Why You May Need a Revocable Living Trust


If you are named the executor of someone's will, be prepared for a hassle. In most states, you will have to go through the probate process, which includes filing court documents and possibly attending hearings. Or, you could get lucky: If the deceased set up a revocable living trust, the process of executing their estate will be much easier.

When I handled a relative's estate this year, the revocable living trust she had set up years earlier made the process so smooth that all I had to do was meet with an attorney and sign checks to the beneficiaries. It was less hassle than getting a mortgage or buying a car. (See also: 6 Things You'll Encounter When Taking Over a Loved One's Finances)

But what is this mysterious document that makes the estate process so much easier for those left behind? Let's look at the details.

What is a revocable living trust?

A revocable living trust is an estate planning tool that people can set up to make the transfer of responsibility seamless both in incapacity and after death. They are "revocable" because you can revise them as your wishes or circumstances change.

When you set up a trust, you designate someone close to you as your successor trustee, giving this person the authority to manage your finances if you become incapacitated or die. You transfer all or some of your property into the trust. You also list your wishes for how to distribute this property after your death, much like you would with a will.

If you become incapacitated or die, the trustee simply needs to provide each of your banks or investment brokerages with a copy of the trust and their identification, and they will have the ability to write checks, sell investments, and make any other financial decisions as if they were you.

Why would I set up a revocable living trust?

When you die, the trustee will have the freedom to carry out the wishes you wrote in your trust without court supervision. This makes the process a lot less onerous. It also preserves the privacy of your heirs, since unlike with court proceedings, the amounts you bequeath and who you leave them to are generally private. In a way, setting up a living trust is a favor you do for your executor and for those you wish to leave bequests to.

But a living trust can also help you while you are among the living. For instance, if you have a stroke and are unable to manage your finances for six months, the trustee could step in and make sure your mortgage payments and other bills get paid out of your checking account. Once you recover, you could take control once again.

If you don't recover and end up passing away, your trustee will already have their name on your accounts, making the process of writing checks to beneficiaries easy.

How would I set up a revocable living trust?

The first thing you would do is visit an attorney, preferably one who specializes in estate planning. The attorney can write the trust document, and walk you through the process of transferring your assets into the trust. You'll also have to choose who you want as your successor trustee, plus a backup in case they can't do it when the time comes, and notify those people. If you don't want to name someone you know as trustee, you could turn to a company to carry this out for you.

Your attorney can advise you on which assets should go in the trust and which should not. For instance, placing an IRA or 401(k) account in a trust can cause problems and/or confusion with what taxes are owed.

Will having my assets in a trust be a hassle?

You won't notice any difference in your day-to-day financial life once your financial assets are transferred to your trust. It's all still your property. Since you are the trustee, you can write checks, sell stock, or make any other financial moves you would have previously done.

Some other assets, however, might be more trouble to add to a trust. Some attorneys advise against adding your home and car to the trust, especially if you think you will sell these and buy new ones during the course of your life. If you do end up adding such assets, you might have to occasionally provide a copy of the trust or fill out extra paperwork.

When do I need to worry about this?

Of course, you never know when life will end, but most people are advised to start thinking about a living trust after the age of 55. If you start one before then, and hypothetically live another 50 years before your successor trustee takes over, you may end up wanting to change your trustee. Estate laws and the size of your estate may change so much that your trust doesn't make sense anymore.

Even if you wait until you are older, the process, which does take some money and effort, may not be for everyone. If your estate is small or you plan to leave all of your assets to your spouse, it may not be necessary.

What if I change my mind?

As stated earlier, "revocable" means you can always change your mind. If you decide you don't want your assets in a trust anymore, or want to create a different kind of trust, you can transfer ownership of all the assets in the trust back to your own name. Once the trust is empty, you create a dissolution document stating that the trust no longer exists.

Will a living trust shelter my assets from nursing home bills?

If you need long-term nursing care, you might be surprised to learn that Medicare will generally not cover it. You will be expected to liquidate your assets and pay for your own care. And only when your own assets have been exhausted will you qualify to have Medicaid pick up future bills.

If your assets are in a revocable trust, you are still expected to use them to pay nursing home bills. There is another kind of trust that can shelter assets from these expenses, called an irrevocable trust; however, this is a complicated strategy and requires careful consideration and consulting with an attorney who specializes in such planning.

Once I have set up a trust, is my estate planning done?

You may be surprised to learn that even after detailing how you want your assets to be distributed in the trust, you will still need to create a will. This is generally called a "pour-over will," and the point of it is to cover any assets that you may have neglected to transfer to the trust.

It's also important that parents with minor children have a will, since this is where you appoint guardians to raise your kids in your place if you die. (See also: 6 Times You Need to Update Your Will)

Estate planning can also involve decisions such as purchasing insurance policies and naming beneficiaries for those policies and for your retirement accounts. Some people also include prepaying funeral expenses in their estate plan; planning the funeral in advance is certainly a big favor you can do your heirs. (See also: 9 End-of-Life Cost Savings Your Survivors Will Thank You For)

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