantor The remaindermen are like heirs in a will. They will receive the income and principal of the trust. The trust can specify if the property is to be transferred as a lump sum or paid periodically.
Normally, the most difficult aspect of a Living Trust is creating it. After it is created and the property transferred to the trust, grantor will use the property as they would have otherwise. Trust terms may vary depending on the state in which the grantor resides. When considering creation of a Living Trust, it is best to speak with a qualified trust preparer.