Revocable Living Trusts

Contents

1. What the document creates
2. The three roles
3. Funding the trust
4. Life before death
5. Probate avoidance and its limits
6. What a trust can do that a will cannot
7. The trustee as fiduciary
8. Taxes, costs and sales dinners
9. What changed and what did not

Brent O’Mara works with business owners and multigenerational families, and tax strategy is one area that work often reaches, which is where a common belief about living trusts usually surfaces. The belief is that a revocable living trust saves taxes. It is an understandable idea, since trusts of other kinds are built for exactly that purpose, and since the people who sell living trusts at hotel dinners have long implied it. But the author of Kiplinger’s book on estate planning told Marketplace that such claims are exaggerated and describe things living trusts do not do.³ A revocable trust is not a tax device. It is a device for holding property during life and moving it at death without a courthouse, and almost every confusion about it comes from mixing those two jobs up.

What the document creates

The Consumer Financial Protection Bureau defines a revocable living trust as an arrangement set up through a legal document that gives someone the power to make decisions about money or property held in the trust.¹ People use it, the bureau says, to keep control of their property while alive and to designate who receives it when they die, and one reason to set one up is to avoid probate, a public process that can be expensive and lengthy.¹ The word revocable matters: the maker can amend the document or undo it entirely at any time, which is the feature that separates it from the irrevocable trusts used in estate tax planning.⁶

The three roles

Every revocable trust names three parties. The grantor makes the trust. The trustee manages what is in it, and during the grantor’s life the grantor is usually his or her own trustee. The beneficiaries receive the money or property, and while the grantor is alive that may be the grantor alone.¹ The document also names a successor trustee who can act only when the original trustee can no longer serve, for example after death or disability.¹ Those who receive what remains after the grantor’s death are called residuary beneficiaries.¹

Figure

The three roles in a revocable trust

1. 01
   GrantorThe person who makes the trust and moves property into it, also called the settlor or trustor.
2. 02
   TrusteeThe person who manages the property; during the grantor's life this is usually the grantor, with a successor named to take over at incapacity or death.
3. 03
   BeneficiariesThose who receive money or property, often the grantor alone during life and the residuary beneficiaries after death.

Funding the trust

A trust is ineffective until the person who made it actually puts property into it.¹ That step, called funding, is where many plans quietly fail. A Washington Post real estate column observed that many people set up living trusts and then forget to convey their homes and other property out of their personal names, so that at the end the owner of record is still the person and not the trust.² The Marketplace guide made the same point about cars and real estate: the title itself changes, so the trust becomes the owner.³ Property left outside the trust falls back to the will, which is why the Chicago Tribune noted that a living trust does not remove the need for a will to catch whatever was never transferred.¹⁰

Life before death

Unlike a will, which does nothing until death, a trust can act while its maker is alive. The bureau notes that a trust can give someone else the power to make financial decisions if the grantor becomes unable to, because of injury or illness.¹ The Post column described the sequence for a widow who moves her home into a trust: she keeps the same control she had before, and upon any mental disability the document designates a successor trustee to handle her affairs.² That continuity is the reason estate planners pair a trust with a durable financial power of attorney rather than treating them as substitutes.

Probate avoidance and its limits

Probate avoidance is the benefit most often advertised, and it is real, but the University of Illinois Extension is careful to add that it is not unique to trusts. Beneficiary designations, pay on death accounts, transfer on death registrations and joint ownership with right of survivorship all avoid probate too.⁵ What a trust adds is reach: it can avoid probate in several states at once where real estate is owned in more than one, something no account form can do.⁵ Marketplace’s guest explained that the practical difference is time, since in the probate system the distribution of assets may take a long time, while a trust simply continues.⁴ How the process works in this state is covered in probate in Nebraska.

Figure

A will beside a living trust

	A will	A revocable living trust
When it operates	Only after death	During life and after death
Probate	Property passes through it	Property titled to the trust avoids it
Guardian for minor children	Can name one	Cannot
Privacy	Becomes a public record	Terms need not be made public
Instructions past death	Ends once assets are distributed	Can last months or generations

What a trust can do that a will cannot

The Illinois Extension author draws the sharpest distinction. Most estate planning tools do one thing: transfer an asset to a person at death, after which their work is over. A will is somewhat broader, since it also names an executor and a guardian, but it still does nothing until death. Trusts are different because they can exist during life and after it, and because they are multipurpose.⁵ A trust can provide professional management, let one person receive income for life while preserving the principal for children of a first marriage, control assets for many years after death, support a disabled person without endangering government benefits, and dictate at what age or time heirs may reach their inheritance.⁵ Money reported that a trust is the only way to influence how heirs use assets from beyond the grave, through devices such as staggered distributions that release money as heirs mature.⁹ The same article warned that heavily restrictive terms can breed resentment, and that an heir can challenge a restriction that reaches too far.⁹

The trustee as fiduciary

Whoever manages a trust is a fiduciary. In an American College of Trust and Estate Counsel video, a fellow explains that the written trust document is the trustee’s instruction manual, and that on top of it the trustee owes duties of loyalty, impartiality, prudence and confidentiality to the beneficiaries.⁷ Administering a trust means understanding its legal language and tax consequences, filing returns and keeping records, and hiring help is both permitted and expected, with the fees a proper expense of the trust.⁷

Figure

Four duties of a trustee

1. 01
   LoyaltyNever placing the trustee's own interest, or anyone else's, above the beneficiaries' interest in the trust.
2. 02
   ImpartialityAdministering the trust without favoring one beneficiary over another, however close the relationship.
3. 03
   PrudenceMaking sound decisions about management and investment of what the trust holds.
4. 04
   ConfidentialityNot discussing the trust or its beneficiaries with outsiders.

A second college video on choosing a trustee notes that the person should understand finances, law or accounting, or failing that be a peacemaker who communicates well with the family; that a corporate trustee can serve instead of an individual; and that a successor must always be named, since an ongoing trust may run for decades.⁸

Taxes, costs and sales dinners

Here the common belief meets the record. For federal income tax purposes, the Post column explained, transferring a home to a living trust changes nothing: the owner keeps the same ownership interest and the same tax basis, as if the property were still in her own name.² The property remains in her estate, which is also why it still receives a step up in basis at death.² South Dakota State University Extension lists the revocable trust as a tool that helps avoid probate but does not provide strong asset protection, in contrast to irrevocable trusts, which cannot be altered once established and which are the ones used for estate tax planning.⁶ Whether a trust earns its cost depends on each family’s circumstances, a judgment that sits with qualified professionals in law and tax rather than with a seminar brochure.

The seminar culture around living trusts deserves its own note. The Marketplace guide cautioned that companies inviting people to hotels to hear about trusts often make exaggerated claims and sell one prepackaged document to everyone, when every person’s estate and heirs are different.³ The Illinois Extension author cited a state alert about such trust mills: documents built from boilerplate rather than tailored, fees high compared with reputable sources, and dinners whose real purpose was to sell insurance.⁵ The Chicago Tribune added that state law often requires a lawyer to draft the actual trust, and that a transfer handled improperly can leave the trust invalid.¹⁰

What changed and what did not

What changed over the past generation is the competition. Transfer on death registrations, payable on death accounts and beneficiary designations now move most financial assets outside probate without any trust at all, and the Tribune’s reminder that a jointly held account goes to the survivor no matter what a document says applies to trusts as much as to wills.¹⁰ What did not change is the thing the trust alone does. No account form can manage property during a long incapacity, hold a house in two states, pay income to a second spouse while saving principal for a first family, or release an inheritance in stages over twenty years. The belief that a revocable trust saves taxes was never right. The narrower claim, that it is the one estate document which works both before and after death, still is.