REVOCABLE LIVING TRUSTS   A revocable living trust is a trust created during the grantor's lifetime that the grantor may alter, amend or revoke. While the revocable living trust is revocable while the grantor is alive, it usually becomes irrevocable or terminates at his death.   Purposes of the Revocable Living Trust   Because of the revocability feature, the revocable living trust does not provide any tax advantages during the grantor's lifetime or at his death. The main purposes of such trusts are:   •        to avoid probate on any assets transferred into the trust during the grantor's life;   •        to receive life insurance proceeds made payable to the trust at the grantor-insured's death;   •        to receive probate assets pouring over into the trust under the deceased grantor's will at death (assuming the trust did not terminate upon the grantor's death); and   •        to keep the decedent's directions for distribution of the assets from being open to public inspection (wills admitted to probate are subject to inspection by the public);   •        to control, through the terms of the trust, the disposition of trust assets much as the grantor's will would have done if these assets were part of the probate estate.   •        to provide management of the assets transferred to the trust by a trustee other than the grantor, if the grantor becomes incapacitated.   Background on the General Nature of Trusts   A trust is a legal entity created by a grantor. The "trustee" takes legal title to the property transferred by the grantor to the trust. The "grantor" is an individual who wishes to have the trust manage property on behalf of the trust beneficiaries. The beneficiaries are said to hold the equitable or beneficial title to the trust property. That means they are generally entitled to the income and/or principal of the trust.     The trustee, as legal titleholder, can exercise most of the usual rights over trust assets. For example, he or she can usually invest or sell the assets. But trustees cannot act in their own interest; they must act in accordance with the trust terms and their fiduciary responsibilities to the trust beneficiaries.     The revocable living trust may be contrasted with both an irrevocable trust—also a trust created during life but which can't be changed—and a testamentary trust—a trust established by the decedent's will to take effect after death.     The trust agreement should always be in writing, and should be prepared only by an attorney who specializes in estate planning. Once the grantor's objectives are known, the attorney will draft a trust that addresses the following key issues:   •        Who (if anyone) is to receive the trust income, and how long do these income payouts (or the accumulation of income) last?   •        Who is to receive distributions of trust principal and at what times?   •        When will the trust terminate?   Overview of the Revocable Living Trust   We have observed that the trust is revocable. A written amendment to the trust can be prepared at any time by the grantor's attorney. There's no tax or other penalty for doing this, since the trust does not provide income tax or estate tax benefits to the grantor anyway.     Further, a revocable living trust is a private document, whereas a testamentary trust will become available for public inspection when the will is filed for probate.     Finally, estate assets will have to travel through probate—with the usual reduction by probate costs—before they get into the testamentary trust. Any assets placed in the revocable living trust before death will avoid probate (but not estate taxes).     And this won't jeopardize the security of the grantor and his family. If an emergency arises, the grantor can simply revoke the trust and get back outright ownership of the former trust property.     Typical Features of a Revocable Living Trust     Typically, the first part of the trust instrument will direct how the trust is to be managed during life. The second part will deal with the management and disposition of trust properties after death.     The trust agreement will generally provide that, during the grantor's life:     •        the grantor is to receive all trust income;   •        the grantor may add property to the trust or take property from the trust at any time; and   •        the grantor can change any of the trust provisions—or cancel the whole arrangement—for any reason and at any time.     The grantor can name himself or herself as the sole trustee of the trust. However, if the grantor wants to avoid day-to-day investment responsibility, a bank or some other person can be named trustee.     The second part of the trust instrument will direct exactly how the trust properties are to be used and disposed of after the grantor's death. In this sense, the revocable living trust is like a will. It can be changed at any time during life, but the terms of the trust instrument become unchangeable at the grantor's death.     Avoiding Probate Costs and Delays     Properties transferred to the revocable living trust during the life of the grantor are not subject to probate at the death of the grantor. Thus, assets in the trust can avoid the delays and the costs of settling or probating an estate. Probate costs may be substantial or modest, depending on the state.     Settling the estate of a decedent always ties up the decedent's property—at least to some degree. Typically, the local probate court will appoint the executor or an administrator who will collect all the properties of the estate, hold these properties until creditors' claims are satisfied and other formalities are complied with, and then distribute the remaining properties as directed in the decedent's will or, if there is no valid will, according to state intestacy laws.     During this time, which usually ranges from six months to a year or more, the properties may be poorly invested and income or principal may not be readily available to the beneficiaries or heirs.     The revocable living trust can be especially important if the grantor owns real property in states other than the state of his residence. The grantor can avoid multiple probate proceedings in several states (called ancillary probate) by placing the property in the trust during life.     Pourover Receptacle     The revocable living trust can be a "shell" during the grantor's lifetime. That is, the trust can be inactive during life.     If the trust did not terminate at the grantor's death, the trust may receive assets passing under the will (after probate) and from life insurance policies.     This is often called a "pourover trust." Remember, the trust is now irrevocable, and the grantor's comprehensive plan for the disposition of assets will be carried out via the trust terms.     With respect to life insurance proceeds, the trust can provide more flexibility in the payout to beneficiaries than is possible with the standard settlement options offered by the insurer.     Also, where there are a number of different policies, the proceeds can be consolidated in the trust and administered under one comprehensive plan of disposition.     Asset Management     The revocable living trust can be more than a mere shell during the grantor's lifetime.     If the grantor wants to be free of investment responsibilities, or fears future mental incapacity or absence from the property, assets may be transferred into the trust during life where they will be professionally managed. The grantor will usually receive an income earned by these assets since he or she is going to be taxed on it anyway.     Tax Consequences of the Revocable Living Trust     The grantor generally enjoys no federal income tax or estate tax benefits from the trust. If the trust has income, the grantor is taxed on it. In fact, if this income is paid to someone other than the grantor, it would be a gift potentially subject to the gift tax.     The trust can be designed to provide fairly liberal benefits to the beneficiaries—all the income and even some rights to withdraw principal—and the trust can still escape the federal estate tax when a beneficiary dies.     The IRS has issued proposed regulations that would allow, if and when they are finalized, a "qualified revocable trust" (QRT) to be treated as part of the decedent’s estate for federal income tax purposes.     If both the executor and the trustee so elect, a revocable trust will not be treated as a separate trust but as part of the estate.     The election would allow certain income tax advantages that apply only to estates to apply to qualifying revocable trusts as well. The election may be made on Form 1041, the federal income tax return for trusts and estates. The regs will not apply until they are finalized.     Disadvantages of the Revocable Living Trust     Besides the lack of tax savings for the grantor, there are some other disadvantages of revocable living trusts.     First, the trust may be more expensive to establish than a will. It's an extra document for the attorney to prepare, and the grantor can expect to pay an additional legal fee.     Second, any assets in the trust at death may not escape the claims of creditors of the estate. The grantor could essentially be treated as if he or she still owned these assets outright.     Third, if the trust is more than a shell during the grantor's life, a trustee other than the grantor or a family member may assess an annual fee for managing the trust assets.     Funding the Revocable Living Trust     We have already discussed some of the possibilities in passing, but here is a list of all the funding options. The grantor can:   •        immediately transfer the ownership of certain properties to the trust;   •        arrange to transfer properties to the trust at a later time—typically when there seems to be a high risk of death, disability or incapacity;   •        name the trust as the beneficiary of life insurance benefits; and   •        in the will, name the trust as the beneficiary of certain properties or even of the entire net probate estate.