What is a Revocable Living Trust and How Does it Work?
A Revocable Living Trust (“RLT” for short, or just “Trust”) is used to manage and control property after a person passes away. A Trust is simply a relationship created whenever one person (the “Trustor”) gives property to someone else (the “Trustee”) to manage and control on behalf of a third party (the “Beneficiary”). “Revocable” means the Trust may be revoked or amended at any time by the Trustor. “Living” means the Trust is set up and managed during the Trustor’s lifetime. We also call these “inter vivos” (during the life) trusts.
The two main purposes of a Revocable Living Trust are to avoid probate and establish a plan for management and distribution of assets after the Trustor passes. There are a lot of key features of a Revocable Living Trust that provide maximum protection and flexibility for planning and managing a person’s estate, as follows:
Probate Avoidance – A key feature of a Revocable Living Trust is the ability to avoid probate of assets. “Probate” is the Court process of transferring assets of a decedent. In a lot of cases, probate is unnecessary when we can transfer assets in some other manner prior to a person passing. The way in which a Revocable Living Trust works to avoid probate is the Trust becomes a legal entity the day we set up the Trust, and we can thereafter transfer a person’s probate property into the Trust. In that way, if a person’s probate property is in the name of their trust, and is not in their name, then there is no need to go through probate. This feature of a trust becomes especially important when a person owns multiple properties in multiple jurisdictions. For example, if you own real estate (the most common type of probate property) in Colorado and in Kansas, a Revocable Living Trust allows you to transfer both properties into the Trust, thereby avoiding probate in both Colorado and Kansas, in that case.
Conservatorship Avoidance – Another key feature of a Revocable Living Trust is the ability to manage and distribute your assets over time. See below. But, a key feature and reason for setting up a plan for management and distribution of assets is avoiding Conservatorship. In Colorado, a person is not allowed to inherit property until they are 21 years of age. If a Trust has not been established for a person under 21, then, by default, your property, if you were to pass, will be set aside into a Conservatorship. A Conservatorship is basically a Court forced and enforced Trust wherein the Court oversees and manages your assets on behalf of your minor (under age 21) beneficiary until they turn 21 years of age. The two main problems with a Conservatorship are: (1) Courts are not set up to be financial managers; and (2) not everyone wants their children who are 21 years of age to inherit and manage on their own a large sum of assets. In addition, Conservatorships can be very, very expensive and tedious to manage over time. Thus, in order to avoid this outcome, a Revocable Living Trust is a much preferred manner of managing and distributing assets over time.
Management and Distribution of Assets Over Time – When you set up a Revocable Living Trust, you have the ability and flexibility to determine who manages that property for your beneficiaries (i.e. who is the Trustee), how the property gets managed, and when it gets distributed. As far as distribution of assets in the Trust, timing, etc., you have full flexibility to determine what is best for your beneficiaries, including holding assets in trust for their lifetime to distribution at certain ages and at certain percentages to everything or anything in between. The key is you get to decide.
Asset/Creditor Protection – One of the best features of a Trust is the ability to protect the assets in the Trust from your beneficiaries’ creditors. This was originally labeled a “Spendthrift clause” to protect the assets from “spendthrift” beneficiaries. We now call it an asset protection clause, creditor protection clause or restriction clause. The purpose of it is to say, effectively, the assets that are in your trust, for as long as they remain in your trust, are off limits from any of your beneficiaries’ creditors. They are not allowed to collect, claim, or attach any such assets in the Trust, for as long as such assets remain in the Trust. This level of asset protection cannot be purchased or put together in any other way or anywhere else – you literally have to die to get it. And, the importance of that level of protection cannot be understated.
There are several other features of a Revocable Living Trust that we will explore and outline in a future blog, but these are the main features of a Revocable Living Trust that make it unique and highly useful in a variety of circumstances.