Avoiding Probate

What Is It?

A revocable living trust is a legal entity created by a person, the grantor, to receive assets that the trustee will manage and ultimately distribute according to the grantor’s wishes. Because the trust is revocable, the grantor can alter, amend or revoke it at any time during his or her lifetime. But it becomes irrevocable or terminates—at the grantor’s death.

What Is Its Purpose?

One reason to establish the trust may be to avoid the costs and publicity associated with probate—the legal process of establishing that a will is valid. Setting up a trust can remain private, unlike assets that go through probate and are made public. It can also provide for asset management in case the grantor becomes disabled.

How Does It Work?

An attorney well versed in estate planning prepares a written trust agreement incorporating the grantor’s wishes. The trust agreement typically specifies who will receive the principal, when these distributions will be made, and when the trust will terminate. The trustee manages and administers the trust according to the terms of the trust agreement. A revocable living trust may be a “shell” or “pour over” trust, which means that only upon the grantor’s death will the trust receive certain assets. For example, it might receive the proceeds of life insurance policies and other assets that have passed under a pour over will after probate. At that point, the trustee administers the trust according to the terms of the trust agreement.

What Are the Benefits?

There are several advantages of creating a revocable living trust. For example, assets transferred into the trust during the grantor’s lifetime avoid probate and its attendant costs and publicity. Also, a trustee designated by the grantor to manage the trust can be a professional who can provide efficient management and relieve the grantor of administrative responsibilities. The trust can receive life insurance proceeds and any estate assets directed to the trust once the grantor dies, and the terms of the trust control the distribution of trust assets according to the grantor’s wishes.

What Are the Disadvantages?

Among the few disadvantages is the fact that a revocable living trust is typically more costly to establish and maintain than a will, and trust assets remain subject to the claims of the estate’s creditors when the grantor dies. Also, the grantor receives no federal income tax benefits from the trust, and must pay current taxes on trust income whether or not the income is paid to the grantor. Nor can the trust assets avoid inclusion in the grantor’s gross estate for estate tax purposes. However, the trust can serve a new purpose as part of the grantor’s estate (e.g., as a bypass trust). But when the advantages and disadvantages are compared, it becomes apparent that a revocable living trust is an efficient way to obtain professional asset management, bypass the probate process, create efficient estate distribution and assure privacy—all in a single document.