So you did it. You finished your estate planning and setup a revocable living trust in the process. Now what do you do? This week, we explore the proper setup of a revocable living trust. Read on to learn everything necessary for the proper setup of a revocable living trust.
What Is A Revocable Living Trust?
Revocable living trusts, also referred to as living trusts or revocable trusts, can be a great way to pass your asset without getting the courts or lawyer involved. A money saver for sure, but a huge time and hassle save as well. As long as the individual who established the trust ensures that it is properly funded.
A living trust is similar to a single member limited liability company. Both entities are a creature of state law and exist on paper only. The trust, like a LLC, owns the assets that are transferred into the trust. As far as the IRS is concerned, the assets are still yours and any tax consequences associated with the assets are also yours. However, when you die the living trust becomes an irrevocable trust. Once the trust becomes irrevocable, assets owned in the name of the trust must be distributed according to the terms of the trust.
Unfortunately, creating a revocable living trust doesn’t mean your estate planning is done. One of the most common issues potential trustees encounter is a simple mistake. It is not unusual for people to forget certain assets or not properly fund a trust. As a result, the heirs must open a probate estate with the court to now move those assets into the trust. To avoid running into a “funding” problem with your revocable trust, identify ALL of your assets. Especially real property.
If someone owns physical property in multiple states, their beneficiaries must open a probate estate in each state. That is, unless a trust is the true owner of the property. Transferring property from an individual to a trust is fairly simple. Usually a quit claim deed from yourself to yourself as trustee of the trust can properly accomplish the change of ownership. Although there may be tax consequences associated with the transfer.
Individuals must work with their estate planners to transfer other assets, such as stocks, to the trust. However, it is different for assets such as bank or brokerage accounts. Estate planners call these “third party” accounts. Typically, those accounts can have a beneficiary.
Financial institutions sometimes refer to the beneficiary designation as a transfer on death (TOD) account or payable on death (POD) account. If you are unsure, ask your bank if you can name a beneficiary on your account.
Assets that can be transferred after death to a beneficiary can name individual beneficiaries, or the trust. Either way, as long as the individual designates a beneficiary, the trust’s assets avoid probate. Some people wish to name individual beneficiaries on your third-party accounts. Remember to keep that in mind as you name the beneficiaries or you could end up with some family disharmony.