A revocable living trust is a contract you make with yourself. It announces who gets what when you die. It avoids conservatorship. And it avoids probate.
Living trusts avoid probate on the theory that you don’t own the asset; a thing called a “trust” does. After you establish a living trust, you fund it. This means transferring assets into a trust. For bank accounts, this means retitling the account into the name of the trustee. For real property, this means recording a deed in the name of the trustee. A living trust can hold almost anything, homes, LLC units, corporate share, an S-corporation, copyrights, etc. (Tax qualified retirement accounts may not be held in a living trust.) To illustrate the idea of funding a trust with clients, I often use the analogy of a bucket. If you place stuff in the bucket, it’s in trust. If you don’t, it’s not. A trust is only effective as to the things you put in the bucket.
Let’s continue. Say you’ve transferred a home into your trust. Your subsequent death is irrelevant to the asset’s ownership. Since you didn’t own the asset at your death – harsh as it may sound — your death is a nonevent. Your home won’t get probated on your death because it wasn’t yours.
I oversimplified to highlight the underlying principle (ownership). Technically, a trust itself doesn’t own assets. Rather, the trustee holds an asset for the benefit of someone else – called a beneficiary. In the typical living trust, the settlor (the person who establishes the trust) and the trustee (the person who manages the trust asset) are the same person. So, in the home example, Bob Smith an individual deeds to Bob Smith, a trustee of the Bob Smith Living Trust. When Bob Smith dies, another person steps in as successor trustee of the Bob Smith Trust. The Successor Trustee manages or distributes the property pursuant to the dictates of the Smith Trust. It’s contractual. It’s private. No probate court.
A revocable living trust is one way to avoid probate. But, it’s not the only way. Common other methods are joint tenancy and beneficiary designations. The reason people choose revocable living trusts is greater flexibility. One can create highly specific and contingent trust distribution clauses. Also, living trusts are easily changed through either amendment, asset acquisition and removal, or the exercise of powers of appointment. A living trust is a tool that allows you to customize your distributions at death.
To recap, among the advantages of the revocable living trust:
- It avoids probate proceedings — the lengthy and expensive legal process that deals with the laws that govern the distribution of the assets to your heirs.
Thanks for reading!