A revocable living trust is a written document which creates a separate legal entity. You appoint yourself as trustee of your trust (the manager of the trust). If you are married, your spouse may be a co-trustee. You are the life beneficiary of the trust (the person who enjoys the use of the properties of the trust). Most of your assets will be retitled in the name of your living trust. As trustee of your own trust, you have 100 percent control over your assets: you can sell assets, buy assets, add assets to the trust, and remove assets from the trust. Since the trust is revocable, you can amend, alter, or revoke your trust at any time.
With a living trust you avoid the costs, time delays, public nature and other difficulties of having your estate go through court supervised probate.
In your living trust document, you name one or more individuals to serve as successor (or backup) trustees should you die or become unable to serve as the trustee. A successor trustee can be one of your adult children or a close friend, a relative, or a trust company or bank trust department.
Your trust includes instructions specifying that upon your death or upon the death of your surviving spouse, your children or other loved ones will become the remainder beneficiaries (the persons who enjoy the remaining property in the trust).
Your trust agreement may also include your instructions on how to distribute the remaining property to those beneficiaries. For example, you may designate that your remainder beneficiaries must attain a certain age or level of maturity before receiving the property. You may instruct the trustee to distribute the trust property to the beneficiaries outright or in increments.
If any of your children are too young to receive their distributions, the successor trustee will manage their shares for their health, support, maintenance, and education until they attain the age you designated. At that time, the trustee may distribute their share.
You need to keep your revocable living trust funded. This means that all your assets (except tax deferred accounts such as IRA’s, etc.) should be titled in the name of your trust. Often individuals will set up a trust, but not remember to place newly acquired assets in the trust’s name. If assets are not held in the trust’s name, they will be subject to probate. Review the titles on all your assets and make sure they show the trust as the owner.
The Pour-Over Will is a separate document which is a necessary part of your living trust. It revokes any prior will you may have executed. Then it distributes your assets according to your plan in your living trust. Any property (real or personal) which you may have neglected to retitle in the name of your living trust will be transferred or “poured-over” into your trust by the pour-over will. However, if the total value of these items that have not been previously transferred into your living trust exceeds your state’s probate exemption amount ($50,000 for Arizona), it will have to go through probate. So, it’s important to keep your trust funded.
There are several good reasons for using a revocable living trust. The first major reason is to avoid the problems associated with probate, including court supervision with its attendant costs, time delays and lack of privacy in settlement.
The second main reason is to reduce or eliminate estate taxes for a married couple. An estate which is less than the applicable exclusion amount (see chart) is exempt from Federal Estate Taxes. A married couple has an unlimited marital deduction. This means if one spouse dies and leaves everything to the surviving spouse, there will be no federal estate tax due. This is true no matter what the size of the estate. However, when the surviving spouse dies, the estate is exempt only up to the current applicable exclusion amount for a single person. It’s as if a married couple has only one exemption for federal estate taxes.
However, with the use of an “A/B Trust” a married couple retains the applicable exclusion amount for each spouse. This is done by splitting the trust assets into two trust shares upon the death of either spouse. Each trust share retains the applicable exclusion amount, which amount is exempt from estate taxes.
In effect an “A/B Trust” doubles the size of an estate which may be exempt from federal estate taxes. The surviving spouse is still entitled to the income generated by the assets in each trust share and may use the principal to maintain the standard of living.
An “A/B Trust” is also referred to as a “Marital Deduction Trust,” a “Credit Shelter Trust,” or an “Exempt Trust.” If your trust does not include this provision you may add this by an amendment or trust restatement. To determine if your trust has an A/B election, check the Table of Contents of your trust for “Separate Trusts.” Many people no longer need an A/B trust because of the high exemptions that now exist (and which have historically never been lowered)
For the year: The Applicable Exclusion Amount is:
2000 and 2001 $675,000
2002 and 2003 $1 million
2004 and 2005 $1.5 million
2006-2008 $2 million
2009 $3.5 million
2010 N/A (taxes repealed!)
2011-2012 $5 million
2013 $5.24 million
Before you create your trust, you may want to review this article on what to name your trust.
If you have a trust, this article will tell you what you need to review and when to update your living trust.