Advanced planning

Revocable living trusts

A revocable living trust is a dynamic estate planning tool for holding assets during lifetime and at death. A trust exists when one person (often called the grantor or settlor) gives property to another person (called the trustee) to hold and manage for one or more other persons (called the beneficiaries).

Your client may wish to create a revocable living trust in order to avoid probate or to provide estate management for their family after your client’s death. When paired with life insurance, a trust can provide a powerful legacy plan for your client and their heirs.

How does it work?

Your client’s attorney drafts the trust to meet their individual goals. As a “revocable” trust, your client can typically modify or even cancel it during their lifetime. In most cases, your client − the trust creator − will act as the trustee during their lifetime. Should your client become incapacitated or unable to act, your client’s successor trustee steps in to manage trust assets according to the trust document. Once the trust is established, your client’s attorney will instruct them on how to “fund” the trust. This might involve steps like retitling assets in the name of the trust or updating beneficiary designations.

Revocable living trusts and life insurance

Life insurance fits well with many revocable living trusts. For example, your client might have beneficiaries who would be unable to manage a large inheritance due to young age or lack of capacity. Life insurance policy proceeds can be paid directly to the trust. Once in the trust, the assets will be managed and/or distributed according to your client’s instructions. Your client’s trust can be designed to distribute funds for things like health, education, maintenance and support of the beneficiary without distributing a large sum all at once.

Additionally, life insurance death benefits are income tax free with very few exceptions, and the trust can be structured to stretch distributions over any period of time, including the lifetime of a beneficiary. This can be an effective legacy planning tool for many situations.

The benefits

• When properly structured, assets inside a revocable living trust avoid the costs, delays, and publicity of probate at death.
• Because trust assets pass outside of probate, your client’s trust agreement can be kept private in most cases.
• Revocable trusts offer incapacity planning. If your client was to become incapacitated, their successor trustee can manage trust assets on your client’s behalf.
• A revocable living trust can be useful if your client has a complex estate or if your client owns real estate in several states.
• Your client’s trust can be drafted with “spendthrift” language and discretionary distributions to protect beneficiaries who might get divorced or who otherwise have creditor protection or spending issues of their own.

Additional considerations

• Revocable living trusts are relatively more expensive than a simple will.
• As with all estate planning documents, your client should work with an attorney to draft their trust and to explain the funding process (updating beneficiary designations, retitling accounts, etc.). In some situations, your client’s attorney might even recommend leaving your client’s trust “unfunded” until death.
• Assets inside a revocable living trust are generally included in your client’s taxable estate for estate tax purposes. If your client has a taxable estate, additional estate planning may be recommended.
• Because your client can revoke the trust during their lifetime, revocable living trusts typically do not offer creditor protection against their own creditors.
• Some assets − such as Individual Retirement Accounts (IRAs) − cannot be owned by a revocable living trust during your client’s lifetime.