Revocable Living Trusts: The Foundation of Modern Estate Planning

A revocable living trust (RLT) is one of the most versatile and widely used estate planning tools. It allows the grantor to maintain complete control over assets during lifetime while ensuring efficient, private, and probate-free transfer of wealth at death. Understanding the characteristics, benefits, and limitations of revocable living trusts is essential for CFP candidates.

Key Characteristics of Revocable Living Trusts

Complete Grantor Control

The defining feature of a revocable trust is that the grantor retains full control throughout their lifetime:

• Right to revoke: The grantor can terminate the trust entirely at any time
• Right to amend: Trust terms can be modified as circumstances change
• Right to manage: The grantor typically serves as initial trustee
• Right to benefit: The grantor is usually the primary lifetime beneficiary
• Right to add/remove assets: Property can be transferred in or out freely

This flexibility makes revocable trusts ideal for clients who want the benefits of a trust structure without permanently giving up control of their assets.

Typical Trust Structure

During Grantor's Lifetime:

• Grantor = Trustee = Beneficiary (same person, all three roles)
• Grantor manages assets, receives all income, can use principal freely
• Successor trustee named to serve at death or incapacity
• Remainder beneficiaries named (who receives assets after grantor's death)

At Grantor's Death:

• Successor trustee takes over administration
• Trust becomes irrevocable (cannot be changed)
• Assets distributed according to trust terms or held in continuing trusts

Why Revocable Living Trusts Are Popular

1. Probate Avoidance

The primary advantage of a revocable living trust is avoiding probate:

What Probate Involves:

• Court supervision of estate administration
• Public proceedings (anyone can access filings)
• Attorney and court fees (often 3-5% of estate value)
• Time delays (12-24 months in many states)
• Ancillary probate required for out-of-state real property

How Trusts Avoid Probate:

• Legal title to assets is held by the trustee, not the individual
• At death, successor trustee has immediate authority to act
• No court appointment necessary
• Assets can be distributed or managed immediately
• Single trust administration covers property in all states

Example: A client owns a primary residence in California, a vacation home in Florida, and a rental property in Arizona. Without a trust, their heirs would face probate in all three states (California probate plus ancillary probate in Florida and Arizona). With a properly funded revocable trust, all three properties transfer under one private trust administration.

2. Privacy Protection

Unlike wills, which become public record when filed for probate:

• Trust documents remain private (not filed with any court)
• Asset inventories are not publicly disclosed
• Beneficiaries and distribution terms stay confidential
• Reduces risk of challenges from disgruntled heirs or solicitors

3. Incapacity Planning

A revocable trust provides seamless asset management if the grantor becomes incapacitated:

Without a Trust:

• Family must petition court for conservatorship/guardianship
• Court supervises all financial decisions
• Annual accountings required to the court
• Expensive and time-consuming process
• Public record of grantor's incapacity

With a Trust:

• Successor trustee automatically steps in to manage assets
• No court involvement required
• Trust document specifies when and how successor takes over
• Privacy maintained
• Often triggered by physician's determination of incapacity

4. Flexibility and Control

The grantor maintains flexibility throughout lifetime:

• Can change beneficiaries as relationships evolve
• Can modify distribution terms as circumstances change
• Can add or remove assets from the trust
• Can change successor trustees
• Can completely revoke if a trust is no longer desired

What Revocable Trusts Do NOT Provide

Understanding the limitations is equally important:

No Estate Tax Savings

Because the grantor retains control, all trust assets are included in the grantor's gross estate for federal estate tax purposes:

• No estate tax reduction during grantor's lifetime
• Revocable trust is a "grantor trust" for income tax and estate tax
• Same result as if grantor owned assets outright
• For estate tax savings, irrevocable trusts are required

No Creditor Protection (for Grantor)

Assets in a revocable trust offer no protection from the grantor's creditors:

• Creditors can reach trust assets to satisfy grantor's debts
• No asset protection until trust becomes irrevocable at death
• For creditor protection during lifetime, irrevocable trusts or other structures needed

No Gift Tax Consequences

Transferring assets to a revocable trust is not a taxable gift:

• Grantor is treated as owner for all tax purposes
• No gift tax reporting required
• Assets retain grantor's cost basis
• Step-up in basis occurs at death (because assets are in the estate)

Funded vs. Unfunded Trusts

The effectiveness of a revocable trust depends entirely on proper funding:

Funded Trust

Assets have been legally transferred to the trust:

• Real property: Deed transfers title to "John Smith, Trustee of the John Smith Revocable Trust dated January 1, 2025"
• Bank accounts: Re-titled in trust name
• Brokerage accounts: Re-registered to trust
• Business interests: Assignment documents executed
• Personal property: General assignment of personal property

Benefits of Proper Funding:

• Trust assets avoid probate
• Successor trustee can immediately manage assets
• No gaps in trust coverage

Unfunded Trust

Trust exists but assets have not been transferred:

• Common mistake: Creating trust but never re-titling assets
• Assets remain in grantor's name and require probate
• Trust is essentially useless at death
• Often requires pour-over will to move assets into trust posthumously (still requires probate)

CFP Exam Point: An unfunded revocable trust provides no probate avoidance for assets not transferred to it. Proper funding is essential.

Standby Trusts

A standby trust (also called a "contingent trust" or "unfunded revocable trust") is a special planning tool:

What Is a Standby Trust?

• Trust is created but intentionally left unfunded or minimally funded
• Typically holds nominal assets (e.g., $100) to establish validity
• Remains "on standby" waiting for a triggering event

Common Triggering Events

• Incapacity: Power of attorney agent pours assets into trust
• Death: Pour-over will transfers probate assets to trust
• Disability: Agent funds trust to receive disability benefits
• Specific condition: Trust becomes active when specified event occurs

Why Use a Standby Trust?

• Avoid hassle of re-titling assets during lifetime
• Trust structure in place for incapacity or death
• Provides flexibility without immediate commitment
• Common for clients who are "not quite ready" to fully fund

Important: A standby trust that is funded via pour-over will at death does NOT avoid probate for those assets. The assets must go through probate to "pour over" into the trust.

Pour-Over Wills

A pour-over will is the essential companion document to a revocable living trust:

Purpose

• "Catches" any assets not transferred to the trust during lifetime
• Directs probate assets to "pour over" into the existing trust
• Trust terms then govern distribution (not the will)
• Provides a safety net for overlooked or newly acquired assets

Key Characteristics

Example

Mary has a revocable living trust and a pour-over will. She funds the trust with her home and investment accounts. Before she dies, she inherits $50,000 from her aunt and opens a new bank account in her own name (not the trust). At death:

• Trust assets (home, investments): Pass directly to beneficiaries, no probate
• Bank account ($50,000): Goes through probate, then "pours over" to trust, then distributed per trust terms

Best Practice: Regularly review assets to ensure everything possible is in the trust name, minimizing pour-over situations.

Revocable Trust vs. Will: Comprehensive Comparison

When Revocable Trusts Make Sense

Ideal Candidates for Revocable Living Trusts:

• Clients who own real property in multiple states
• High-net-worth individuals seeking privacy
• Clients concerned about incapacity planning
• Those with complex asset portfolios
• Business owners wanting smooth succession
• Clients in high-probate-cost states (California, Florida)
• Those with beneficiaries who may need managed distributions

When a Simple Will May Suffice:

• Modest estates with assets passing to one or two beneficiaries
• Most assets already pass by beneficiary designation (IRAs, life insurance)
• Young clients with limited assets
• States with simplified probate procedures
• Clients unwilling to properly fund a trust

The Transition at Death

When the grantor dies, several important changes occur:

1. Trust becomes irrevocable: No further amendments possible
2. Successor trustee assumes control: Named successor takes over immediately
3. New tax ID required: Trust applies for its own EIN
4. Separate tax entity: Trust files Form 1041 (if income earned after death)
5. Step-up in basis: Assets receive new cost basis at date of death value
6. Distribution or continuation: Assets distributed outright or held in continuing trust

CFP Exam Point: Assets in a revocable trust receive a step-up in basis at death because they are included in the gross estate, just like assets owned outright.