Should a revocable living trust be part of your estate planning? We explore revocable living trusts with an elder law attorney and CFP.

by Gary Foreman

Having a proper estate plan is an essential part of any financial plan. It’s especially important as you reach a more mature stage in life. Often you’ll hear something called a ‘revocable living trust’ mentioned as an estate planning tool.

We wanted to understand what a revocable living trust was and how it worked. To help answer those questions and more, we contacted Andrew H. Hook. Mr. Hook is a Certified Elder Law Attorney (CELA), a Certified Financial Planner (CFP), Accredited Estate Planner (AEP), a Fellow of the American College of Trust and Estate Council (ACTEC), and a Fellow of National Academy of Elder Law Attorneys (NELA).

Q: What is a Revocable Living Trust and what does it do?

Mr. Hook: The easiest way to explain a “Revocable Living Trust” is to break the term down into its core components: “Revocable,” “Living,” and “Trust.”

A Revocable Living Trust is first and foremost a trust, which is simply a legal arrangement by which an individual (the “Settlor” or “Grantor”) transfers property to a “Trustee” for management that will benefit certain beneficiaries. In this case, the arrangement is reduced to a trust agreement. Think of the trust agreement as a set of instructions by which the Settlor and Trustee agree upon how the Trustee will manage property given to the Trustee in trust.

The “Living” portion of the term Revocable Living Trust means that that the trust was created during the life of the Settlor. Another legal term often seen to describe this concept is “inter vivos.” The key to the “living” aspect of the trust is that it is not “testamentary,” which means a trust created under a will or by other death transfer. The benefit of the “living” aspect of the trust is that the trust is created during the life of the Settlor, and depending on the terms of the trust, the Trustee can easily handle the administration of the trust property in the event of the Settlor’s incapacity or death. In contrast, a testamentary trust only comes into existence after the Settlor’s death, which means it cannot be used to plan for the Settlor’s incapacity.

“Revocable” in the context of a Revocable Living Trust generally means that the trust can be terminated or amended if the Settlor has capacity and wants to terminate or amend the trust. Upon termination or “revocation” of the trust, the trust property will be put back into the name of the Settlor. Amendment of a Revocable Living Trust can operate to change any or all of the trust’s terms.

Now that the term has been distilled into its key parts, you are probably asking, “What does a Revocable Living Trust do?” Simply, a revocable living trust provides for the management of property by a Trustee during the life of the Settlor and after the death of the Settlor, so long as the trust has property and there are beneficiaries of the trust. The Trustee has a legal obligation to manage the property in the best interest of the beneficiaries of the trust. When a Trustee is unable to serve, another individual becomes Trustee and takes over management of the property. This means that while the Settlor is capable, the Settlor continues to have control of the Trust property. In the event of the Settlor’s incapacity or death, someone is there to manage the property without the need for court intervention.

Q: What are the other names for a revocable living trust?

Mr. Hook: Revocable Living Trusts go by many names, including, but not limited to, Revocable Trust, Living Trust, Inter Vivos Trust, and Personal Trust. Frequently, these types of trusts are called “will substitutes” due to their avoidance of probate. Many individuals when referring to “my Trust” are referring to a Revocable Living Trust.

Q: What kind of person benefits from a revocable living trust?

Mr. Hook: Most people can benefit from having a Revocable Living Trust if they have concerns over incapacity, asset management, privacy, family situations, ancillary estate administration, and other complexities. These concerns arise due to irresponsible or immature beneficiaries, fears of financial exploitation, complicated assets, and contentious family environments.

The primary benefit individuals who use a Revocable Living Trust gain is a smooth transition for asset management in the event of disability, incapacity, or death. This allows for the individual who creates the trust to manage the funds themselves when they are able and have the funds managed by a trusted individual after they are no longer able. Furthermore, access to the trust funds is limited in the event of incapacity or death to only the acting Trustee. This often can help protect against elder financial exploitation. After death, assets in numerous locations can be managed by a single Trustee. By contrast, a Will may require “ancillary administration,” which means that separate probate administration occurs in several different states. Ancillary administration can greatly increase costs.

Revocable Living Trusts can also provide specific provisions for certain beneficiaries of the trust. This can prevent a young beneficiary from receiving money at a young age and wasting an inheritance. It can also prevent the trust from being reached in the event of a divorce or other financial trouble. More importantly, specific terms can be used to provide for individuals with special needs. Often individuals with special needs are cut out of estate plans due to concerns over their ability to manage money or potential impact on their benefits, but a properly drafted trust can leverage an inheritance to provide an improved quality of life without unnecessarily diminishing benefits. If these protections are needed, a trust is the best way to incorporate these considerations and protections.

Q: When most people hear of a trust they think of wealthy people. Can trusts be helpful for people without significant assets?

Mr. Hook: The school of thought that trusts are only for the “wealthy” is simply not true. While an individual may not have significant financial assets during life, they may have the same concerns that need to be addressed as a person of more significant financial assets. Disability, complex family situations, and the need for privacy do not occur only among the wealthy. Significant wealth can be generated at death under life insurance policies, personal injury action, or other means.

Q: Trusts are complicated enough to require an attorney to draft it properly. How can you know that your attorney is doing it correctly?

Mr. Hook: Using a competent attorney to draft your trust is important. A general practice attorney may draft trusts, but that does not mean the trust will suit your needs. If your attorney is only asking you about who your trustee is, who your beneficiaries are, and what you have, then they are likely not drafting your trust correctly. Proper drafting of a trust requires more probative questions to understand what specific concerns a client has with regard to their beneficiaries and trustee. In ensuring that you choose an appropriate attorney who is capable of drafting your trust correctly, you should check the attorney’s credentials and not be afraid to ask for clarifying questions. The value you receive in hiring a competent attorney to prepare your trust is that you should better understand your plan and be guided through the choices that were made in drafting the document. If the attorney cannot explain provisions in the trust or answer relatively simple questions, it is a red flag that they may lack the experience or knowledge necessary to draft the trust properly.

In working with your chosen attorney, you should be sure to read carefully through draft documents you receive and follow up with questions or changes. Even careful attorneys can make errors. Whether something you said was misheard, or information has changed during the drafting process, your active participation in the drafting process is essential for your documents to be as accurate and complete as possible. Furthermore, your active participation should leave you more comfortable when you have completed your trust.

Q: It’s important to fund the trust. What does it mean to fund a trust and why is it important?

Mr. Hook: Simply put, a trust is only as effective as its funding. The main point of a revocable living trust is to provide for the effective, efficient, and private management of assets in crisis events, such as disability and death. If a trust is not funded, it reduces protections that the Trust was intended to provide. Any property that is not funded into the trust will not be managed by the Trustee until the property is funded into the trust. If the Settlor is incapacitated or has died, there may not be an ability to move the property into the trust. Court proceedings will likely be required to handle assets not in the trust, which wastes time and money. An attorney can assist in funding the trust, but in the end, much of the work has to be done by the individual or a person they authorize.

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Reviewed June 2024

About the Author

Gary Foreman is the former owner and editor of the After50Finances.com website and newsletter. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.