What is a Revocable Living Trust?
Revocable Living Trusts are also called “Revocable Trusts” or just “Living Trusts” – these are all terms that mean the exact same thing. Revocable Living Trusts are most commonly used to get property to your heirs quickly, privately and avoiding probate.
In a Revocable Trust, the creator of the trust (probably you) is called the “Grantor” or “Settlor” (I commonly use the word Grantor in my Living Trust documents). The Grantor, while he/she is alive and has capacity, is also simultaneously the Trustee. The Trustee is the person designated to control and make decisions regarding all accounts and property held by the Revocable Living Trust (e.g. usually bank accounts, brokerage accounts and real estate while the Grantor is alive and possibly life-insurance proceeds and retirement account distributions after the Grantor passes away). The Trustee must follow the rules as set forth in the Living Trust.
The Revocable Living Trust is Essentially an Instruction Manual
I commonly refer to the Revocable Living Trust as an instruction manual or rule book. The grantor, while his/she is alive and not incapacitated, is always allowed to change the rules or totally revoke the trust entirely (its referred to as a “revocable” trust because the grantor always retains the right to make changes, amendments, or revoke it entirely while they are capable of doing so).
When the grantor become incapacitated or dies, the Revocable Living Trust, automatically become irrevocable – meaning the rules and instructions are now basically set in stone. The Revocable Trust will designate one or more “successor trustee(s)” who must then follow the instructions as to what to do with the property either (a) while the Grantor is alive but incapacitated; and then (b) what happens to the property goes after the Grantor passes away.
Living Trust vs. Last Will and Testament
Revocable Living Trusts are called “living” because they can be utilized right away - literally immediately after the document is properly signed by the Grantor. This is a stark contrast to the Last Will and Testament which is essentially useless until the Testator (the person who creates the Will is called a “Testator” as compared to the person who creates a Trust, who is called a “Grantor”) actually passes away.
This is the primary advantage a Revocable Living Trust has over a Last Will and Testament and the reason why the Living Trust avoids probate (i.e. a RLT is activated immediately and provides for a smooth and seamless transition to successor trustees, allowing assets to be utilized as instructed).
Relying on a Will, on the other hand, freezes up assets until the probate process is complete.
Revocable Trusts have an important role to play while the Grantor is alivebut incapacitated. For assets properly placed inside the Revocable LivingTrust, the Successor Trustee can then utilize the assets held by the livingtrust to, among other things, pay for things that the Grantor needs orwould benefit from.
Not all Heirs Should Receive Assets Outright – a Revocable Trust can protect your family
Another primary advantage a Revocable Living Trust has over Last Will and Testament: With a Will, you are generally leaving assets to specific people (a typical example: to my son, X and my daughter Y).
But oftentimes, one or more beneficiaries would be harmed by receiving funds outright. What if son X is married and his spouse has children from a prior relationship. Perhaps you, the Grantor, want to ensure that your assets are only used to benefit your own familial line. If you gave 50% of your assets to your son through a Will, and he then got divorced, then a large piece would go to the ex-wife! If your son, in this example, passes away (before or after you), then the wife gets everything.
We have other examples of keeping asset in the trust, even after the Grantor passes away, to protect children from creditors as well.
Finally, the Revocable Trust has the ability to create sub- trusts and special needs trusts. If any of your heirs are disabled, elderly or otherwise have special needs, a special needs trust (held within your Revocable Living Trust) can protect their access to means-tested government benefits, such as Medicaid or SSI for Disabled Persons.