What is a Revocable Living Trust?
A Revocable Living Trust is a legal document often used as an integral part of an estate plan. A Revocable Trust is a document created by a person to manage assets during their lifetime and distribute the remaining assets after their death. A Revocable Trust allows for the person creating the Trust Agreement, during their lifetime, to manage the Trust, to receive benefits from the Trust, and to change the terms of the Trust or revoke it.
How Does a Revocable Trust Work?
Who is involved? It is important to understand the roles that people involved in the Trust play and their legal names. Essentially there are three parties: the Grantor, the Trustee, and the Beneficiaries. In most Revocable Trusts, the person establishing the Revocable Trust will serve in all three roles simultaneously. In all events, the person establishing the Revocable Trust will be the Grantor and one of the Beneficiaries.
- Grantor: An individual that establishes the Revocable Trust. Some Revocable Trusts refer to the Grantor as the Creator, Donor, Settlor or Trustor.
- Trustee: A Trustee must be named in all Revocable Trusts. Most individuals establishing a Revocable Trust choose to be the Trustee of their Revocable Trust or a Co-Trustee with their spouse or a child. By serving as the Trustee, the individual will continue to control his or her assets in the same manner as was done before the creation of the Revocable Trust. It is not a requirement that one serve as their own Trustee. In such an event, another individual or qualified institution with trust powers, professional trust manager, can serve as the Trustee. In addition, most Trusts name someone to serve as a Successor-Trustee in the event that the Trustee can no longer serve due to their incapacity or death.
- Beneficiaries: The persons receiving the benefits of the assets in the Revocable Trust (income and/or principal). During the Grantor’s life, he or she will be the Beneficiary of the Revocable Trust and will receive all of the benefits from the assets in the Revocable Trust. The Grantor’s spouse may also receive benefits from the Grantor’s Revocable Trust. At the death of the Grantor, the persons or organizations that the Grantor designates to receive the benefits of the Revocable Trust will then become the Beneficiaries. During the Grantor’s life, he or she may change the Beneficiaries who will benefit from the Trust at any time.
What Happens After the Revocable Trust is Executed?
Most assets, which were otherwise in the Grantor’s name, must be transferred to the Revocable Trust. Funding the Revocable Trust is essential because the Trustee only has control of assets that are actually in the Revocable Trust. After the Revocable Trust is funded, the individual will administer the trust assets (as Trustee) for their own benefit (as Beneficiary). In other words, the person will deal with the trust assets in the same manner as when the assets were in their individual name.
What Happens to the Revocable Trust if the Grantor Becomes Incompetent?
The back-up or Successor-Trustee will automatically take over the duties and responsibilities and administer the Revocable Trust to avoid having a court-appointed guardian to administer the assets in the Revocable Trust.
What Happens to the Revocable Trust After the Death of the Grantor?
The Successor or back-up Trustee named in the Revocable Trust will act in a manner similar to an individual’s personal representative in a Will, but he or she will not have to report to the probate court. The successor or back-up Trustee will carry out the terms, conditions, and instructions stated in the Revocable Trust. This usually involves the payment of bills and taxes and the distribution of the assets to the Beneficiaries. If the Revocable Trust provides for the assets to remain in trust for the Grantor’s spouse or children, the Trustee will administer those assets following the terms of the Revocable Trust. The process is quicker, less expensive and more private than a probate proceeding which must occur if a person’s assets are left under a Will.
Revoking or Amending a Revocable Trust
A Revocable Trust can be amended by the Grantor at during Grantor’s lifetime. Amendments are often done when a Grantor wishes to change the Beneficiaries or the Successor or back-up Trustee; or if the Grantor has children, grandchildren, gets married or divorced; or other changes in the financial or physical life of the Grantor change (for better or for worse); or changes in the estate or gift tax law occur. Most amendments are simple and will not require significant revisions of the Trust Agreement.