What is a revocable living trust?
A revocable living trust is an agreement set up during the life of its creator – who is commonly referred to as the grantor. The trust agreement is between two people: the grantor and a trustee. After the trust agreement is signed the grantor contributes assets to the trust to be held by the trustee under the trust. For those persons setting up revocable trusts to avoid probate it is critical that you retitle all your assets to the trust or make your assets payable or transferable on death to the trust or your chosen beneficiaries.
While a bank or trust company may serve as trustee, the grantor may serve as trustee of his or her own trust. An effective trust agreement will name a successor trustee to manage the trust if in the future the original trustee becomes unable to continue serving. This is a considerable benefit should you become incompetent. First, your family may avoid having to institute a conservatorship proceeding. Second, under a living trust, you – not a judge or anyone else – sets forth how you wish your financial affairs to be managed if your incompetency occurs.
The trustee’s job is to safeguard the trust assets of the trust and to administer them according to the terms of the trust. Typically, during the life of the grantor, the assets of the trust and all income of the trust are to be used for the benefit of the grantor. After the grantor’s death, the terms of the trust – like a will – may provide for a surviving spouse, children or any other number of beneficiaries. Sometimes a trust terminates at death and the assets are distributed outright to the surviving spouse or children. If there are minor children involved the trust may provide that the assets continue to be held in trust for their benefit until they attain a certain age specified by the grantor.
Revocable living trust vs. an irrevocable trust.
A revocable living trust is, as the name would suggest, revocable. So long as the grantor is living and competent, he or she may amend, alter or revoke their trust in any way they see fit. Upon the grantor’s death, the trust then becomes irrevocable and may not be freely modified.
What are the tax consequences of a revocable living trust?
In most situations there are no income tax consequences to having a revocable living trust. The IRS does not require you to apply for a separate tax identification number unless you do not serve as trustee of your own trust. During the life of the grantor all trust income generally flows through the trust and is reported on the grantor’s individual 1040 tax return.
For certain married couples a joint-trust agreement called a Tennessee community-property trust may have certain income tax advantages.
For death taxes there is a common misperception by the public that a revocable living-trust agreement avoids Tennessee inheritance taxes or estate taxes. This is untrue as a trust does not minimize inheritance or estate taxes any more or less than a well-drafted will does. Likewise, a revocable living trust does not avoid creditor claims and usually a creditor may reach these assets to satisfy their claims.
Many considerations must be taken when determining whether or not a revocable living trust is right for you. Often it is, but in many situations there is no need for one, or the costs do not outweigh the benefits.
For many families, avoiding probate is the primary reason for implementing a revocable living trust. In certain situations avoiding probate may significantly reduce the costs and time to administer a loved one’s estate. In other situations the costs of implementing and administering a revocable trust may exceed the costs of settling a probate estate where assets pass under a will. A licensed Tennessee attorney experienced in trusts and estates can advise you on the pros and cons of creating a revocable living trust based on the facts of your particular situation. Also, see our page about choosing a probate attorney.
Maintaining privacy is important for many families. A will becomes a public record when offered for probate with the court. A revocable-living-trust agreement, to the contrary, remains a private document after the death of the grantor. With a trust there may still be a loss of privacy during your lifetime. This is because banks and other financial institutions likely will not open new accounts or transfer assets into the trust without first being provided a copy of the trust instrument.
A revocable trust may help people who own real property in multiple states avoid added expense and delay having to enter into probate proceedings in multiple states. A probate proceeding held in a state where the decedent did not die a resident is called an “ancillary” probate. Out-of-state real property, properly titled in the name of a valid trust agreement, will usually avoid the necessity of having to go through an ancillary probate.