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What is a revocable living trust? First,
you should know that all trusts are written agreements that provide for
property management. This management is provided by someone with a
special position of responsibility and duty for the benefit of others.
A revocable living trust (sometimes called a "living trust" or
"revocable trust") is a particular kind of agreement that you make that
says how you want property you put into the trust to be managed and
distributed. This trust agreement can be changed or revoked. The trust
agreement involves at least three parties: - the settlor or grantor (you, the person who creates the trust);
- the trustee (the person who agrees to accept your property and manage it as the trust directs); and
- the
beneficiary (the person or people who will get the income from the
property in the trust and, with your direction, the property itself).
You can name two or more people to act together as trustees. They are
called "co-trustees," because they must act together. Usually, you will
name yourself – or you and your spouse – as the trustee because you
want full control of the property. However, many people do name trusted
friends or relatives, or a bank trust department as trustee. A
revocable living trust in which you or a friend or relative is the
trustee should always name a second person or bank trust department to
act if the first trustee dies or otherwise is not able to continue to
manage the property. This second person is called a "successor trustee."
It is not necessary to put anything into the trust when you set it up.
Such a trust would be an "unfunded" trust. An unfunded trust is
intended for future use, such as an anticipated disability or old age.
When you want to create a trust for future use you usually put only a
small amount of money (such as $10) to start the trust. This trust will
not do anything for you until later, when you decide to add more
property to it. You might create this kind of trust as an alternative
to a future guardianship or conservatorship. If you can't take care of
your own affairs your property is put into the trust later during your
lifetime.
If you put a larger sum of money or stocks or real
estate in your trust, it becomes "funded." Now the trustee has
something to do. The trustee manages the property as the trust
agreement requires. The trustee pays the income to the beneficiaries
you have selected. If you die, the people you have chosen will receive
the property.
Some people put all or most of their property in
the trust at the beginning. Others put some in at the beginning and add
more from time to time (for example, when a certificate of deposit
matures). Others may wait and transfer much of their property only when
they die. To do this you would use a simple will – called a pour-over
will. The pour-over will funds the trust with property that you did not
put in the trust during your lifetime.
When you set up a
revocable living trust, you are usually the first beneficiary. If you
are married, you may decide to make both you and your spouse the first
beneficiaries. If not the first beneficiary, you usually make your
spouse the second beneficiary if you die first. In any event, you will
want to choose the people whom you want to get your property after you
die, so that the trustee will know what to do then.
Can a revocable living trust provide for minor children when I die? Yes.
Actually, you can make all of the provisions for a spouse or for minor
or adult children in a revocable living trust that you can in a will.
Will a revocable living trust avoid nursing home costs? No.
Because you can change the trust any time and take the property back,
the property in the trust is still yours and will be included when your
eligibility for medical benefits is calculated.
Will a revocable living trust save me any income taxes? No.
Because you can end the trust any time, the state and federal
governments treat the income that the trust earns as your income.
Usually the trustee pays you all of the income and pays you any amount
of principal necessary to provide for your needs and requirements. If
you become incapacitated, the trustee pays necessary amounts of income
and principal for your benefit.
Will a revocable living trust save any estate or other death taxes? You
do not save any taxes just because the trust is a revocable living
trust. If the net value of all of the property you have an ownership
interest in when you die is more than a certain amount, there may be
some taxes. The amount is $1 million in 2002 and increases to a maximum
of $3 million in 2009 for the Federal Estate Tax. There may be some tax
in Wisconsin on amounts over $675,000. It may be possible to reduce or
avoid these taxes by setting up certain other types of trusts, either
while you are alive or through a will.
Is the revocable trust part of my taxable estate when I die? Yes.
Because you can end the trust any time, all of the property that is in
the trust at the time of your death will be included in your taxable
estate.
Can I change the trust after I set it up? Yes,
as long as you are mentally competent, which is why the trust is called
revocable. You can change the trust or take back the property any time
for any reason without having to get permission from anyone else. In
Wisconsin, a trust is revocable only if it says so in the trust
agreement. The trust will become irrevocable when you die and no
changes are allowed then.
What can a revocable living trust do? It can do several things: - provide for property management if you can't manage your own affairs.
If you have property that needs active management and you become too
sick or disabled to do it, without a trust there may have to be a
guardianship or conservatorship. If you have a trust, this expense and
inconvenience can be avoided. If you have an unfunded trust, you will
need to have given someone a durable power of attorney that lets that
person add your property to the trust.
- provide financial management of your property.
Whether you begin by acting as your own trustee or not, you may find at
some point that you no longer wish to manage your property. You can
name a trustee or successor trustee who has proper training and
qualifications to take over the day-to-day problems of property
management. Expect to pay such a person a reasonable fee for this
responsibility and effort.
- avoid probate. Property in
a revocable living trust is not subject to the probate process. If all
of your property is in your living trust, there will be no need to
probate your estate. This also may provide some privacy since the
probate records are open to the public. To the extent that a trustee or
beneficiary does not insist on court approval of accounts, the
revocable trust is not made part of the public record and remains
confidential. However, if you have not put substantially all your
property in the trust before you die, probate usually will be required.
If you own land in another state, probate may be necessary in that
state to transfer that land to your heirs. By putting that land in a
revocable living trust, probate in the other state may be avoided.
- shorten or eliminate the delay in distributing your property when you die.
Because a revocable trust operates without court supervision (unless
someone requests the court to become involved), a trustee probably can
act more quickly than a personal representative of a probate estate to
carry out the trust terms. The trustee probably can distribute property
to your beneficiaries that would be delayed in a probate proceeding.
However, if there are outstanding claims or taxes, there also may be a
delay in distribution from a revocable trust.
Are there things a revocable living trust cannot do? There are several things a revocable living trust cannot do: - a revocable living trust will not reduce taxes any more than a will.
You can have proper estate tax planning with either a will or trust. It
is not necessary to have a revocable living trust to get the best tax
savings.
- it cannot totally avoid many costs associated with probate.
Even with a living trust you may have to pay the trustee or someone
else for preparing documents, tax returns, transfers of property and
other costs in running and distributing the trust. This work is similar
to what a probate personal representative does. These costs usually are
included in the fee that is charged by the personal representative.
- the living trust does not shorten the period that a creditor can make a claim after your death.
One advantage of probate is that any claims of creditors are cut off
soon after your death. Instead of the normal rules, a creditor has to
make the claim within four months after the start of probate to be able
to collect. This assures the beneficiaries that they will get your
property without having to worry about a creditor being able to take
some of it to pay your old bills. If there is no probate, the
beneficiaries do not get this protection.
- the revocable
living trust does not eliminate the need for a will or the possible
need for a durable power of attorney or guardian. If you do not
have all of your property in your trust, you should have a will that
transfers it to the trust. You also should have a durable power of
attorney that will give someone the power to deal with any property
that you have not put into the trust if later you can't manage your own
affairs. The trustee can manage and make decisions about your property
but does not have the authority to make decisions about you. If there
is no durable power of attorney, a court-appointed guardian can make
these decisions.
Can there be court supervision of a revocable living trust? Yes.
Usually, people prefer the informality of operating the trust without
court supervision. A trustee or beneficiary who wants the protection of
the court can get court supervision if needed or wanted. This
supervision may involve accounting matters, issues of property
management or general fairness.
Is a revocable living trust a complete substitute for a durable power of attorney? No.
The two documents usually work best together. The trust can provide
more flexible property management and distributes your property after
you die. The power of attorney can help with final funding of your
trust, but is better for dealing with special services, Medicare and
Medicaid, personal income taxes and daily living expenses.
Should I have an attorney prepare my trust? An
experienced attorney can give you valuable help and make sure that
legal documents are prepared properly and are proper for your
situation. Just as one size coat does not fit all, do-it-yourself kits
and form books can't deal with your unique needs and can be very
dangerous.
Does a living trust cost more if you have a lawyer prepare it? It
would be more expensive than the do-it-yourself kits or form books.
However, making sure that the documents are prepared properly and fit
your situation is very important and can save money in the end. Just as
you would run a risk in flying in a plane built by someone without the
proper engineering training and experience, it can be dangerous to have
someone prepare living trusts who does not have the training or
experience. There also are commercial trust packages being sold that
cost more in many areas of Wisconsin than would equal or better trust
documents prepared locally by experienced lawyers.
Last updated: September 2004 |
