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When is Living with a Revocable Trust Good?

One of the fundamentals of the estate planning documents is the Revocable Living Trust. As with any trust, there are three parties:

The Settlor is the creator of the trust who provides the assets. The Settlor is often also called a Trustor or Grantor. The terms can be used interchangeably, but the Arizona Trust Code, which took effect in 2009, prefers the use of "Settlor."

The Trustee is the owner of the assets of the trust who has a fiduciary duty of loyalty to care for the trust assets for the benefit of the beneficiaries.

The Beneficiaries of the trust are the recipients of the income and/or the principal.

The term “revocable” means that the trust terms are changeable. The term “living” means that the Settlors are living at the time that the trust comes into existence. This is distinguished from a testamentary trust which comes into existence in accordance with the terms of a Last Will and Testament, after the death of the person who wrote the will.
For most Revocable Living Trusts, the Settlor is also the Trustee and the initial beneficiary. A couple, whether married or not, can have one Revocable Living Trust and both be Settlors, Trustees and initial beneficiaries. The trust can hold community or jointly owned property as well as sole and separate property. The property can keep its character as community, jointly owned or sole and separate property.

Couples who are not married but share property can receive advantages with a Revocable Living Trust. If one of the couple becomes incapacitated, the other one can act as sole trustee for the trust assets. Also, they can jointly determine how their assets should be distributed upon their deaths.

With a married couple, a Revocable Living Trust can provide estate tax benefits by creating subtrusts when one of the couple dies. The deceased spouse’s portion of the trust assets, up to the Applicable Tax Exclusion, can be held in an irrevocable, unchangeable trust. The surviving spouse can receive income and even principal from the irrevocable trust and the assets do not become part of the surviving spouse’s assets. As a result, twice the amount of the Applicable Tax Exclusion (one for each spouse) can be passed to the couple’s children or other beneficiaries; free of estate tax.

If the assets of the married couple do not exceed the Applicable Tax Exclusion, then the Revocable Living Trust can remain completely revocable until the surviving spouse dies. As a result, the surviving spouse has more flexibility. Thus, trusts should include language allowing the most flexibility for the tax changes.

Other than taxes, there are two major benefits of the Revocable Living Trust: avoiding probate and facilitating access to assets if the Settlor becomes incapacitated. Probate is avoided because if all of the Settlor’s assets are titled in the name of the trust, then when the Settlor dies, the trust continues on. The probate court does not need to get involved with the distribution of assets because the successor Trustee will handle the distribution.

If a person's assets are in a trust and the person becomes incapacitated, then the successor Trustee can step in and handle the assets without any need for a conservatorship proceeding and court involvement.

There are certain assets which cannot be placed in trust, such as retirement accounts. Thus, a durable power of attorney is also needed along with the trust documents.

To determine if a Revocable Living Trust would be useful, several factors are considered, such as:

  1. If the Settlor owns more than one parcel of real property or owns real estate outside of Arizona or wants to leave Arizona real estate to more than three adults. In such cases, a Revocable Living Trust eases the administration of the property and avoids probate.
  2. If the Settlor owns many stocks, bonds or other investments which are not held in accounts that have "transfer on death" designation. If there is no "transfer on death" designation, then a trust is necessary to avoid probate.
  3. If the Settlor want to leave assets to minors. Court involvement is required if a minor receives more than $10,000 in a year, unless the funds are held in a trust.
  4. An adult beneficiary needs oversight over finances.

There are other factors but these are some of the most determinative