MT. DIABLO TRUST

Serving Northern California Since 1994

 

What is a Revocable

Living Trust?

A Revocable Living Trust, sometimes simply called a Living Trust, is a legal entity created to hold ownership of an individual's assets. The person who forms the Trust is called the Trustor (Trustor or grantor), and in most cases, the Trustor also serves as the Trustee, controlling and managing the assets placed there.

 

A Revocable Living Trust covers three phases of the Trustor’s life: his/her lifetime, possible incapacitation, and what happens after death.

 

Phase One of a Revocable Living Trust: The Trustor is Alive and Well

 

The Trust's formation documents should include specific provisions allowing the Trustor to invest and spend the Trust assets for his/her benefit during his/her lifetime. The Trustor can go about business as usual with the assets that have been transferred or funded into the Trust's ownership, assuming the Trustor hasn't appointed someone else to act as Trustee. In this case, the Trustee would typically take direction from him/her.

 

The Trustor reserves the right to undo a Revocable Trust -- thus the term "revocable." The Trustor can reclaim assets placed into the Trust, divert the Trust's income to him/herself or another beneficiary, sell the assets or place more assets into it. The Trustor maintains final control.

 

A Revocable Living Trust does not have a taxpayer identification number, unlike an irrevocable Trust -- one where the Trustor gives up all control.

 

A Revocable Trust and its Trustor share the same Social Security number. Trust taxes are filed on the Trustor's Form 1040, just as though the Trustor continued to hold ownership of the assets personally.

 

Phase Two of a Revocable Living Trust: The Trustor Becomes Mentally Incapacitated

 

A Financial Power of Attorney should be part of a Trust package. If the Trustor becomes mentally incapacitated and can no longer manage his/her affairs and those of the Trust, the Financial Power of Attorney allows someone (usually the successor Trustee) to step in and take over management of the Trust if the Trustor is determined to be mentally incompetent. The Successor Trustee can then manage the Trustor's finances and the assets that have been placed into the Trust.

 

Phase Three of a Revocable Living Trust: The Trustor's Death

 

A Revocable Trust automatically becomes Irrevocable when the Trustor dies because he/she can no longer make changes to it. The named Successor Trustee steps in now as well, paying the Trustor's final bills, debts and taxes, just as he/she would if the Trustor became incapacitated. In the case of death, however, the successor Trustee would then distribute the remaining assets to the Trust's beneficiaries, according to instructions included in the Trust's formation documents.

 

How a Revocable Living Trust Avoids Probate:

 

The Internal Revenue Service and probate courts view revocable Trusts a little differently. Because the Trustor and the Trust share the same Social Security number, assets placed in the Trust do not avoid estate taxes. The Trustor can reclaim them anytime he/she likes, so the IRS takes the position that he/she has not technically relinquished ownership as he/she would with an irrevocable Trust, which does escape estate taxation.

 

The probate court says he/she has indeed relinquished ownership. The Trustor has given the assets to the Trust, even though he/she could theoretically take them back. Assuming the Trustor hasn't done so as of the date of death, the Trust's assets would not pass through probate. The successor Trustee can settle the Trust outside of court, without supervision.

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