Revocable Trust Funds
The revocable trust is sometimes referred to as a living trust. It is a way to avoid probate and for the estate to possibly save on taxes when the trust owner dies. A trust does have advantages when compared to a traditional will but also has disadvantages. A thorough understanding is important before you decide to use a revocable trust in your estate planning.
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Definition
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A revocable trust is a way to pass property to your heirs. Like a traditional will, a revocable trust can be changed, or even eliminated, any time. Setting up a revocable trust requires an agreement that names a trustee, defines how you want your property managed and how it is to be distributed when you die.
Setting up a Trust -- Naming a Trustee
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To set up a trust you must name a trustee and you must also transfer your assets to the trust. You can select a competent adult to be your trustee, you can be your own trustee, or you could name a bank or trust company as the trustee. It is common to appoint an alternative trustee in case the first trustee is unable to manage the trust. This is especially important if you are the first trustee, where the second trustee will fulfill your instructions if you die or become ill.
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Setting up a Trust -- Transferring Assets
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The most time-consuming and expensive part of setting up a trust is the transferring of assets, as the assets must be owned by the trust, not by you. This must be done legally with name changes on deeds, the establishment of new bank accounts and stock transfers. Cost involved could involve legal fees and taxes, such as incurring capital gains when selling stock.
How the Trust Works
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While you are still alive, the trustee will manage the property within the trust according to your instructions. One of the big advantages of this type of trust is that if you become ill or unable to handle your financial affairs, your trustee can continue paying your bills and managing the assets. When you die, the trustee pays all debts and taxes owed, then distributes the trust assets based upon your instructions.
Avoiding Probate
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Avoiding probate is one of the reasons revocable trusts are established. The probate process varies by state but, in general, it is a process to transfer assets to beneficiaries that is court supervised. Not only are fees involved but probate results in a public record of the assets involved in the probate process. If all assets have been transferred to the trust, there are no assets to probate or to add to the public record.
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