Revocable Living Trust
A trust is a legal entity that holds property and assets for a grantor (the person who opened the trust), and specifies a trustee (the person who manages the trust) and a beneficiary (the person who receives the benefit of the trust). Although in most cases a different person fulfills each of these roles, this does not necessarily have to be the case.
There are two main categories of trusts, living trusts and testamentary trusts. Living trusts are those that are created by individuals who are still living, whereas testamentary trusts are those that are created after a person has died as part of his or her last will and testament.
There are two kinds of living trusts: revocable and irrevocable. Whereas the grantor cannot change the terms of an irrevocable trust after it has been created, the terms of a revocable trust can be changed. Because of this, living revocable trusts are generally used to serve different purposes than irrevocable living trusts, and they come with their own potential advantages and disadvantages.
The Purpose of a Revocable Living Trust
With a revocable trust, the grantor maintains complete control over the assets that are held within the trust. This is different than in an irrevocable trust, wherein any changes to the trust (or the assets within it) cannot be made without the consent of the beneficiary. The trust agreement itself establishes what is to happen to the assets held within the trust in the event of the grantor’s death. This is why living trusts – despite the name – are often used as a part of estate planning.
Since a living trust can be altered over the course of the grantor’s life, this allows for ongoing alterations to be made with respect to estate planning. For example, if a beneficiary identifies himself or herself as being especially untrustworthy with large sums of money, the terms of the living trust can be changed to account for this. The trust, for example, could be set to only pay out the income that it earns, or the offending beneficiary could be moved from the living trust entirely.
With respect to estate planning, there is another important aspect of living trusts. Because they are not a matter of public record – as a last will and testament is – living trusts allow grantors to pass on assets to beneficiaries privately. Moreover, a living trust obviates the need for an individual’s assets to be divvied up in probate court.
The Potential Disadvantages of a Revocable Living Trust
While the fact that the grantor can maintain control over the trust while he or she is alive is an obvious benefit, this does come with a trade off. Most importantly, a living trust is not the best way to shelter your assets from estate taxes – although an experienced estate planning attorney can help you find ways around this. Further, a revocable living trust is not the best kind of trust for asset protection. This is especially the case if a grantor is also acting as the trustee. Disadvantages aside however, a revocable living trust may still be perfect for your estate planning needs.
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