Tips for Creating a Successful Revocable Living Trust and What to Avoid

A revocable living trust helps you pass your assets on to your designated beneficiaries. (William Potter/Shutterstock)

A revocable living trust helps you pass your assets on to your designated beneficiaries. What makes it attractive is that it can be changed at any time and beneficiaries or assets can be added or subtracted while you are alive. Before setting one up, there are some things you need to know.

Reasons to Make a Living Trust

If you have more than $100,000, real estate (including property out of state), or other valuable assets, you may want to create a revocable living trust to help protect it all. Putting them into a trust that you control enables you to avoid the cost of probate and pass your assets to your chosen beneficiaries faster. It also puts a trusted person in charge to distribute your assets should you become incapacitated.

A trust document gives you greater control over your assets than a will. It would especially benefit single people, business owners, married couples with their own property, and people with dependent children. Others that would benefit are those whose assets are higher than the federal estate tax exemption, which is $12,060,000 for 2022, or your state’s exemption limits.

Carefully Word Trust Documents

Because challenges to a trust are not as easy as challenging a will, your trust documents need to be worded correctly—by a lawyer. Otherwise, it may not help your beneficiaries avoid taxes or successfully transfer your assets to where you want them to go.

A revocable living trust helps you pass your assets on to your designated beneficiaries. (Tania Kolinko/Shutterstock)

Naming a Successor Trustee

A couple can create a trust in both their names. The spouse is named as a co-trustee, which allows for the control of the trust to be given to the spouse when the primary trustee dies. If the trust creator becomes incapacitated, a successor trustee is named to manage the trust according to the creator’s wishes (incapacity protection).

In case both spouses die, the successor trustee (or trust company) needs to be someone you can trust to deliver the assets according to your desires. It also means that it probably should not be one of your children—unless you are sure that he or she will manage the assets faithfully.

Failing to Put Assets into the Trust

Sometimes, people create trusts but never actually add any assets, thus, making it incapable of accomplishing anything. LegalZoom says that you will need official documents to put things into the trust.

Personal property that does not have a registration needs to have a Bill of Sale or a Gift Deed. Real estate is put into the trust with a Warranty Deed or a Quitclaim Deed. If it is not placed into the trust, the property cannot avoid probate or estate taxes. When putting bank accounts into it, you will need to follow the rules of the bank, which differ with each financial institution.

Investopedia mentions that an additional reason to put assets into a trust is when married spouses have their own property. A trust can prevent the wrong people from getting assets they are not entitled to.

If you own a business or are a partner in a business, you can transfer those assets, or some of them, to a trust. Special rules and costs may apply.

You can put your assets into the revocable living trust, and name the beneficiaries. (Shutterstock)

There are also some things that you cannot, or at least, should not, put in a living trust. Kiplinger states that 401(k)s and other retirement accounts cannot be placed into a trust because it requires withdrawing your money, which then becomes instantly taxable. The same is true with Health Savings Accounts. Vehicles and financial accounts you regularly use should not be put into a living trust.

A Revocable Living Trust Is Not a Tax Shelter

Some people want to create a revocable living trust from a desire to reduce taxes. The AmericanBar says that this kind of trust will not do that for you because you still report all income gained on assets in a trust on your personal tax forms while you are alive. Only an irrevocable trust can give you a reduction in taxes because you will no longer own those assets.

Understand the Cost of Creating a Living Trust

Creating a revocable living trust has several costs attached to it.

First, it will cost around $2,000 to create. Then, assuming you created a revocable living trust in case you may need to change it later, each change made will incur a cost. Thirdly, it will cost to have various changes made to titles, deeds, bills of sales, and certificates, to transfer the property into the trust.

There will also be annual fees to maintain the trust. Get a good estimate from a lawyer before creating it so you know what to expect.

A Living Trust Needs Occasional Modifications

A living trust continues to exist as long as the owner remains alive or until it is canceled. Thus, assets need to be added or subtracted, beneficiaries may need to be changed, and some beneficiaries may need to be added to it.

A revocable living trust is different from a will as it can skip probate.(zimmytws/Shutterstock)

A Living Trust Cannot Protect Assets from Creditors

Since the Grantor, the trust creator, still owns everything in the living trust, there is no protection from creditors. A creditor can force the trust to be closed to gain access to the assets. Protection from creditors comes after the Grantor dies, except for any possessions not placed in the trust.

A Pour-Over Will Is Needed for Everything Else

A trust will not protect all your assets. You also need a pour-over will, which takes effect after you die and places all remaining assets into the trust. At that time, it enables your assets to avoid probate and be distributed quickly to the beneficiaries.

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.