Revocable Living Trusts are legal entities created to hold the ownership of individuals’ assets. Since individuals hold property in the name of their trust, rather than in their individual names, the property transfers to their desired beneficiaries without the necessity of probate. The term probate encompasses the court process to transfer assets to beneficiaries. Given the length of time probate takes, the cost, and the fact that everything is public record, many clients seek to avoid probate. Revocable Living Trusts provide that benefit.
The Grantor is the individual who creates the trust. The Grantor then names an individual to serve as Trustee to manage the trust assets. In the beginning, the Grantor typically serves as the Trustee. The trust will include language naming a successor Trustee if the Grantor is unable to manage his or her assets.
The trust addresses the management of assets during the Grantor’s lifetime, during incapacity, and following death. The Grantor outlines the process for determining whether the Grantor is financially capable and who will ultimately receive the Grantor’s assets after the Grantor passes away.
There is often a lot of confusion between Revocable Living Trusts and other types of irrevocable trusts. The Revocable Living Trust allows the Grantor to amend, restate, or revoke the trust, which provides the Grantor with maximum flexibility. However, the assets in the revocable trust are included in the Grantor’s gross estate for tax purposes whereas assets held in an irrevocable trust are excluded from the Grantor’s gross estate. Irrevocable trusts provide significantly less flexibility.
The Grantor continues to file taxes on Form 1040 as usual and does not need a separate tax identification number. With an irrevocable trust, on the other hand, the Grantor needs a new tax identification number and typically files a tax return each year for the irrevocable trust.
“Funding” the trust involves the essential process of retitling assets to the Revocable Living Trust. In other words, any real property will now be titled to the Grantors as Trustees of their trust rather than as the Grantors in their individual names. The Grantor will sign new signature cards to retitle the bank accounts to the name of the trust. As with the real property, the Grantor will own the bank accounts as Trustee, rather than as an individual. The same process is followed for investment accounts.
However, the Grantor will not retitle life insurance policies or retirement accounts, such as 401(k)s and IRAs, to the name of a Revocable Living Trust. That would have negative tax implications. The Grantor can name the trust as the beneficiary of life insurance policies.
Notwithstanding the above, the Grantor should never name the trust as the beneficiary of a retirement account, such as a 401(k) and IRA, unless unique circumstances exist. Doing so will could accelerate the required minimum distributions and require the entire balance to be withdrawn in five years, thereby causing an income tax issue for the beneficiaries.
The funding process can be a bit complicated. As a result, Julia Rice guides clients closely through this process. If an asset is not properly funded to the trust, that asset will have to go through probate. Obviously, this is a negative result given one of the primary purposes of the Revocable Living Trust is to avoid probate.
There are many tax planning opportunities available for a Revocable Living Trust depending on the Grantor’s goals and the value of the gross estate. Julia Rice discusses these opportunities in more detail during client meetings ensuring the advice corresponds with each client’s unique goals and circumstances.