In our East Valley estate planning practice at Peterson Law Offices, clients often ask about how a revocable living trust works and also wonder if they need one. There isn't a simple answer to those questions.
Every estate plan is carefully designed to the individual client's family and financial situation. A revocable living trust is appropriate for some estate plans, but it's not the best choice for every plan. Understanding how a revocable living trust works will prepare you for discussing with your estate planning attorney whether a revocable living trust would be a good choice for your estate plan.
A trust is a special type of fund set up by legal documents prepared by an estate planning attorney. The person who creates the trust is the grantor or settlor of the trust.
The trust documents appoint a person or institution (like a bank) as trustee. That person or institution manages the funds in trust and distributes them according to the terms of the trust documents. The individuals who receive funds from a trust are the beneficiaries of the trust.
Arizona law governs administration of trusts and trustees. Every trustee has fiduciary duties in administering and distributing trust funds. Those duties hold the trustee to the highest legal standards in all matters relating to management of the trust.
When a grantor sets up a trust during his/her lifetime, the trust is a living or inter vivos (a Latin term for “between the living”) trust. If the grantor establishes a trust to be effective on death (such as in a will), it is a testamentary trust.
A trust can be either revocable or irrevocable. The grantor can change or terminate a revocable trust. An irrevocable trust cannot be changed or terminated, except in very limited situations.
There are many different types of trusts. A revocable living trust has distinguishing characteristics, including that it:
Each revocable living trust is drafted for a specific person and circumstances. The provisions in the trust documents can vary from these general characteristics according to the grantor's wishes.
When a grantor sets up a revocable living trust, the grantor names himself/herself as trustee. The trust documents also name a successor trustee to assume responsibility for administering the trust if the grantor dies or becomes incapacitated. On the death of the grantor, the trust assets are distributed to named beneficiaries or placed into an irrevocable trust for their benefit, according to the provisions of the trust documents.
During the grantor’s lifetime, a revocable living trust benefits the grantor. Usually, the grantor is the only beneficiary during his/her lifetime, but the trust documents may name other beneficiaries as well. The grantor may change or terminate the trust at any time.
Setting up a revocable living trust is a two-step process. First, the grantor signs trust documents drafted by an experienced estate planning lawyer. Specific legal requirements apply to creating trusts and executing trust documents. The trust is created when the documents are signed.
Signing the documents establishing the trust is only the first step. For the trust to take effect, the grantor must fund it. Funding a trust involves establishing a trust account at a bank or other qualified institution and transferring money and other assets into the trust.
Trust assets may include money as well as tangible assets, like real estate and securities. For assets that are titled, the grantor must change the title to transfer the assets into the trust. At Peterson Law Offices, we assist our clients in making these asset transfers, to take as much of the burden off the client as possible.
After the grantor funds the trust, the trustee (initially the grantor) manages it according to the terms of the trust documents. The grantor loses no control over the trust assets, since he or she serves as trustee of the assets.
There are several good reasons why an individual may decide to set up a revocable living trust. One important advantage is that using a revocable living trust can avoid probate after the grantor’s death. Beneficiaries of the estate receive the assets sooner. Avoiding probate may save substantial fees and costs as well.
Avoiding probate also keeps family financial matters private. When an estate goes through probate, the financial details of the estate are a matter of public record, available for anyone to see. When a revocable living trust is used, the family's financial matters do not become public knowledge.
A revocable living trust also benefits the grantor during his/her lifetime. In the event of the grantor’s incapacity, the successor trustee manages the trust for the benefit of the grantor, according to the terms of the trust documents. This characteristic protects the grantor and avoids a court proceeding to have a conservator appointed if the grantor becomes incapacitated. This protection is a significant benefit of a revocable living trust.
In some situations, a revocable living trust may have estate tax advantages. An experienced estate planning attorney can advise you whether there will be tax benefits in your specific circumstances.
Having a revocable living trust does not necessarily avoid the need for a will. In most cases, an individual with a revocable living trust also has a will to make sure that assets not included in the trust are distributed after the person's death according to his/her express wishes. A will also may be necessary to name guardians for minor children.
Generally, individuals or families with substantial assets should consider a revocable living trust as part of an estate plan. Estates that are more modest may not require a trust — a will may be sufficient to protect the family and assets.
Whether a revocable living trust is right for your estate plan depends on your individual family and financial situation. The only way to determine if it is the best option for you is to consult with a knowledgeable estate planning attorney. Other estate planning tools may be better suited for your circumstances.
At Peterson Law Offices, we provide high-quality estate planning services at affordable prices. We welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.
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