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What You Need to Know About Revocable Living Trusts

Maybe you're single, a business owner who doesn't want information relating to the value of your business made public upon your death, or a parent who wants to disinherit a child and don't want the whole world to know it. For any number of reasons, a revocable living trust can be an effective estate planning tool.

How so? A living trust can help in avoiding probate and conservatorship, which are both court administrative processes open to the public and costly, says Wonsun Willey, a tax partner at CPA firm Sensiba San Filippo. “A living trust usually is a faster way to distribute assets if there are no disputes involved,” she says.

Living trusts are one of the most misunderstood documents. There's a good reason for that. “There are a lot of twists and turns to navigate so that the trust expresses your precise wishes,” says Debra Speyer, principal at Speyer Law.

To explain it simply, the creator signs a document much like a will in terms of its dispositive provisions after death, but the trust also has provisions for the benefit of the creator during his or her life. It's completely revocable by the creator. It has no tax effect until the creator's death. The creator gives up nothing during his or her life, it's as if he or she still owns the assets, says Doris Martin, partner/director at Garfunkel Wild, the law firm where she heads the personal services & estate planning group. If you become ill or incompetent, the assigned trustee takes over the management of the trusts' assets. When you can no longer manage your affairs, the trust spells out who will make that determination.

For sure though, there is much to think about.

When to consider a revocable living trust?

Anyone and everyone can sign one, and “grow” into one over the course of their lifetimes, instead of a standard will, says Martin. However, for younger folks with many different accounts or even residences during their lives, it's going to be a project to keep up with the revocable trust administration. The older you get, the more settled financially, and the closer to the end of your life that you get, the less of a project it is, and the more important it is to transfer assets to the trust name, points out Martin. You must actually transfer assets to the trust to make it do the job intended. “This is critical, you must re-title bank accounts and do new deeds in the trust name or you will still have to probate. This can be tedious and time consuming and if you are not careful, you will end up probating a will, despite your best intentions,” she warns.

Know the rules

For the most part, banks will allow eligible accounts to be titled in the name of the trust. However, there are times when a a financial institution would not allow an account to be titled in the name of a revocable living trust. “IRAs, 401ks and other qualified plans cannot be held in a trust. They must be held in the individual's name under their own Social Security number,” says Curtis Chambers, founder of the Chambers Financial Group. “Often the financial institution will require the account holder to close the account held in an individual or joint registration and then open a new account in the name of the trust. This is because the trust is a separate entity and is essentially a new owner. The assets can then be transferred into the new account. So the assets can still be titled in the name of the trust, but it requires opening a new account and transferring assets,” he adds.

Living trusts do not reduce or eliminate income taxes. “Clients often think that revocable trusts have special estate tax saving features that wills do not. That is simply not true. The same estate tax benefits are available in both revocable trusts and wills,” says Martin.

Know too, that setting up a revocable trust properly can cost more than a standard will because of the asset restructuring required. “That cost, versus the cost of a simple probate, may not produce an overall savings for some clients,” says Martin.

For income tax purposes, the tax code treats them as if they don't exist – income earned by the trust's assets is taxed to the grantor, says Patrick Howley, a shareholder at the law firm of Shulman, Rogers, Gandal, Pordy & Ecker, who specializes in estate planning.

Living trusts do not provide creditor protection. Transferring your assets to a living trust will not protect your assets from valid creditors' claims. While most states' probate laws typically provide six months from the date of death or from the date the executor of the estate is appointed, for creditors of a decedent to file a claim against the decedent's estate, such limitation periods do not apply to claims against living trusts after the grantor's death, making it possible for claimants to pursue their claims for longer than would have been possible in a probate situation.

Says Howley, “Living trusts are a great tool in the right situation. They aren't always required, but when called for, it is essential that they be properly drafted and fully funded.”

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Paoli2   |     |   Comment #1
Sheryl:  I was thinking about this last week and going to call someone about more info but I figured you would end up posting about it before long.  Well, here it is today and I thank you for providing the information because I have some questions I hope you can answer about a Living Trust. 

If one puts certain amount of assets into a Living Trust with the intent upon their death it will go to a certain adult relative, can CDs be used as vehicles for the funds in the trust?  Can the owner of the Trust get monthly interest checks from the CDs in the Trust?  I spoke to a couple of lawyers a while back about a Living Trust and it seems after speaking to them, we decided it wasn't something useful for our intents.  We have a DD who has chronic medical problems and we would like to be able to set aside certain amount of funds for her after we are deceased but need the interest from the funds while we are living.  I was under the impression from the legal advice we got that all of our assets should be put into the Living Trust so how does one still continue to get income to live on?

  Thank you for any information you can provide and for your good work in keeping us financially informed through your regular articles. 
rosie43   |     |   Comment #3
You can put beneficiaries on any bank account. You can change beneficiaries at any time. At the time of death the beneficiary would just need a death certificate and the bank would give the funds to that person. You would want the beneficiary to know of the account or to let someone know of it. Some banks need drivers license numbers or SS numbers, address or phone numbers of beneficiaries.  6 months after death there would be no FDIC or NCUA insurance on the account so make sure you have someone to deal with this. You can have more than one beneficiary. We have a trust and a pour over will for anything we have not been able to name beneficiaries. Nothing is titled to the trust, because we have named beneficiaries on all bank accounts, life insurance policies, annuities, stock accounts, IRA's and have a Lady Bird Deed on the house. The car, furniture, household items such as pots and pans, silverware etc, and jewelry would go to the trust through the pour over will.
Anonymous   |     |   Comment #8
Does a Lady Bird Deed on the house have a five year look back periord?
Braden   |     |   Comment #9
Yes it does. Everything has a 5 year look back period even cash, jewelry etc  given to someone under penalty of the law.
Braden   |     |   Comment #10
Evidently the 5 year look back period  is in response to a medicaid spend down. Another important point is never sign anything while admitting someone to a nursing home without an elder lawyer reading it. The nursing homes (especially for profit nursing homes) have a clause stating that the person signing the papers will be responsible for any unpaid bills. 
Anonymous   |     |   Comment #11
Thanks for the information.  I would not be interested if it has a look back period; however, I have found a link that says it does not have a look back period?  Not sure if this is correct, but I copied the portion that discusses the look back period subject below:

F. No Medicaid Look-back. The Enhanced Life Estate Deed does not constitute a penalized transfer for
Medicaid. Because the grantors retain full control during their lifetime, there is no present transfer.
Therefore, there is no look-back or penalty period to be considered when using this conveyance. 

Anonymous   |     |   Comment #12
and it depends on your state laws and what they require. Each state is different. My state was the last state to require this look back period. My state in many circumstances does not count a home in the countable assets but does count it if you sign it away. They need to know of the Lady Bird if it is registered etc. If it is not registered (what does your state require) what are the consequences. 
Anonymous   |     |   Comment #13
And the "Deed" is counted as available assets from Medicaid's perspective????  Either it is exempt or available
Braden   |     |   Comment #15
You must report under penalty of the law all assets. All assets are not attached for medicaid reimbursement. You must check your state laws. If you are able to come back home, have a disabled child that was disabled before age 26 in some cases and living with you, or have a spouse living in that house and many other reasons (depending on the state it will not be attached immediately. Each state is different. Some states have a higher amount for the residence than others. If the house is worth more than that amount the whole house is not exempt and be attached in some states. Some states have the house exempt worth at 50% in your county. If your house is worth over 50% is can be take by Medicare to reimburse for your bills. Each state is different and the laws in that state can be changed every year and what you have done may not work anymore. We all should pay our own way and not leave it to others to pay our bills. My cousin has a sister-in-law whose friend's children had to pay back Medicare for their mom's care because the nursing home found out the mother paid cash to her children within the look back period.  Check with a senior agency in your county or with an estate lawyer. Anything in a trust is not exempt in my state and I think now in all states it can be attached.  After you die the earnings in a trust is taxed at a very high rate. A trust is not the answer for most people. I have one but it is not funded. It is there only in case I forgot to title something correctly and I have what is called a pour over will. 
Anonymous   |     |   Comment #16
Again, look at a state's Medicaid/Medi-Cal rules on compliant annuities for the stay at home spouse where the other one is admitted to a nursing home such that that annuity (like a savings account with several required conditions, e.g. residue paid to the State) is exempt in addition to home, care, etc.
Anonymous   |     |   Comment #17
I am a widower and I cared for my wife until she passed. So I am not concerned with the laws for the stay at home spouse. I have gifted to my 3 children years ago and left enough for 5 years in a nursing home. If I don't use it up then the kids can have it along with the house. With SS, pension, and RMD's etc it does not require a lot of savings to be used every year and it is a lot cheaper to have someone come into the house to care for you if you don't want to go to a nursing home.  Average stay in the nursing home is 3 years but I do know someone who was in a nursing home for over 20 years. She worked for a doctor and he had disability insurance on her and it also paid full cost of the nursing home after her assets were gone. 
Anonymous   |     |   Comment #18
Once the majority gets wind of the assets people deliberately hide to avoid paying for nursing care new legislation will change the game forever. Making sure the kids get an inheritance while the rest of society pays the mom/dad's tab is not going to be tolerated in the new health care environment. Legislation is already in the works. 
Anonymous   |     |   Comment #19
Legistation was passed by recent fed Budget Act a couple of years ago....most states have conformed, eg in look back provisions, etc. But, the current regs provide for compliant Annuities where there are two spouses...the goal was and is by the law is to ensure the two spouses can remain married w/o bankrupting the stay at home spouse! It doesn't work in any other situations! It is funded by fed taxes and administered by the states One should not try to scare anyone from NOT looking into it!
Anonymous   |     |   Comment #24
Does anyone know of any insurers writing this approved annuities?
Anonymous   |     |   Comment #20
In Texas, there is no hiding about it.  Enhanced life estates on homes are exempt from getting Medicaid Recovery.  It is written into the state Medicaid law.  It is basically the same as you taking your allowable deductions when filing your income taxes.
Anonymous   |     |   Comment #21
Any readily available articles on "enhanced life estates?"  Most homes owned by the parties and that is intended to be lived in (in the future), are exempt.  But, beyond homes the annuities are another option for the stay at home spouse under Medicaid/MediCal rules
Anonymous   |     |   Comment #22
PS I just saw your earlier post of a link
Rosedala   |     |   Comment #4
To Paoli2: I hope the good article writer, Sheryl Nance-Nash and/or someone knowledgeable here answers you soon.  Unfortunately I'm neither, but I can tell you that i have a Revocable Living Trust for a few years now where ALL my assets were entered (by adding the Trust to the title of my accounts in banks, annuities, bonds, etc) except IRAs which arent permitted to put into a Trust.  Then, I also indicated (just as if it were a Will) how much should go to whom or where.  So you can still receive the interest from your CDs, as well as manage any other asssets you may have.

I'm able to manage all my assets in the Trust as I need or wish, and my Trustee (appointed by me) will take over in case of incompetence or death.  Until then, my assets in the Trust are as if they weren't there, for me to manage. 

If no one answers your questions here, you must select a Wills and Trusts attorney to ask the questions.  You want to have ALL your answers before you open a Trust.  Maybe in your case you don't need one (thereby saving yourself a bundle?), but this you don't want to ask an attorney who may be eager to get the business.  Also, you can probably find on the Internet a site giving reviews and info on this subject (just make sure it isn't a law firm in search of clients)  lol!

Hope this helps you a little?  :)

P.S.  What does DD stand for?  Just curious...

P.P.S.  Surprised to see only 2 comments.  Usually there are dozens (?)

rosie43   |     |   Comment #5
If your bank and credit union accounts are titled to the trust make sure you know what the FDIC and NCUA requirements are for insurance on large amounts. The rules seem to be  different for banks and credit unions.




Paoli2   |     |   Comment #6
Rosedala:  You may or may not be reading this since it's been quite some months since you posted your reply to my questions.  First, DD is supposed to mean "Darling Daughter" in internet jargon.  She is the one we are concerned about.  Thank you for your replies.  They did help resolve a lot of the concerns I have about Living Trusts.  I will have to make up my mine what to do about seeing that she is protected once we are no longer here.  Much appreciation for your help and sorry I just got to see the posts.
Rosedala   |     |   Comment #7
Hi Paoli, I'm so glad that you were able to resolve this most important part of our lives (and deaths...) ;o)  

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