What is a revocable living trust? Isn’t it the same as a will? Why do so many financial experts advocate and push people to do the revocable trust before a will?
Oh, the questions go on and on! The good news is that the answers are relatively simple, and pretty important to ask. If you are ready to take the advice of financial experts like Suze Orman (celebrity host of her own CNBC program), you can use the following Q & A to begin to recognize the power of the revocable living trust.
What, exactly, is a revocable living trust?
The technical definition from Investopedia is:
“A trust whereby provisions can be altered or canceled dependent on the grantor. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. Also referred to as a ‘revocable living trust'”.
Okay, maybe that’s not so helpful. If you use Orman’s simple and straightforward definition (“trust has an incapacity clause that states who you want to sign for your affairs in the event you are unable to do so for yourself” [Orman, 2013]), you realize that the revocable trust is wildly different from a traditional will. It deals with issues long before the individual has died.
Additionally, the revocable trust addresses issues that a will does not. The will is going to instruct legally named people to distribute assets according to your wishes and wants. That’s really it.
The revocable trust, on the other hand, deals with issues like what happens to your home should you become incapacitated to (according to Orman). In other words, it answers the enormous question of “who is going to take care of you and pay your bills?”
Remember that there are many legalities associated with things like your bank account, your debts, your assets, etc. that could prevent even a spouse from taking necessary steps if you are unable to do so yourself. Fortunately, the revocable trust allows for all of these “contingencies” and creates a legal framework that lets things move forward without delay.
The next big question posed by many is “why put this in place before you handle your will?”
While we already know that the revocable trust is a “living” document while the will is for those who have died, there is a bit more to the story. Though the experts tend to agree that the revocable trust is for everyone, it is most important for those who are worried about issues like probate.
Probate is a lengthy legal process that begins with a judge examining a will to be sure it is valid and authentic, but it is also the mandatory process for those without a will in place at the time of their death. The court must then officially appoint the “executor” (either someone named in a will or someone chosen by the court if there is not a will). This person will have to pull together an inventory of all of the assets of the deceased, calculate if there are liabilities (debts) against the estate, and find a way of distributing assets to those named in the will.
That is all pretty clear, but some assets – like real estate – can be transferred into a revocable living trust with beneficiaries named directly in the document. This keeps the asset out of probate, saves a huge amount of time and money, and ensures that there is no delay in the handling of an estate.
The simplest answer about the revocable trust is that it should be the “main document” (Skawinski, 2007) in your estate planning because it guarantees that your affairs are looked after properly if you are incapacitated and spares a lot of hassles for your family after you have died.
- Investopedia. Revocable Trust Definition. Investopedia. 2014.
- Skawinski, Kamil. Spotlight: Suze Orman. Bankrate.com. 2007.
- Spruell, Sakina. Why everyone needs a living revocable trust. CNBC.com. 2013.