REVOCABLE LIVING TRUSTS
By far the most popular and common Estate Planning tool is the Revocable Living Trust (RLT). A RLT is a legal document that allows you to determine who will inherit your assets after you pass and who will be in charge of administering your estate.
The person who creates the RLT is called the Grantor (sometimes called the Trustor). The Grantor is the only person who has the ability to modify the Trust.
In most cases, the Grantor also serves as the Trustee, the person who controls and manages the Trust assets. However if the Grantor passes away or becomes incapacitated, then a person who has been pre-selected as the Successor Trustee steps in. The Successor Trustee simply follows the instructions and guidelines set forth in the Trust - but can never change its terms.
Probate is the court-mandated process that occurs if you pass away without a Trust. It is expensive (can cost tens of thousands of dollars) and lengthy (can take approximately six months to two years on average).
Without a legal document that clearly names your beneficiaries, the court will step in and determine who will inherit your assets.
By creating a RLT, you are formally dictating your wishes which eliminates the need to undergo probate.
DETER FAMILY FIGHTING
One major fear parents have is that an inheritance dispute will arise after they're gone that will tear the family apart.
To prevent this type of family fighting, most RLTs include a No Contest clause, a provision that is intended to discourage disgruntled individuals from legally challenging your Trust.
If the individual does contest your Trust and the court finds that there was no probable cause for doing so, then that person will lose their inheritance - bottom line, they get nothing.
A RLT ensures that your wishes are honored after you're gone.
You can determine who inherits your assets, in what amount, at what age, and under what conditions. So if you want your grandchildren to receive $20,000 for their college education, you can stipulate the terms in a RLT.
You can also choose who will oversee the administration of your estate. If your children tend to argue, you can instead appoint a more neutral party, like a nephew or financial advisor.
REDUCE OR ELIMINATE TAXES
One of the biggest tax advantages to inheriting assets from a RLT is that the assets are “stepped up” to the fair market value at the date of the decedent’s death.
For tax purposes, this means that if you have inherited assets that have appreciated in value and then you choose to sell them, you can eliminate (or at the very least, minimize) the “gain.”
In addition, creating a RLT may help reduce or eliminate the amount of federal estate taxes that need to be paid upon your death as well.