September 17


Before Starting a Revocable Living Trust

By Michael Taylor

September 17, 2020

What is a Revocable Living Trust? 

A revocable living trust is a great way for those who want to set aside assets into a trust for their beneficiaries while still maintaining full control of them. Additionally, a living trust can have assets added or removed at your convenience meaning that as your financial situation changes or your goals shift, your trust can reflect those new changes. Lastly, as the name implies, a revocable living trust that names yourself as the trustee can be dissolved at any time while you are still alive. Here are 5 things to consider before starting a revocable living trust.

1. Great Way for Smart Asset Growth 

For those that might possess large amounts of money, property, securities, or all the above, a living trust might be right for you. One of the benefits of the living trust is that you can name your successor trustee and change who this person is if you so desire. Why this is good for many people with large amounts of assets is that the successor trustee could be the large trust department of a bank or company with a proven track record of trust growth. 

By being able to change who this company or entity is throughout your lifetime, you have the opportunity to continue shopping around for the best available people to manage your assets after your passing to gain the most money possible for your beneficiaries.

2. Lots of Assets Could be Lots of Problems 

While being able to name a competent trust managing firm as sure way to guarantee the longevity of the trust, having lots of assets could be a hindrance depending on your financial goals. That is because every time an asset, piece of property, or security is bought and sold, it needs ownership changed. For instance, real estate you sell from the trust needs to be transferred back to your name. On the contrary, property bought for the trust must be transferred to the trust’s name. 

If you are buying and selling large amounts of securities frequently, you could easily get money mixed up or forget something altogether. The consequences of this would be that money you intended for the trust could be accidentally left out and would have to be settled in probate court.

3. Trust Costs vs. Probate Court Costs 

A common selling point of revocable living trusts is that they avoid a costly probate court process. While this might be true if all the assets are properly titled, this claim does not take into account the expenses of managing a trust. Trusts are charged management fees and depending on the size of the trust can run anywhere from around $500 to $2500 per year. 

If your trust does go to probate court if beneficiaries challenge it, the trust can still be charged money by not only the successor but by the lawyer he or she hires to represent the trust. Those debating whether or not to set up a living trust need to weigh the possible fees the trust would incur during its lifetime vice the possible fees if the trust ever went to probate court. For smaller valued assets, a living trust may not be a good idea. 

4. Assets Have Limited Protections 

While there are no Federal gift or estate taxes due at the creation of a living trust, your successor would have to pay these taxes upon your death and before any of the beneficiaries receive their portion. However, smaller estates are exempt from this since these taxes apply to trusts of $1,000,000 or more. 

What would apply to everyone would be the income taxes generated from the trust each year. If the trust earns income from qualifying dividends, stock sales, or other investments, the income will have to be reported on your taxes, which can be burdensome if you have no other source of income. 

Revocable living trusts are also not protected from liens against them from nursing homes. Nursing homes can pay for your care from your trust since the trust can be changed at any time and is considered a valid asset to pay medical expenses. Therefore, if you ever intend on staying for an extended period of time in a nursing home understand that the trust is not a shield that your assets can hide behind untouched.

5. Protection Against Incompetency 

A great and little known provision of a living trust is being able to name your own grantor in case you become incapacitated. There are many ways that one can become incapacitated either through accident or illness. A living trust is a great safety net in that you get to name your own grantor while still competent eliminating the risk of someone you might not have wanted being appointed over your assets. 

You also get to create your own definition of when you would feel incompetent and this person or entity would then carry out the duties of your trust until your passing. It is important to keep in mind that the new grantor cannot make medical decisions on your behalf so this arrangement would have to be worked out separately. Because of this benefit, those who feel they might succumb to incompetency later in life and want control over who has a say in their finances now would be a great candidate for this financial tool.

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Michael Taylor

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