Estate planning is full of terms that most people have vaguely heard of but don’t know what they mean. Knowing what terminology means is important to being an informed person and an informed client. When I was going through my classes to be a high school basketball official, my instructor stressed that if you learn definitions, then it’s easy to learn the rules. That stuck with me. So, I am going to devote every Tuesday to a new estate planning definition. We started with “probate”; in the last few posts. This week’s phrase is “living trust”.
A “living trust” is more properly known as a revocable trust. A revocable trust is a document that is an agreement between the grantor (person or persons creating it), the trustee (the person or persons administering it) and the beneficiaries (the person or persons receiving stuff from it). In a revocable trust, often all three positions are held by the same person, you. Since you hold all of the positions, you have complete access to all of the assets that are in it. This is what makes it revocable. You can pull all of the assets out of the trust and close it at any time. However, this feature that allows you complete access to the assets makes it available to creditors.
The main benefits of a revocable trust are: privacy (it does not go through probate court), ease (when you pass away, your successor trustee has control of the assets almost immediately), protection for your minor children (at death, the assets become owned by the trust not the trustee, if something happens financially to the minor or trustee, the assets are protected). There are a couple of myths about revocable trusts. First, they do not protect you from creditors. Second, a revocable trust does not prevent you from paying income taxes. It can protect you from estate taxes but that requires very specific language and planning. Finally, it does not protect your assets from being counted as an asset for Medicaid. Specific planning is required to protect assets from Medicaid.
Revocable Trusts are the backbone of estate planning. They are fantastic tools and absolutely essential for anyone with minor children. They are complicated legal documents and should not be created without an estate planning attorney with you every step of the way.