What Is a Revocable Living Trust?

1. The Task: Avoiding a Probate at Death
2. The Solution: Separating Ownership from Use
3. The Entity: A Living Trust
4. A Living Trust Works

The Task: Avoiding a Probate at Death 

Our task is to avoid a probate at death.  To avoid a probate at death, we cannot at death own any property titled in our name.  The easiest way to avoid having property titled in our name at death is to have given it all away during life.  The task, therefore, is to find some way of “giving it all away during life” while retaining all of its benefits for the rest of our life as well as the ability to control its disposition at death.

The Solution: Separating Ownership from Use

What exactly is the problem?  To avoid probate, we cannot at death own any property then titled in our own name.  So we need to look for a way that allows us to possess and use our property without it being titled in our own name — we need to separate “ownership” (evidenced by our assets being titled in our own name) from “possession” and “use” (our ability to continue to enjoy them).

The Entity: A Living Trust

An ideal legal entity that allows us to separate ownership from possession and use is a Revocable Living Trust.  With a Trust, its property is owned and managed by, and titled in the name of, its Trustee.  Its property is possessed and used by its Beneficiaries.  Furthermore, its Trustee may be its only Beneficiary or among its Beneficiaries, the same person wearing two “hats” at the same time.

Revocable Living Trusts have been serving people for almost 1000 years now.  If you are unfamiliar with Trusts, please use some “beginner’s mind.”  When many people hear “a Trust,” they think of the Rockefellers, the Vanderbilts, Newport, Rhode Island, Palm Beach, Florida, Rolls Royces, and 5 o’clock tea at the Ritz.  Granted, the Rockefellers, the Vanderbilts, and the wealthy in general have their Trusts.  The point is: A Trust might work as well for you, too.

How do you create and who are the principal players of a a trust:

A Living Trust Works 

You’re now in business!  And, as your first act in business, you, as Trustor, will transfer all your personal assets to and re-title them in the name of your Living Trust (technically, you will transfer them from yourself, in your capacity as Trustor, to yourself, in your capacity as Trustee of your Living Trust).  Result:

• Immediately before the transfer:
  • All of your assets were titled in your name as an individual.
  • Had you then died, owning all those assets titled in your name, they would have been required to be probated in order to take your name off their title and transfer them to and re-title them in the name of your transferees, for example, the beneficiaries under your Will.
• Immediately after the transfer:
  • All of your assets are now titled in the name of your Living Trust, as an entity that will live for as long as your have provided in your Declaration of Trust, for example, in a typical marital situation, upon the later of:
    • Your death,
    • Your spouse’s death, and
    • Your youngest child attaining an age that you have selected, such as 35.
  • Had you then died, all those assets would continue to be held and managed by your Living Trust, although now for the benefit of others (eg, in a typical marital situation, your surviving spouse and children) as your beneficiaries, as you have provided in your Declaration of Trust.
  • As there is no need upon your death to re-title the assets held by your Living Trust, there is no need for those assets to be probated.  What will likely happen, if you have serving as the Trustee of your Living Trust, is that a new Trustee will begin serving, whose identity you will have provided for in your Declaration of Trustee by naming an ordered list of successor Trustees.  At your death, you will have avoided a probate to the extent that, during your life, you have transferred your assets to and they are now held by your Living Trust.  During your life, you, as Trustee, will have complete control over those assets, and at your death, that task will be assumed by your successor Trustee — without any need to probate them.

Side-bar:  Some nomenclature: Unless otherwise specified, the Trusts discussed on this website are known:

• For property law purposes as:
  • Revocable Trusts, meaning that the person who creates the Trust (ie, the Trustor) may revoke or modify it at anytime during his/her life for no reason at all (as opposed to an Irrevocable Trust, which cannot be revoked once it has been created); and
  • Living Trusts (also known as Inter Vivos Trusts), meaning that the Trust is not only created but also comes into being during the Trustor’s life (as opposed to a Testamentary Trust, which although created by a Testator in his/her Will during his/her life, comes into being only following the Testator’s death, upon the closing of probate and the distribution of its assets, here, from the Testator/Decedent’s Personal Representative to his/her Testamentary Trustee).
• For tax law purposes as:
  • Grantor Trusts, meaning that the the person who creates the Trust retains for his/her life any one or more (and usually all) of a number of different rights to the Trust, for example:
    • To revoke it,
    • To receive any of its income or to have it used to pay premiums on insurance policies on that person’s life,
    • To obtain any of its assets other than by purchase at fair market value,
    • To borrow any of its assets without adequate interest and security, or
    • To receive any of its assets at a later date.

    For income tax purposes, Grantor Trusts are ignored, and all of their tax attributes (income, expenses, tax credits, etc.) are attributed (ie, passed on) to the Grantor during his/her life and reported on the Grantor’s individual income tax return (Form 1040).  At the Grantor’s death, Grantor Trust status stops, the Trust becomes a separate tax-paying entity, and its tax attributes are reported by its Trustee on a fiduciary income tax return (Form 1041).

    Summary:  For income tax purposes, Revocable Living Trusts are “transparent” during the life of the Grantor and take on a life of their own only upon the Grantor’s death, as would that person’s probate estate if he/she had chosen to use a Will, instead of a Living Trust, as his/her estate planning vehicle.  As a corollary, Living Trusts cannot be used to obtain income tax savings during the Grantor’s life (a Living Trust and its living Grantor being identical in the eyes of the IRS).  As will be discussed further on, the primary reasons for using a Living Trust are:

    • To avoid probate at death and possibly
    • To ease financial management upon disability —
    • Not to effect either income or estate tax savings or avoidance, either during life or at death.

Bottom-line: This process was created by some of history’s first “estate and tax planners” in order to reduce the “property, income, and death taxes” imposed on the common folk of England upon their defeat by William the Conqueror in the Battle of Hastings in 1066.  This process has continued successfully ever since.  In its almost 1000 years of existence, its “bugs” have been worked out.  You should not expect any “manufacturer’s recalls” except as a result of a future change in the law.

Furthermore, upon creating a Living Trust in the present, if there is any change in the law in the future:

• During your life: You should be able to respond to it, if you desire to do so, by changing your Living Trust to take advantage of (or protect yourself against) those legal changes, because your Living Trust remains fully revocable and amendable.
• Following your death: Your Living Trust should not become burdened by any change in the law, because by then your Living Trust will have become irrevocable and unamendable, and for our purposes, the due process clause of our Constitution provides in effect that a current change in the law cannot negatively affect a then valid irrevocable Trust or take effect retroactively (eg, when your Living Trust was revocable and amendable).

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