A Revocable Living Trust: Right for You?

A revocable living trust is popular for several reasons, even though the initial cost is slightly higher.

Have questions about what's right for you?

Helping you figure out if a will or a trust would be useful for you is a crucial part of estate planning these days. In general, but not always, using a Living Trust can be a better estate planning approach. As part of our consultation, we go over your situation. And give you an honest, knowledgeable recommendation about whether a trust or a will is right for you.

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"A revocable living trust allows your heirs to avoid probate entirely and keeps you in complete control of your finances while you're alive. You can always make changes to what's in the trust and to how you'd ultimately like it managed or disbursed."

- Suze Orman

REASON #1. Avoid probate

Most people know of one non-tax benefit: Trusts 'avoid probate'.

A probate court proceeding is needed if you die with assets in your SOLE name. A probate court authorizes the transfer of those assets (such as a bank account in the name of Joel Bernstein at the Bank of Lexington, with only my name as the owner).

On the other hand, after you sign a living trust, the trustee will own the assets. With directions to pass it on. The probate court is not needed to appoint the person you appoint. You would have put the name of the trust on the bank account before you died.

The trustee (or trust) will own many of your assets. Maybe not all assets, but many.

How it works

In the living trust, you appoint the 'Successor Trustee'. Without court involvement, the trustee follows your post-passing instructions, which can be simple or detailed, depending on your situation.

A trust can distribute assets upon your death. Outright to the beneficiaries. Or it can can instruct the successor trustee to continue to own the assets. Then USE it over time for the beneficiary's benefit.

Maybe you tell the successor trustee to split the assets into shares for multiple persons on your death. Perhaps hold the share of one beneficiary in trust. In that case, the trust continues for a loved one with an issue. For one reason or another, they can't handle a lot of money at your death.

When an asset is held 'in trust' the beneficiary does not become the actual owner of the asset. Instead, they get its benefit through getting its income. Plus principal in whole or part, from time to time, if the successor trustee decides to also give them more money than just income.

This approach of owning assets in trust adds the element of TIME to asset ownership. You control the asset even after death.

It's so flexible that you can even name the same person to be the trustee and one of the beneficiaries. It's common for a spouse or child to be both the successor trustee and its current beneficiary.

It's about more than avoiding probate

Going through probate is not the end of the world. In real life, it's usually a delay. A bit costly and confusing. But hardly a root canal. So, 'avoiding probate' should not be your sole estate planning goal. As clear as I can say it: Not the only reason to get estate planning.

There are other things to consider before deciding that a trust is right for you in Massachusetts.

REASON #2. Reduce estate taxes

If you're:

(1) married
(2) live in MA and
(3) have more than $1 million in wealth

you could almost always save estate taxes by using MA Living Trusts.

How it works

In a Living Trust, you can tell the Successor Trustee (including your spouse as the trustee) to:

Invest up to $1 million in a separate investment account at the first death. Call it a Family Trust.

In your Living Trust, you instruct the Successor Trustee to spend the income for your spouse and the principal as needed.

But when your surviving spouse later dies, the $1 million does NOT become part of your survivor spouse's estate. And so it does not get taxed.

This is because the trust terms are structured to achieve this result.

So, with a married person's living trust, you can protect up to $2 million from MA estate taxes. By the way, if your estate is higher, then other additional tools are available, to be used along with the revocable trust.

A Living Trust can lead to reduced estate taxes.

REASON #3. Protect a beneficiary from overspending

You may want to leave money or assets to a person who can't control their behavior. Or just can't manage money. Or has special circumstances.

Here are some reasons why it might not be wise for a person to receive money or assets directly:

Too young
Uncontrollable spending
A pending divorce
Government benefits
Drug/alcohol problems

How it works

The person who controls the money is called the 'trustee.' The person you want to benefit is the 'beneficiary.' For an uncertain situation in which time plays a role, such as in the case of a pending divorce or an underage beneficiary, you can set a trust provision that won't be in place forever. Maybe just until the beneficiary reaches the age of say 30. This is the most common type of trust provision.

Another possible issue to address is when the beneficiary receives government benefits. If the beneficiary receives a huge sum, the government rules may say he or she no longer will receive those benefits. This affects only some but not all government benefits.

You can instruct the trustee to supplement—but not replace—those government benefits. It is a called a supplemental needs trust, or a special needs trust.

Drugs. Alcohol. You may have a child with a severe drug problem. If you leave assets to them, they may spend all the money within months. Or weeks.

Instead of leaving it directly to the beneficiary, put in the beneficiary's own name and control, you can instruct the Successor Trustee to continue to hold that beneficiary's share.
And then to use it for the beneficiary's benefit. Keep the beneficiary safe. Roof over head. Food in refrigerator.
So as not to lose the bulk of the funds to abuse.
Your money can be part of the solution. If the problem ends, the trustee can loosen the purse.

A Living Trust can protect the beneficiary's interests.

Wills & Trusts—in plain English

Face, don't avoid, death, disability, and taxes. It’s easier than you think.

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REASON #4. You can change the trust's terms

Like a will, you can change the terms of a revocable Living Trust. On the other hand, it is more difficult to change an irrevocable trust.

But remember, even an irrevocable trust contains a good deal of flexibility. And a careful review of it may assist you to do what you want to achieve.

REASON #5. Protect others from their creditors

After you die, if a beneficiary develops a problem with a creditor, your trust will likely give that beneficiary some protection from losing the money you left them.

But remember that Massachusetts law does not give this same protection to you as the trust creator. If you can benefit—by getting some of the trust's income or principal—the law does not give you creditor protection.

REASON #6. Reduce income tax with an irrevocable trust

For several years I was a national lecturer on the topic of income taxation of trusts and estates. Refreshing my knowledge every time I spoke to CPAs throughout the country, I can tell you it is complex.

Living trusts continue to be taxed to you. As if the trust did not exist. But it's a different story for irrevocable trusts.

How it works

For irrevocable trusts in Massachusetts:

When a trust distributes income to a beneficiary, the beneficiary pays income tax on it. And the trust does not.
On its income tax return, the irrevocable trust takes a deduction for the distribution, so it does not pay income tax on it.

Income tax savings can happen if the beneficiary pays income tax at a lower tax bracket than you.

Lower a family's income tax by having trust income taxable to a lower-bracket family member.

Have questions about what's right for you?

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