Revocable Living Trusts

Revocable living trusts are becoming a common estate planning tool for families in all stages of life. Younger families can use trusts to control how a simple life insurance policy is distributed to young beneficiaries or allow guardians to use the primary residence until children reach adulthood.

Families without dependent children are often concerned with avoiding probate when one passes. $100,000 of equity in real estate can trigger probate in Arizona unless property is jointly owned with another person still living, placed in a living trust or a beneficiary deed is used. $75,000 of non-real estate assets that do not already have a beneficiary listed will be subject to probate unless the assets are placed in a living trust.

Creating a Living Trust

When setting up a living trust, people typically name themselves both the Trustor(s) and Trustee(s), which allows people to maintain control of their assets.

While the Trustors are living, assets may be added or removed from the living trust. The Trustors are the initial beneficiaries of the living trust. Assets are only distributed to other beneficiaries once all Trustors are no longer living.

In Arizona a living trust may remain intact up to 500 yrs after the Trustors pass. In most cases, the trust terminates once all the trust's assets have been distributed.

Trustors Create and Amend Living Trusts

Trustors are also known as Grantors or Settlors and are the initial beneficiaries of a revocable living trust. Once the living trust is created, there is little action for the Trustors except amend language when needed. If both Co-Trustors are living, both Co-Trustors are needed to create an amendment. Depending on how the living trust is written, a surviving spouse can amend the trust alone. When all Trustors have passed, the language in the living trust may no longer be amended.

Trustees Manage Trust Assets

Trustees manage all trust assets in the best interest of the beneficiaries, who are initially the Trustors above. Couples typically name themselves Co-Trustees so either can manage accounts and other assets. A few duties include:

• Manage bank accounts
• Buy / sell real estate
• Borrow / lend money
• Purchase insurance

If the initial trustee(s) is/are incapacitated, Successor Trustees take over management of the trust, similar to financial powers of attorneys.

Transferring Assets To Living Trusts

This step is crucial when creating a living trust to manage an incapacitation easier and avoid probate. Signing legal documents alone does not transfer all your assets to your living trust. Some legwork is required on your part.

• Real estate   New deeds must be prepared to transfer property to your living trust. We prepare deeds for Arizona properties with your estate plan. Out of state deeds can be prepared by a title insurance company in the county of your property.

• Bank accounts   Take all estate planning documents to the bank so they record and copy appropriate information for their records. Your account numbers should not change and your checks can keep your name on them. Bank statements will now reflect the trust's name instead of your name as the owner.

• Investments   Non-qualified money (meaning after-tax money that you invest and pay annual capital gains taxes) may be transferred into your trust in the same manner as transferring bank accounts.

• Savings bonds   Paper bonds have to be mailed to the Treasury to reissue them in the trust name (see http://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eereplace.htm).
  Before doing this, consider converting paper bonds to digital bonds first (if that is desirable) so bonds will not need to be mailed to the Treasury twice. Digital bonds might make it easier for original and successor trustees to manage. To convert to digital bonds, see http://www.treasurydirect.gov/indiv/research/indepth/smartexchangeinfo.htm.
  (Thank you to Angela B. for this information)

• Personal property without titles   Living trusts typically have one page assigning all present and future non-titled assets to the trust, including but not limited to jewelry, art, furniture, electronics, firearms, etc. You will not need to list out each item unless you want to specify a beneficiary.

Clients are encouraged to contact us when assistance is needed.

Some Assets Remain Outside Living Trusts

Both retirement accounts and life insurance avoid probate when accounts and policies have living beneficiaries listed.

• Retirement accounts   IRA's, 401(k)'s and other tax-deferred assets remain outside the living trust. Transferring them to the trust can cause a taxable event. Your financial advisor would likely stop you before you could accidentally make the change. There are additional tax advantages if beneficiaries are listed on the account rather than listing a trust as the beneficiary.

• Life insurance   Ownership of the policy is not changed from the person to the living trust. Instead, the living trust can be named the backup beneficiary of policies. If your trust has age-dependent distribution clauses, young beneficiaries are prevented from spending the insurance policy's payout until a more mature age is reached.

Types of Trusts

There are many types of trusts. The type used often depends on the complexity and pending estate tax issues.

• Testamentary Trust - A trust created after you pass by a Last Will and Testament. This trust may be used to hold assets for beneficiaries. Assets in a Testamentary Trust do not avoid probate.

• Revocable Living Trust - A type of revocable trust used in estate planning to control distributions, avoid probate Revocable Living trusts are established during the life of the trustor(s), who retains the right to the income and principal and the right to amend or revoke the trust. When the trustor(s) dies, the trust becomes irrevocable and acts as a substitute for a traditional will.

• Bypass/Disclaimer Trust - A revocable living trust that starts as one trust (an A trust) but within 9 months of the first spouse passing can be split into two trusts (an A/B or Survivor/Disclaimer). This type of living trust was useful to couples over the estate tax exemption prior to 2011 but new estate tax laws no longer require a married couple to use a trust to double their exemption

• A/B Trust - Married couples use this type of living trust in which two trusts (trust A and trust B) are created. These trusts were used often prior to 2011 for estate tax purposes but new estate tax laws no longer require A/B trusts for this purpose.
  After one spouse passes, the deceased spouse's trust becomes irrevocable and the principle assets in the deceased spouse's trust are off-limits to the surviving spouse. Only the income generated by the assets may be used. Many married couples find this a disadvantage and opt for a Bypass/Disclaimer Trust when creating a trust so the surviving spouse is not stuck without half the assets if the estate ends up lower than the estate tax.
  On the other hand, blended families may wish to use an A/B trust to separate assets to ensure the surviving spouse does not change distribution language of the deceased spouse's trust.

If an estate is over the estate tax limit, a variety of trusts are used. Below are two commonly used trusts. For more information on trusts to minimize estate taxes, contact an estate planner.

• Irrevocable Trust - A trust that cannot be changed, canceled, or "revoked" once it is set up. A "living trust" is not an example of an irrevocable trust. Insurance trusts and "Children's Trusts," or "2503 Trusts," are examples of irrevocable trusts. Irrevocable trusts are treated by the IRS very differently than revocable trusts.

• QTIP Trust - A Qualified Terminable Interest Trust (Q-Tip) is a type of trust which provides an unlimited marital deduction for qualified property put into the trust. However, rather than permitting the surviving spouse to have full power to distribute the property to anyone he or she wishes, the trust restricts the ability of the surviving spouse to distribute the property in the trust to a select group of individuals, such as the children, as agreed when both spouses were alive. Without the new QTIP laws, any attempt to "tie down" the property and restrict the surviving spouse's rights to transfer the trust property would have resulted in the property not qualifying for the marital deduction tax benefit.

Successor trustees

If you would like to learn more about revocable living trusts and the steps, it is very helpful to understand the role of the successor trustee, as this role is vital in the management of your estate both during your lifetime when you are unable to act as the initial trustee and after you pass.

When creating your estate plan with a revocable living trust, place yourself in the shoes of the successor trustee. By doing so, you'll create a plan that is manageable and functions in line with your expectations. Click here to learn more.