Avoiding Probate with a Revocable Living Trust
Probate is the process by which a deceased person’s (“decedent”) will is determined to be valid and her estate is lawfully distributed to named individuals. Payment of estate tax and inheritance tax (depending on state) is also due at this time. A probate court rules on the case, so court fees, lawyers’ fees, executor fees, and other costs can quickly add up. Therefore, it is in everyone’s best interest to avoid the cost and time of probate if possible.
There are several ways to avoid the probate of cash: setting up a joint account, a payable on death account, or a trust. A wise person once said, “Don’t put your trust in money, but your money in trust.” A trust is where a “settlor” gives money to a “trustee” to hold for, and in the future distribute to, named “beneficiaries.”
There are many types of trusts available, but a revocable living trust is a popular option. It is called a “living” or (“inter vivos”) trust because it is set up during the lifetime of the person. It is called “revocable” because it can be terminated, or legally erased. If the settlor runs out of money before death, she can take it back at any time.
Both a revocable and an irrevocable trust avoid the payment of probate fees, because the money distribution has already been arranged. However, only in a revocable trust is the money no longer legally the settlor’s and so is not a part of the estate at death. In a revocable trust, income is taxable to the beneficiaries, but in a revocable trust, income is still taxable to the settlors, who are really just owners.
In summary, a revocable trust may save some money on death taxes, whereas an irrevocable trust will not. A revocable living trust is particularly useful in states were probate procedures are complicated and fees are high. In these states, a revocable living trust acts as a substitute for a will.
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Last Modified: 07-07-2010 03:22 PM PDT
