What is a Revocable Living Trust?

            A Revocable Living Trust is a written agreement which creates a trust and contains provisions for the management and distribution of your property.  The agreement gives you the power to revoke the trust, to amend or modify it, or to add or withdraw property from it.  After your death the trust cannot be changed, and the property is held and distributed to your family.

How Does a Revocable Living Trust Avoid Probate?

            When you transfer legal title of your property to your trustee, then you eliminate the need for a probate proceeding to transfer title to the property at the time of death.  When you establish a Revocable Living Trust, and if you transfer legal title of your property from your individual name to the name of your trust – such as from “John and Mary Smith” to “John Smith, Trustee Under Trust Agreement Dated January 1, 2021,” only then will your property not be subject to probate administration.  

What is Probate? 

            “Probate” is the legal process by which the Probate Court makes sure that a deceased person’s debts are paid and his property is distributed according to his Will.  The Probate Court oversees the administration of your estate, which includes payment of bills, gathering of assets, filing of tax returns, and distributing assets according to the deceased’s will.  Also, the Probate Court proceedings ensure the proper transfer of legal title to each asset to your family. 

Why Would You Want to Avoid Probate?  

            It takes time to process an estate through probate, and usually, distributions of property from the estate should not be made until all claims against the estate have been filed, which is six months or more from the commencement of the probate proceedings.  Avoidance of court supervision, or probate, may provide savings in estate settlement expenses.  Also, probate files are a public record, open to public inspection, so anyone will know what you owned, who you owed, and who will receive your assets.  Finally, during the probate process, your family has no control over the assets and this might be frustrating to your family.  

Doesn’t Joint Ownership of Assets Avoid Probate? 

            No.  When one joint owner dies, ownership will automatically transfer to the surviving joint owner; however, when the “second owner” dies, or if both owners die at the same time, the property must pass through probate.  There are risks in putting someone else’s name as a co-owner of your property – you lose control.  You may expose your property to the other person’s debts, and you will need your co-owner’s signature to sell or transfer your property.  If the joint owner dies before you do, a death tax may be imposed on the jointly owned property in the estate of the other joint owner – you may have to pay a tax to get your money back. 

Who Should Be Trustee? 

            You may be the trustee and you may designate another person or a bank as a co-trustee or successor trustee, so that management of your trust will not be interrupted by your disability or death.  If you are primarily interested in using the trust as a probate avoidance device, and do not want to give up control of the day-to-day management of the assets to any other person, then you may be the sole trustee.  At your death or disability, a successor trustee would act as trustee.

Should I Use A Corporate Trustee?

            A bank or trust company specializes in the management of trusts, and they usually have a trained staff of professionals who manage your assets according to the instructions you put into your trust agreement.  Also, they will handle all of the required paperwork, maintain accurate records, distribute the income from the trust, and, when the trust is dissolved, distribute the assets to your beneficiaries. A bank has the advantage of experience, professional investment management, reliability and objectivity.  A bank does not get sick, or go on vacation, and a bank trustee is subject to government regulatory control.

May An Individual Be A Trustee?

            You may manage your own trust or you and your spouse can be co-trustees.  In this case, either one of you can act and have control if one of you becomes incapacitated or dies.  While family members and friends may serve as trustee, they might not be the best choice because they may be too busy, live too far away, or they may not be responsible or experienced enough to manage your assets.  A family member who serves as trustee may not be qualified, may not be independent, and might cause problems for the other family members. 

Is A Revocable Living Trust Expensive?

            A Revocable Living Trust is not expensive when compared to the cost of a full probate proceeding.  How much you pay depends on how complicated your estate plan is, and the type and amount of your assets.  The costs associated with the Revocable Living Trust involve the preparation and registration of documents to transfer title of assets to the trust, the acquisition and subsequent investment or reinvestment of assets in the name of the trust, and, in some cases, the reporting of income and expenses on a fiduciary income tax return.  The Revocable Living Trust may be used to hold title to out-of-state real estate, such as a vacation home.  You can reduce the probate proceedings required from two states (residence state and vacation state) to one state (residence state), and effectively reduce the overall settlement costs without cumbersome ongoing costs for the lifetime administration of your assets.  The expense of funding the trust with the vacation home would be the cost of preparing and recording the deed of conveyance, and the annual cost of preparing income tax information for the trust-owned real estate. 

What Are The Income Tax Consequences Of A Revocable Living Trust?

            During your life the Revocable Living Trust provides the same income tax results as though you had retained the assets in your name.  If you serve as trustee or co-trustee, then the trust’s income and deductions should be reported on your personal income tax return, and a trust income tax return should not be filed.  If you do not serve as trustee or co-trustee, then a separate income tax return for the trust is required, even though the trust’s income and deductions will still be reported on your income tax return.  If you serve as trustee, then the tax identification number should be your Social Security number.  A separate tax identification number would be necessary only if you are not serving as trustee. 

Do I Have To Transfer Assets To The Trust During My Life? 

            If you do not change title to your Revocable Living Trust during your life then your assets will still be subject to probate court administration.  If you want your estate to avoid the probate process then it is necessary that you transfer legal title of your property to your trust. 

How Do I Transfer Assets Into The Name Of The Trust?

            You should change the registration of title which shows the ownership of the assets.  For example, if the asset is registered in the name of John Smith, 1234 Main Street, Louisville, KY., then it should be changed to “John Smith, Trustee of the John Smith Revocable Trust, under Agreement dated January 1, 2000.”  For your stocks and bonds it may be best to have your stockbroker keep possession of your securities, and register the securities in the name of your trust.  We recommend that you transfer your stocks and bonds to the brokerage house of your choice, and have the securities registered in “street name.”  “Street name” means stocks and bonds held in the name of your brokerage firm as agent for you.  Non-registered property, such as household property, objects of art, etc., should be transferred to the trust by a separate written instrument (not your will) identifying the item delivered to the trustee and the date of delivery.  The written instrument that evidences this transfer would be a Deed of Gift, which is similar to a Bill of Sale. 

Should I Change My Property Insurance? 

            Yes.  If you change legal title to real estate or personal property into your trust, it is imperative that you confirm with your insurance agent that your trust will now be a “named insured.”   If the trust is not a “name insured” under your liability policy, then it is most probable that your insurance company will deny any form of coverage protection.  If your insurance agent advises that it is not necessary to have the trustee as an additional named insured, then we encourage you to get that advice in writing.  If the property is rented to others, then be sure to change the terms of your lease agreement.  

What Should I Do With My IRA And Pension Benefits?

            Assets in a pension or profit sharing plan or an IRA are subject to income taxes when distributed from a qualified plan arrangement; hence, you should not transfer your pension or IRA to your Revocable Living Trust.  Instead, you should consult with us as to the best way to transfer this kind of asset because pension benefits and IRAs are subject to both income and death taxes. 

How Do I Get Money Out Of My Revocable Living Trust?

            During your life the trustee may give you money from the trust.  Property that you put into the trust is called principal, and the earnings on the principal is called income.  The trustee may make discretionary distributions of income and principal to you as and when you need or want it.  If someone else is serving as trustee and they do not make a distribution when you want it, then you may fire the trustee and appoint someone else as trustee.  After death, the trust assets may be distributed to your family or retained in trust for the benefit of your spouse and children.  The trustee will be required to make distributions of income and principal in accordance with the written provisions of the trust agreement.  The trust agreement needs to contain the necessary instructions for the trustee so that the trustee knows what to do with your property, and we will help you write those instructions. 

Do I Still Need A Will?

            The Revocable Living Trust, by itself, is not sufficient to accomplish your goals of reduced probate expenses.  If you have not transferred all of your property to the Revocable Living Trust, you must have a will which is integrated with your trust.  This kind of will is referred to as a “pour-over” will.  There are numerous other good reasons for having a will; for example, if the cause of your death gives rise to a legal claim against another person, your executor will want to sure the person who caused your death. 

What Happens If I Suffer A Disability? 

            The Revocable Living Trust can continue to provide for the management of your assets in the event you suffer a disability.  During the period of time immediately prior to death the successor trustee could commence to serve as trustee in order to protect the trust assets and to use the assets for your benefit and the benefit of your family. 

Do I Need A Power of Attorney?

            You should also have a durable power of attorney designating a person to complete the transfer of property to your Revocable Living Trust during your lifetime.  The durable power of attorney and the pour-over will are companions to the Revocable Living Trust to facilitate the complete funding of your Revocable Living Trust during your lifetime.  While your attorney-in-fact may act for you, and this could be helpful; however, the power of attorney terminates at death and sometimes your attorney-in-fact may do things that you would not like. In certain instances, to deal with real estate and transfer of automobile titles, the power of attorney document must be recorded in the county court clerk’s office.