EveryBody's Guide to the Law

REVOCABLE LIVING TRUSTS
A revocable living trust is a trust set up during the lifetime of the trustor (or settlor), the
person who makes the trust. A testamentary trust, on the other hand, is found in a person’s
will and takes effect only upon the person’s death. Lawyers refer to a “living” trust as an inter
vivos trust, inter vivos meaning “between living persons.” A living trust may be either revocable
or irrevocable. An “irrevocable” trust is ordinarily a device only the very rich take advantage
of, primarily to minimize income tax liability. The person with an average-size estate is more
interested in the “revocable living trust,” in which the trustor retains control over the property,
including the right to change or revoke the trust at any time.
Unlike revocable living trusts, the settlor of an irrevocable trust generally must give up
complete control over the trust property from the moment the trust is created. If the settlor
doesn’t relinquish all control, the trust assets will be considered a part of his or her estate,
thereby subjecting that property to income and/or estate taxes, the avoidance of which is usually
the primary goal in using irrevocable trusts.
For most people, the funded revocable living trust (RLT) is the most flexible estate planning
tool available today. There are three main goals of a revocable living trust: (1) avoid probate
and its costs and delays; (2) eliminate or substantially reduce estate taxes; and (3)
distribute your property the way you want it distributed. Even though it may avoid probate and
completely eliminate estate taxes, the best living trust is utterly worthless if the property does
not go to the people you want it to go to. That should be foremost in the estate planner’s mind
in preparing an estate plan for you.
Advantages of a Living Trust
A properly drafted and funded revocable living trust avoids probate and its high financial and
emotional costs, as well as long delays. With an RLT, settling an estate usually can be accomplished
quickly and smoothly, at a much lower cost. A lawyer’s assistance in winding up an
RLT is advised, but the lawyer’s overall fee should be considerably less than his or her fee
would have been had the property gone through probate.
You will have the same amount of control over your property when you place it in a revocable
living trust as you have right now. You will be able to use your property or give it away or
sell it as you see fit.
In community property states, revocable living trusts take full advantage of the increased,
or “stepped-up,” basis rules used to determine taxable gain when community property is sold.
Upon the death of the trustor, the basis of the entire property is stepped-up to its fair market
value on the date of death.
Unlike probate proceedings, which are open to the public, revocable living trusts are for the
104 Everybody’s Guide to the Law