A Revocable Living Trust (RLT) is an estate planning tool that A) distributes assets outside of probate, B) provides for incapacity planning for the trustmaker, and C) provides asset protection for beneficiaries.
A RLT is created by a trustmaker (also called grantor). The trustmaker chooses a trustee and successor trustees to manage and distribute property titled in the name of the trust. The trustee distributes this property to a beneficiary per the terms that the trustmaker created.
This type of trust is called a “revocable living” trust. Just like it sounds, when a trustmaker is alive, he may revoke or amend the trust. The purpose of revocable trusts are typically to avoid probate, provide incapacity planning, and to distribute assets to whom you want, when you want, and how you want.
A revocable trust is different from an irrevocable trust. Typically, a trustmaker may not amend or revoke an irrevocable trust. Irrevocable trusts are generally used for tax planning and asset protection purposes.
- A) Assets held in trust avoid probate.
- B) A RLT can prevent the need of a Guardian or Conservator.
- C) A RLT can provide asset protection for beneficiaries.
Probate is the process by which a court distributes a person’s assets at their death that are subject to probate. Assets that are titled in the name of a trust, or that have a beneficiary form stating who the asset will go to at your death (such as a life insurance form), are not subject to probate. This is because a person already decided to whom the asset should be distributed by either filling out a beneficiary form or by transferring the property to a trust with listed beneficiaries.
If an individual creates a trust and properly retitles their assets to flow through the trust at their death, a probate is not needed. In Arizona, this will save a family approximately $2,000-$4,000 in fees and costs for a “simple” probate, as well as countless hours of time, and the emotional expense of a 9-12 month court process.
In Arizona, if one becomes incapacitated (dementia, stroke, traumatic brain injury, etc.) it is likely necessary to petition the court to have a guardian or conservator appointed for the incapacitated person to help them manage their finances. These court actions are time consuming and expensive.
Under Arizona law, if an institution fails to recognize a successor trustee, it can be liable for court costs and attorney fees when the trustee sues. This statute is stronger than the statutes we have for Powers of Attorney, which do not impose any liability to an institution if it fails to recognize a Financial Power of Attorney. That is why many banks now require that a power of attorney be executed within the past year. If older, some banks are requiring family members to petition the probate court for a conservatorship to access the incapacitated person’s bank account.
If assets are held in an RLT, they are easier to access during a time of incapacity.
Although a trustmaker can provide asset protection for the beneficiaries of his trust, the trustmaker himself does not enjoy asset protection. A trustmaker may design his trust to distribute monies to a beneficiary through a sub-trust (rather than giving the beneficiary the money outright). This sub-trust can be designed to protect against the beneficiary’s creditors, predators, spouses, and even the beneficiary himself.
For example, a trustmaker may know his adult child has a drug problem and because of this the child does not manage money well. The trustmaker can name an independent trustee of the child’s sub-trust and either allow the trustee to requestor requirethe child to pass a drug test before any trust monies are distributed to him. The trust may also instruct the trustee to only make payments to third parties on behalf of the beneficiary-not the beneficiary himself. This will ensure the trust monies are not spent on drugs.
RLT’s are highly sophisticated estate planning tools to meet very specific client goals. Like any legal document, a trust that is drafted by an attorney who regularly practices in this field will offer more protections than one drafted by a document preparer who cannot give you any legal advice. Make an appointment with a trusted estate planning attorney to ensure your family will avoid probate, have a plan in place for any potential incapacity, and provide asset protection for your beneficiary’s.