A revocable living trust is a written contract wherein you name a person, another trust, or company, to be responsible for managing property for the benefit of others.
A revocable trust can avoid probate court, keep your personal and financial matters private, provide tax advantages, and allow you to select a trustee to carry out your affairs.
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What is a Valid Living Trust or Revocable Trust?
A trust is a written document that names someone to be responsible for managing property for the benefit of others. A revocable living trust also called a living trust or revocable trust) is one type of trust. It’s a living trust because you create it while you’re alive. It’s revocable because, as long as you’re mentally competent, you can change or end the trust at any time, for any reason. You need no one’s permission to do so unless you have created a joint trust with your spouse. In Wisconsin, a trust is revocable unless it specifically states it is irrevocable in the trust document. Usually, a living revocable trust becomes irrevocable (not open to changes) when you die.
A trust involves three parties:
The settlor or grantor is you, the person who creates the trust.
The trustee is the person who agrees to accept your property and manage it as the trust agreement directs. You can name more than one trustee, thus creating co-trustees who must act together. Usually, you are the trustee during your lifetime.
The beneficiaries are those who will receive the income from the property in the trust and, with your direction, the property itself.
During your lifetime the trustee invests and manages the trust property. Most trust agreements allow the grantor to withdraw money or assets from the trust at any time, and in any amount. If you become incapacitated, the trustee is authorized to continue to manage your trust assets, pay your bills, and make investment decisions. This may avoid the need for a court-appointed guardian of your property. This is one of the advantages of a revocable trust. Upon your death, the trustee (or your successor if you were the initial trustee) is responsible for paying all claims and taxes, and then distributing the assets to your beneficiaries as described in the trust agreement.
Your assets, such as bank accounts, real estate and investments, must be formally transferred to the trust before your death to get the maximum benefit from the trust. This process is called “funding” the trust and requires changing the ownership of the assets to the trust. Assets that are not properly transferred to the trust may be subject to probate. However, certain assets should not be transferred to a trust because income tax problems may result. We advise and counsel our clients on determining if your assets are appropriate for trust ownership.
Who Can Be A Trustee?
Any competent adult may be a trustee. Usually, you name yourself, or you and your spouse, as the trustee because you want full control of the property while you’re alive. Some people, however, select a friend, relative, or qualified corporation (one to which the state has given trust powers) to serve as trustee. If you choose one individual as a trustee, you also should name a successor trustee (a second person or a corporate trustee). This party can act if the first trustee dies or is unable or unwilling to continue as trustee. Anyone you select as trustee should have the proper training and qualifications to carry out the trustee duties. These include managing the property, paying out income from the trust to beneficiaries, filing state and federal tax returns, and distributing property to beneficiaries after you die.
Who Can Be A Beneficiary?
When you set up a revocable living trust, you usually name yourself as the first beneficiary. If you’re married, you might decide to name both you and your spouse as first beneficiaries. The trust also must specify who will receive your property after you die. This makes it clear to the trustee how you want your property distributed.
How and When Do I Fund A Revocable Living Trust?
You need not put anything substantial into the trust when you set it up. Some people put only a small dollar amount (say $10) into a trust initially. This is known as an “unfunded” trust. It’s intended for future use, such as during old age or in case of disability. Until then the trust remains essentially empty, but it is in place if you wish to add more to it. You might use an unfunded trust as an alternative to a future guardianship or conservatorship.
When you decide to add substantial property to your trust, it becomes funded. From then on, the trustee has duties to perform. Some people put all or most of their property into the trust in the beginning. Others put in some property at first and add more from time to time – for instance, when a certificate of deposit matures. Still others set up a trust so that much of their property gets transferred only after they die. To accomplish this, you’d use a simple will called a pour-over will. It funds the trust with any property you didn’t put into the trust during your lifetime. To avoid probate, most people fund the trust during their lifetime or designate the trust as the beneficiary of their assets.
What Can A Revocable Living Trust Do?
provide financial management of your property – You may act as trustee at first and later decide you no longer wish to do so. A trustee or successor trustee you’ve selected can take over the day-to-day property management. Expect to pay this person a reasonable fee.
provide property management if you can’t manage your affairs – If you become too ill or disabled to manage your property, your trustee or successor trustee will do this for you. With no trust in place, you may need a guardianship or conservatorship if you also do not have power of attorney. You avoid the trouble and expense of setting up such arrangements if you have a properly funded living trust. If your trust is unfunded when you become disabled, you’ll need to have given someone a durable power of attorney to enable that person to transfer your property into the trust (more on this later).
provide for minor children when you die – In a living trust, you can make all the provisions for your spouse and children that you can in a will, except naming guardians for minor children.
avoid probate – Property in your revocable living trust doesn’t go through probate after your death. If, however, you die leaving property that never got transferred to the trust, probate usually will be required. Also, if you own land in another state, probate may be necessary in that state to transfer the land to your heirs. But putting that land in the trust may avoid probate in the other state, too. One advantage of avoiding probate is confidentiality. A living trust doesn’t become part of the public record, unless a trustee or beneficiary insists on court approval of accounts. Probate records, on the other hand, are open to the public. A living trust also avoids the probate filing fee.
shorten or eliminate delays in distributing your property to beneficiaries – This is another advantage of avoiding probate. The probate process may delay property distribution. With a trust, your trustee may be able to distribute property to your beneficiaries sooner. This is because, unlike probate, a living trust operates without court supervision – unless someone requests such supervision. Still, even with a living trust, outstanding taxes or claims that you owe money could delay property distribution.
What Can’t A Revocable Living Trust Do?
A revocable living trust:
can’t save you income taxes – Because you can end a revocable living trust at any time, the state and federal governments view any income the trust earns as your income. Usually the trustee pays you all the income, as well as any amount of principal necessary to provide for your needs. If you become disabled, the trustee pays necessary amounts of income and principal for your benefit.
won’t reduce estate and other death taxes more than any other estate-planning tool – Property in your trust at the time of your death will be part of your taxable estate. Your estate may need to pay some taxes if, at the time of your death, you held property ownership interest with a net value above a certain amount. For the federal estate tax for 2014, that amount is $5.34 million per person and is indexed to inflation. You may be able to reduce or avoid these taxes through some type of trust or a will.
won’t completely eliminate costs associated with probate – You have to pay the trustee or someone to prepare documents, file tax returns, transfer property, and so on, unless you have a savvy family member or friend who will serve as trustee at no cost. These costs are similar to what a personal representative would have in managing the probate of your estate, not including the probate filing fee.
doesn’t protect against creditors’ claims after you die – One advantage of probate is that creditors’ claim periods expire a short time after your death. To be able to collect, a creditor must make a claim within four months after probate begins. This guarantees beneficiaries they’ll get the property, with no worry that later they’ll have to pay creditors for old bills. If you use a trust and your estate thus avoids probate, your beneficiaries will have no such protection unless they publish an appropriate notice.
doesn’t eliminate the need for a will – You may have property that never got transferred to your trust. You’d need a will to transfer that property to your trust after your death (the pour-over will mentioned earlier). Also, your estate might receive money after your death, such as a settlement from a wrongful death action. You’d need a will to transfer this money to your trust. You also need a will to appoint a guardian for minor children.
doesn’t eliminate the possible need for a durable power of attorney – You may become unable to manage your property before you’ve transferred all of it into your trust. If so, the person you appointed with a durable power of attorney – your agent – could do this for you. The trustee, however, can make decisions only about property already in the trust. Your agent also can take care of taxes, health benefits, living expenses, and other matters. If you haven’t used a durable power of attorney to name an agent, the court appoints a guardian to make these decisions.
won’t help you avoid nursing home costs – The property in a living trust still belongs to you because you can take it back anytime. Thus, it will be included in calculations of your eligibility for Medicaid, which helps pay for nursing home care and provides other benefits.
How does a Living Trust differ from a Will?
Both a will and a living trust enable you to provide for your beneficiaries and direct how your property will be distributed after you die. A will is a probate document, while a trust is a nonprobate vehicle. With a living trust, you turn over some or all of your property to the trustee to manage while you’re alive. With a will, you keep your property and manage it yourself while you’re alive. A living trust also lets you do something a will can’t do: Spell out how you want your property managed if you become disabled during your lifetime.
What is Probate?
Probate is the court-supervised administration of a decedent’s estate. It is a process created by state law to transfer assets from the decedent’s name to his or her beneficiaries. A personal representative is appointed to handle the estate administration. The probate process ensures that creditors, taxes and expenses are paid before distribution of the estate to the beneficiaries. The personal representative is accountable to the court as well as the estate beneficiaries for his or her actions during the administration. For probate estates having less than $50,000 of non-exempt assets, Wisconsin law provides a simplified probate procedure, known as summary assignment.
How does a Revocable Living Trust?
A revocable trust avoids probate by effecting the transfer of assets during your lifetime to the trustee. This avoids the need to use the probate process to make the transfer after your death. The trustee has immediate authority to manage the trust assets at your death; appointment by the court is not necessary. The “funding” of a revocable trust is critical to successfully avoid probate. Those persons who do not fully fund their trusts often need both a probate administration for the non-trust assets as well as a trust administration to completely distribute the assets. Because the revocable trust may not completely avoid probate, a simple “pour over” will is needed to transfer any probate assets to the trust after death.
Benefits of A Revocable Living Trust?
The benefits of a revocable living trust are:
It Eliminates Guardianship Proceedings. If you become disabled or are unable to manage your estate, your living trust avoids the need for a court mandated guardianship for the trust assets. The successor trustee you have named will step in and manage your affairs without government interference and expense.
It Avoids Probate. With a living trust your assets will go directly to your beneficiaries after your death. There will be no probate attorney’s fees or court costs, if done correctly. There will be no court delay in distributing your assets and all your estate planning wishes will be completely private.
It Can Reduce or Eliminate State Estate Taxes. With living trusts, a married couple can pass $10,000,000 absolutely state and federal estate tax free to their heirs. A single person can pass $5,000,000 State estate tax free.
It Can Protect Children From Earlier Marriages. Both the surviving spouse and the children from a previous marriage can receive fair treatment and protection under the terms of your living trust.
It Can Insure That Your Wishes Are Carried Out and Are Not Subject To Attack. It is generally accepted that living trusts are more difficult to contest than wills. This prevents disgruntled heirs from successfully attacking your estate plan.
It Allows You to Restrict How Your Estate is Managed and Spent Even After Your Death. It can provide for the care, support and education of your children or grandchildren by turning over assets to them at an age chosen by you. Even insurance proceeds can be paid to the trust so your successor trustee can manage them for the benefit of your family.
It Gives You Peace of Mind. When your living trust is completed, you and your family will relax knowing that your estate will be managed and distributed by someone you have selected and trust.
How Can We Help You?
Our experienced estate planning attorneys will offer your family personalized advice in order to draft a carefully considered, thoughtful, and comprehensive estate plan to meet your wishes and goals. Contact us today to discuss your estate planning needs.