A Revocable Trust is a legal document that allows you to direct how you want your assets to be distributed when you die while allowing you to maintain control of those assets during your lifetime. Assets transferred to the Trust during your life avoid Probate. The Trust allows the person or institution that you name as successor trustee to settle your estate privately and more quickly and is more difficult to contest. The trust also may include specifically designed provisions which accomplish, for example, the following:
• reduce or eliminate estate taxes,
• allow assets to remain in trust for the benefit of your beneficiaries with successor trustees managing the distribution and investment of the assets,
• provide for beneficiaries with special needs or drug or alcohol dependence,
• allow the retention of assets to guard against a bad marriage, lawsuits or the lack of self-determination, or
• provide for the common use of a particular asset such as a residence or vacation home.
A Revocable Living Trusts works by having you transfer the title of all of your assets from yourself as an individual, to yourself as trustee of your Trust. As the trustee, you manage the assets of the Trust during your lifetime which allows you to maintain complete control. As long as the Trust is revocable and either the husband or wife serve as the trustee or co-trustee, the Trust does not require a separate tax return or tax ID number. The couple continues to report all taxable income, dividends, capital gains, and interest on the couple’s tax return using the husband’s or wife’s Social Security Number, and need not refer to the trust. If you become incapacitated and unable to manage your financial affair, a successor trustee is appointed.
Upon your death, a successor trustee that you appoint takes over the management of the assets for the benefit of the beneficiaries that you named in your trust. Your assets avoid Probate because they are no longer titled in your name as an individual, but are titled in the name of the trust. Upon your death, the successor trustee that you named transfers your assets directly to your beneficiaries, or to a trust for their benefit if that is what the revocable trust calls for, without the need for court.
Your Revocable Trust may contain “sub-trusts,” for any number of reasons. One common reason for establishing a sub-trust after the first death is for a married couple to utilize the estate tax exemption of the first to die. Another reason is to provide that the property of the first spouse to die be held in trust for the benefit of the surviving spouse. This is commonly called a Bypass Trust, Family Trust, or AB Trust.