Many people know that they need an estate plan, but don’t know what documents compose one. I’m going to provide a brief overview of these documents, in a few installments. In this first installment, I’ll answer the most frequently asked questions about Revocable Trusts, or Living Trusts, or Revocable Living Trusts, as they are frequently called.
Is “revocable living trust” same thing as a “revocable trust”?
A: Yes, the two names are interchangeable. Anyone who talks about a “revocable trust” is talking about a “revocable living trust.”
Is “revocable living trust” same thing as a “living will”?
A: No, a “revocable living trust” is a trust created to protect and manage your property, whereas a “living will” is actually another name for a health care directive, which is a document where you specify your incapacity care and health-related end of life wishes.
What is a will?
A: A will is a document, a piece of paper where you, called “the testator,” spell our your wishes – what do you want to happen to your stuff after your death. Additionally, parents of minor children use the will to nominate who would take care of their children and the children’s assets should something happen to the parents. You can learn more about wills here.
What is a revocable living trust?
A: Unlike a will, which is just a piece of paper, a revocable living trust is more like an entity – a corporation, an LLC, or even another person. As a friend of mine put it, “it’s like your imaginary friend.” Yes, physically it’s a stack of paper. But the most important characteristic of this stack of paper is that, just like a corporation, an LLC, or another person, this stack of paper has the ability to legally own property.
When the revocable living trust is created, or “born,” the title to most of your assets is literally transferred from you to your revocable living trust, with the end result being that the legally, the trust owns all of your assets.
This is not as scary as it sounds, since so long as you are alive and well, you retain 100% control over all the assets that are in your revocable living trust. So, for practical purposes, you continue living as if there is no trust: you can sell your current house, buy three new houses, or give all your money away, without having to ask anybody’s permission.
What happens if I don’t have a revocable living trust?
A: When there’s no revocable living trust in place, the deceased person’s assets have to go through the probate process before they are distributed to the beneficiary. A guardianship of estate must be established before the assets can be distributed to any beneficiary who’s under 18 years of age.
Let’s use me, Marina, as an example. Let’s say I am not married, own a house worth $800,000 with a $500,000 mortgage on it, and have one child, a five year-old daughter. I have no revocable living trust, and I die in a tragic car accident.
My house is going to my daughter. To get there, a “probate process” is initiated in “probate court,” it takes close to a year, and the attorney fees and the executor’s fees (executor is the person in charge of putting my house through probate) are… drumroll… $19,000 each, for a total of $38,000, if things go smoothly. (The probate process mandates “statutory fees” to both attorney and executor. These fees are a percentage of the total value of the estate disregarding any mortgages. So, they don’t care that I only had $300,000 of equity in my house.
As if that’s not enough, before the house can be distri daueft without an owner.” When my trust owns my house and I die – my house continues to be owned by my trust, even though I’m dead. Thus, the probate process with the statutory attorney and executor fees is never triggered.
My trust names a “successor trustee” – the next person in charge of the trust assets, after I die. Let’s say it’s my sister. So, my sister steps up and evaluates the trust assets, as well as the beneficiaries. She sees that my daughter is five, and thus can’t own the house outright. In fact, my trust specifies that no beneficiary will receive their inheritance until they are at least twenty-four (or twenty-one, or thirty-five, whatever I wanted). So the sister doesn’t distribute the house to the daughter, thus avoiding court involvement and fees for a guardianship of estate. She continues to manage the house or the cash from its sale until the daughter is twenty-four, at which point she distributes it to the daughter outright.
Is a will and not a revocable living trust ever enough?
A: For most people who own real estate, and/or have minor children, I recommend having a revocable living trust instead of just a will. For people with no minor beneficiaries, no real estate, and estates under $166,250, a will may be sufficient. I do recommend consulting an attorney to help you decide.
If I have a revocable trust, do I still need a will?
A: Generally, a person who has a revocable living trust gets what’s called a “pourover will” – a will that gives all of the person’s assets to the trustee of that person’s trust. This serves as a backup for any assets that the person forgot to give to the trust. Also, parents of minor children use the will to nominate who would take care of these children should something happen to the parents.
Remember, with death and property, there are always things that must be done, and I’m happy to help, or just answer any questions you have.
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