A revocable living trust is an estate planning tool often used in conjunction with a will. The main parts of a trust are:
- The creator of the trust. For example – the person who is planning for the day they die.
- The appointment of a trustee to manage the trust assets.
- The selection of assets that belong to the creator that are placed into the trust.
- A beneficiary who is designated to receive the benefits of the trust
- The terms of the trust – how the trust is managed and when it ends.
A revocable living trust means that trust can be changed by the creator of the trust until the day he/she dies. Trusts are “living” because they are created while the creator of the trust is alive.
Revocable living trusts (RLTs) are often used to avoid probate. Property that passes through probate is generally subject to an inheritance tax and administrative costs. Property that passes through probate can take months before the property is passed to the heirs.
Trusts do have limitations. You cannot use a trust to name guardians for your children or an executor of your will.
Common mistakes when creating or using an RLT
Some of the mistakes that a creator of the trust may make include:
- Not properly identifying the trust assets. Only properly identified assets pass through the trust instead of through probate.
- Not retitling property such as real estate that must be retitled in the name of the trust.
- Not hiring a lawyer to create the revocable living trust. An experienced Pennsylvania trust and estate lawyer will explain whether bank accounts, retirement benefits, annuities, and other assets that are often titled in the name of the creator of the trust need to be retitled. The lawyer will also explain the pros and cons of using trusts as compared to wills, who should be appointed a trustee, what trust management terms should be identified in the trust, the ability to use the trust to protect the assets against claims by creditors, and many other legal issues. An experienced lawyer will also help ensure upset heirs can’t challenge the validity of the trust.
- Choosing the wrong trustee. Your lawyer will review the financial and other responsibilities of the trustee. The lawyer will also discuss whether you might consider a corporate trustee such as a bank, co-trustees, and who should be a successor trustee – if the original trustee dies or can’t act as trustee.
- Not considering the tax consequences. Generally, the assets in a revocable trust are taxable when you pass away. Your lawyer will normally discuss how choosing an irrevocable trust option might avoid the duty to pay estate taxes.
- Not considering the claims of creditors. Since the trust is revocable, creditors may be able to seize the trust assets to pay the debts of the creator of the trust. There are some ways to create trusts that protect the assets from the reach of creditors.
- Not considering Medicaid eligibility requirements. Medicaid does normally have the right to consider revocable trust assets when considering your eligibility for Medicaid.
- Not thinking through who the beneficiaries should be. It’s natural to create trusts for family members. You can also create RLTs for charities and nonprofits.
- Not regularly reviewing your RLT. Life happens. Families expand through births and marriages and contract through deaths and divorce. The types of assets you have and their value change. These changes should be reviewed with your lawyer – generally on a yearly basis.
Other RLT mistakes include:
- Failing to review how an irresponsible trustee can be removed.
- Whether the trustee will be entitled to any compensation and how much.
- What should be the role and rights of the surviving spouse.
At Antanavage Farbiarz, our estate planning lawyers discuss all your goals for when you become older and when you pass away. We explain all the documents you should consider to protect yourself in your old age such as powers of attorney and documents you can use to avoid probate such as revocable living trusts. We’ll discuss how to coordinate your RLT with your will. To discuss your estate planning goals, your options, and what legal documents you need, contact the seasoned Pennsylvania estate planning lawyers at Antanavage Farbiarz, PLLC, today.