What is a revocable living trust?

It's not a Will or a Contract or a Corporation...

In estate planning, revocable living trusts stand out as a pivotal tool, but many folks don’t really understand what a “trust” actually is…

First, a trust is not a Last Will and Testament. A Will is a testamentary instrument that serves as a set of formal instructions to the Court in a probate matter. If a trust requires court intervention, the matter is a trust administration action, not a probate. On a basic level, a trust actually avoids probate by transferring assets held by it to the beneficiaries without court intervention.

Second, a trust is not exactly a contract although it has aspects of contractual-type language. To break it down, a contract is a legally enforceable agreement that involves certain elements such as offer & acceptance, an exchange of services or money (consideration), and certain rules regarding equity between parties. A trust is created by the initial grantors and as there is no requirement for a beneficiary to agree to the terms of the trust, there is no offer & acceptance or consideration exchanged between the parties.

So, what exactly is a revocable living trust? Well, it’s sort of like a contractual plan for holding and distributing assets to beneficiaries. It might be useful to think of a trust as being more like a corporation or company but more personal like a plan or outline for how your estate is to be administered…without going to court for the authority to do it.

Key Concepts Explained

*What is a grantor? When a trust is created, the person who creates and funds the trust is the Grantor. A couple who does so are the Grantors. (I.E. I hereby grant unto my trust the following property…) Other terms that are used similarly might be “Settlor” or “Trustor” or “Trust Maker” or “Trust Creator.” Generally, but not always, the Grantors are also the initial Trustees.

*What is a trustee? If you are thinking of a trust as being somewhat similar to a corporation, then the Trustee is like the CEO. Just like how a CEO runs the corporation, the Trustee operates the trust.

*What is funding? Putting property into a trust is referred to as “Funding.” (I.E. The Grantors transferred or funded their residence into the trust using a deed.)

*What is a beneficiary? In a Will, the heir is a beneficiary (I.E. One who benefits from the estate…) In a trust, a beneficiary is a person who benefits from the trust estate.

*What does revocable mean? This a term of art necessary to get the best tax treatment that will simultaneously provide control over assets during the Grantor’s lifetime. (I.E. The trust may be changed during the Grantor's lifetime so it is revocable or changeable … and not irrevocable or unchangeable.)

To recap, the core components of a revocable living trust include the grantor, the trustee, and the beneficiaries. The grantor is the person who establishes the trust, contributing assets into it. Initially, the grantor often serves as their own trustee, maintaining control over the management and distribution of the trust assets. This setup provides a unique advantage in terms of asset management and estate planning: it ensures continuing management of the assets should the grantor become incapacitated, and upon the grantor’s death, the assets can be transferred to the designated beneficiaries without the need for probate. This not only facilitates a smoother transition of assets but also contributes to privacy, as the trust’s terms and asset distribution do not become a matter of public record, contrary to the probate process associated with Wills.

Please be cautious. When setting up a revocable living trust, there must be a  comprehensive approach to the entire estate plan. The grantor must meticulously transfer ownership of their assets into the trust, a process known as funding the trust, to fully leverage the benefits of bypassing probate and optimizing asset control. This includes not only tangible assets like real estate and vehicles but also intangible assets such as bank accounts and stocks for non-retirement accounts. There are nuances and "traps" in the funding process, so please approach funding carefully. Failure to properly fund the trust can result in a significant part of the grantor's estate undergoing probate, negating one of the trust's primary advantages. Thus, while a revocable living trust offers considerable flexibility and control, it requires careful planning and management to ensure it serves its intended purpose effectively. (I.E. If you were to set up a corporation and then just let everything slide, what would you expect to happen?)

In closing, grasping the fundamentals of a revocable living trust is essential for anyone seeking to manage their estate with flexibility and foresight. A trust is a dynamic tool for asset protection and succession planning, providing not only peace of mind but also tangible benefits for both the grantor and beneficiaries in terms of avoiding administration costs and complying with the most beneficial tax treatment.

Thank you,

Curry D. Andrews, Attorney at Law