Revocable Living Trust

A Revocable Living Trust (RLT) is an estate planning document that is sometimes used instead of a traditional Last Will and Testament. Unlike the Last Will and Testament, the RLT is effective while the grantor is still alive and, in many cases, allows the beneficiaries to avoid probate. The RLT holds the assets of the Grantor while the Grantor is still alive and gives instructions to his Successor Trustee on how to manage the assets upon the Grantor’s death. When you establish a RLT you will transfer many of your assets, including real property and investment accounts, into the RLT. Typically, the person that establishes the RLT, also known as the Grantor, is the first Trustee. Most people that have a RLT also have a Pour Over Will which will cause any assets that they failed to place in their RLT to “pour over” into the trust upon their death.

The primary reason to use a Revocable Living Trust is to avoid probate. In Virginia, if you die with a Last Will and Testament, your beneficiaries may have to go through probate. Probate is a court process that takes time and may cost your beneficiaries money if they have to hire an attorney. Many people can avoid probate in Virginia without a RLT by listing designated beneficiaries on their financial accounts and by using Transfer-on-Death provisions for other assets. Designated Beneficiaries and Transfer-on-Death (TOD) designations, while effective at avoiding probate, allow for very little control over the asset after you pass. Unlike TOD designations, a Revocable Living Trust will allow you to establish a Trustee to hold the assets and distribute them based on your instructions. If you own real property in more than one state, a Revocable Living Trust would be helpful in avoiding having to deal with probate in multiple states.

There are several circumstances where you would not want your assets to pass directly to your beneficiaries, but rather be held in trust for their benefit. If you have a disabled child that is receiving means tested government benefits, you will want their inheritance held in a Special Needs Trust so as to not disrupt their government benefits. If you have an adult child that has a hard time handling money, going through a divorce, or has a lot of debt, then you may want his inheritance held in trust to protect it from his creditors. If you have a minor child, you may want his inheritance delayed until he reaches a certain age, perhaps eighteen, twenty-five, or thirty. Perhaps you have an adult child who is struggling with an addiction, delaying his inheritance in a RLT could prevent him from wasting it on illegal substances.

A Revocable Living Trust avoids the cost and delays of probate, but it also allows for more privacy and confidentiality. A Last Will and Testament is recorded and a matter of public record, whereas a RLT is not. If you or your family are high profile people, or celebrities, then perhaps secrecy is very important to you and a RLT will allow your estate to pass outside of the public eye.

Unlike a Last Will and Testament, a Revocable Living Trust could be used in helping the Grantor manage his affairs after he becomes incapacitated. Once the Grantor becomes incapacitated, the Successor Trustee will take over and have access to the Grantor’s financial accounts in the RLT. However, the incapacitated person could probably accomplish the same thing with a Durable Power of Attorney. In most cases, a person with a RLT will also have a Durable Power of Attorney.

A Revocable Living Trust will not protect your assets from your creditors. With a RLT the Grantor is usually the first Trustee and maintains complete control over his assets, even maintaining the ability to revoke the trust all together. As such, the Grantor’s creditors can still access all of the Grantor’s assets placed in the Trust. In Virginia, a RLT will not protect the Grantor’s assets from claims made by his spouse in a divorce; nor will it prevent a spouse from taking her elective share after the Grantor’s death. If you are concerned with your spouse getting assets you don’t want him or her to receive, a prenuptial or postnuptial agreement should be considered. While you are alive you do not need to file a tax return for your Revocable Living Trust, and your RLT will not reduce your personal income tax liability.

The Revocable Living Trust only applies to assets titled in the trust’s name. There are several assets that many people do not place in their RLT. Most people do not put a retirement plan, like a TSP or 401K in their RLT. Typically, one does not put ordinary automobiles in a RLT. Many times, a person will forget to place an asset in their trust, maybe forget to put an investment account or house in their RLT. Any asset that is left out of the Revocable Living Trust, intentional or not, is not subject to the RLT and unless it is subject to a beneficiary designation, will have to go through probate.

Even if you have a Revocable Living Trust you may not wish to place all of your assets in it. You could set a designated beneficiary for your 401K and have that balance transfer to the named person at your death, completely avoiding probate. You could have a Transfer on Death (TOD) recorded at the DMV so your automobile passes directly to the named beneficiary, outside of probate. You could have a Last Will and Testament that names a stepchild as beneficiary, but not have him or her in the Revocable Living Trust. You could set up a Transfer-on-Death-Deed to pass a house to one adult child, while having the remainder of your estate go to a minor child through your Revocable Living Trust. You could have a life insurance policy that names a specific person as the beneficiary, rather than the Trust. When using a RLT with TOD or Designated Beneficiary Designations you need to be very careful to make certain they do not conflict or contradict one another. For example, if you were going to fund your RLT with a particular financial account, you should not also designate that account go to a beneficiary other than the RLT.

Assets contained in a Revocable Living Trust will still be counted by Medicaid. Since you still have control over the assets in your RLT, Medicaid will still consider them for spend-down purposes. If you are trying to shield your assets from creditors or Medicaid, then you may need an irrevocable trust. An irrevocable trust is one in which you no longer have control over your assets, but after five years, your creditors will not be able to access them.

The vast majority of Virginians will never pay a death tax. In 2024, the federal estate tax exemption is over thirteen million dollars for an individual. That means a Virginian does not have to pay an estate tax, sometimes called a death tax, unless his net worth is over 13 million. That amount is expected to be reduced to around seven million at the end of 2025. However, even at seven million, most Virginians will never pay a death tax. However, if your net worth is over the exempt amount, you could use a Credit Shelter Trust or A/B Trust to avoid, reduce, or delay the payment of estate taxes.

In summary, you may need a Revocable Living Trust if you are trying to avoid probate, wish for privacy, need to exercise control over your assets after your death, wish to delay your beneficiaries’ access to their inheritance, or wish to protect your beneficiaries’ inheritance from their spouses or creditors. However, if you are trying to avoid your own creditors or taxes, the Revocable Living Trust may not be the best option for you.