Paul Meloan – Vested Interest

In conversations with clients and prospective clients in the last few weeks, I have been reminded that many people have heard of revocable living trusts yet few really understand how they work, as well as the potential advantages and drawbacks.  With that in mind, let’s review some basics.

What is it?

Three parties are part of a revocable living trust. In the trust, the Grantor (current property owner) places legal title of property (real estate, bank accounts, brokerage accounts) in the name of a Trustee.  A trustee is a person with a legal duty to manage the asset on behalf of the Beneficiary.  In 99% of living trusts, the grantor, trustee and the beneficiary (at least in the beginning) are the same person.  A key feature of the trust structure is that the Grantor can name a co-Trustee to serve with him, and can also name a substitute Trustee if he becomes incapacitated or no longer able to manage his affairs.

Look more closely at the name: the trust is revocable.  It can be amended or terminated by the grantor at any time for any reason, or for no reason.  Also, we call it a living trust because it is created during the grantor’s lifetime.  A testamentary trust is one that is created by will upon the death of the grantor, but that is a completely different cat.

The law in all states now considers the trust to be the legal owner of the property.  Virtually anything can be titled in the name of a revocable living trust, except ownership of retirement plans like an IRA or a 401k plan.

What is good about that?

The main advantages of a revocable living trust are (1) to avoid the probate process upon your death, and (2) to receive assistance in managing your affairs while you are alive.

Probate avoidance can be a nice thing, but thankfully probate is no longer the long nightmare it used to be.  Still, if you are apprehensive about the assets in your estate becoming publicly available (if a busybody is willing to go down to the courthouse and dig up your file, they can learn what was in your will when you die) this can be a good thing.  Also, probate is not a drive-through process.  Even in states with good systems, it will probably be several months before a probate estate is closed.  NOTE: if you own real estate in a state other than the one in which you reside, a revocable living trust is almost a necessity. Upon your death if you leave that property to someone else in your will, an ancillary probate will need to be created in the state in which that property sits, even if that is 2000 miles away.  Avoid this PITA: all property in states other than the one in which you reside should be in a revocable living trust.

The real advantage to revocable trusts is when the Grantor is no longer capable of managing her affairs on her own, and wants another person to step in.  For older persons, the reality is that at any time you may have a medical event that prevents you from being able manage your own affairs, in which case a trust with a co-Trustee can be a godsend.  Yes, there are alternative means of accomplishing this.  However, a trust as a practical matter more efficient and effective than a power of attorney, and is light-years better than having to go to court to declare someone mentally incompetent (a legal standard that is difficult to meet) and have a guardian appointed.  Those cases are legal nightmares for everyone involved, and will end up consuming thousands of dollars in legal fees and potentially weeks of delay.

The bottom line is that revocable trusts can be useful devices in aiding management of your financial affairs.  They are not all powerful, and in the next part I will discuss some of the limits to what a revocable trust can accomplish.

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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